The Risky Business Of Fertilizer

Wabash River
With record plantings, 2008 was expected to be a boom time for fertilizer dealers. But not all realized the promise of increased sales — in fact, some retailers reported a dip in product movement. Why the drop in spite of healthy crop prices and deeper grower pocketbooks? Uncharacteristic rain and cold this spring were culprits, as was the catastrophic flooding experienced in parts of the Midwest.

“Flooding along the Wabash River in Indiana took many acres out of production or converted corn acres to soybeans,” says Jim Swinney, general manager, Posey County Co-op, Mt. Vernon, IN.

Dave Coppess, executive vice president at Heartland Co-Op, West Des Moines, IA, reports wet weather as well, with sizeable acreage never drying out enough for planting or forced into replanting because of wet spots. His company’s fertilizer sales were also lower because customers were doing variable-rate application, putting down less product.

Then, too, growers were admittedly balking at the higher prices, which were fueled in part by stronger-than-ever global competition for fertilizer. “Some of the farmers are talking of cutting back on pounds per acre due to high prices,” says Swinney, “but we’ve heard more talk than action due to the high commodity prices. If we see a continued softening of grain prices, we will see a cut back of application.”

Brent Sutton, president of Growers Fertilizer Co-op, Lake Alfred, FL, says his volumes were indeed down because of price points. In his specialty crop market (citrus, vegetables, ranches, turfgrass, and homeowners), fertilizer costs in some cases tripled and customers are now worried. “I really believe that we’re really going to start seeing a lot of fertilizer applications get cut back next year,” he says. Here too, commodity prices are a key factor — in this case for fruits and vegetables facing stiff foreign competition.

But some dealers did enjoy increased income. “Margins were excellent as the appreciation on purchases were outstanding. We couldn’t make a wrong buying decision as prices continued to increase through the season,” says Larry Stivers, sales at marketing director with Miles Farm Supply, Owensboro, KY. “It was our best year ever by two-and-half times.”

“Prices and pricing were crazy this year,” agrees Case DeYoung, branch manager at Wil­bur-Ellis, Sparta, MI. “Products appreciated nearly daily. We would fret about the timing of a purchase and by the time we got the product in and sold, in some cases it doubled in value.” In fact, DeYoung says fertilizer sales at his location were greater than 25% higher by volume than last year.

Even though Miles Farm Supply had a great season for profits, actual volume was down some 19%, as growers did a “pushback” when prices when up, says Stivers. “For 2009, we anticipate more of the same pushback from farmers, especially on phosphate rates.”

Taking Care Of Customers

Heartland‘s Coppess tries to put the fertilizer picture into perspective for customers. He’s done some number crunching, gathering data on crop input costs from Iowa State University as well as plugging in his own retail figures. In 2002, growers spent about 32% of their revenues on seed, fertilizer, and ag chemicals. Then, from 2003-08, the figure crept up to 40%. For 2009, he projects an average input cost of $405 per acre — then with a traditional yield at $6 a bushel for corn, growers would be spending 39%. “It’s relative. When the farmer looks at his input costs as a percentage of his total revenues, it’s not too disruptive, really,” says Coppess. “It’s what he’s used to paying.”

To save customers money, Heartland Co-op is encouraging variable-rate application. The company does grid sampling, dividing fields into three types of management zones. Applications are tailored to match the needs of those zones.

“We’re constantly trying to come up with the least-cost options for our customers,” says Grower Fertilizer Co-op’s Sutton. Half of his sales staff is certified crop advisors with the expertise to make such recommendations. They’re also able to refer growers to equipment like the Seeing Eye for citrus groves — “it will not fertilize unless the tree is right next to the spreader,” he explains.

Advice to growers can come in other forms. Wilbur-Ellis’ DeYoung noted that this year saw a large increase in sales of slow release liquid nitrogen products over last year. He credits some of the new corn hybrids that need larger doses of nitrogen later in the season. DeYoung sees opportunity here for dealers who can identify nutrient demand curves for specific crops and then time the use and application of nutrients. “The folks that can do this will return more to a customer for each dollar he spends on inputs,” says DeYoung. “This will make a dealer a very valuable business partner.”

Financial Incentives

Many retailers are offering farm financing, contracting programs, and prepay programs for fertilizer this fall, so customers anticipating higher spring prices can reserve product. “We’re running prepaid price programs to give them the benefit of early prices and bring us in some cash flow,” says Posey County Co-op’s Swinney.

Dealers are also investigating products that just plain make farmers’ applications go farther. One such product has been the Agrotain, which reduces nitrogen losses and extends plant-available nitrogen. It’s the world’s first and only commercially available urea or urea-ammonium nitrate (UAN) additive that stops nitrogen volatilization for up to 14 days, explains Mike Stegmann, president of wholesale distributor Lange-Stegmann, St. Louis, MO.

More growers have been turning to the Agrotain in the last few years; in fact, “sales nationally have shot through the roof.” Miles Farm Supply’s Stivers reports that sales of the product at his dealership increased 25% this past season.

Growers Fertilizer Co-op’s Sutton has been checking out an item called MPPA Duo for citrus and vegetables from a French company, Timac. The University of Florida Experiment station is testing the additive, which has been reported to cut fertilizer use by 25%, he says.

Stegmann notes that the industry is starting to see less reputable products coming on the market, as companies try to take advantage of growers concerns about high fertilizer prices. He would encourage dealers and growers to ensure any additives they try are researched thoroughly — and well respected by the research community.
Solutions for growers will revolve around nutrient use efficiency, however that may be achieved, says Stegmann, and will be driven not only by high fertilizer prices but environmental concerns.

Business Strategies

Retailers have been trying to take care of themselves as well as their customers. A major strategy has been to stock up on as much fertilizer as possible. Posey County Co-op put up a 5,000-ton storage building some five years ago, and “it’s helped us dramatically, to be able to buy ahead,” says Swinney. “Now we wish we had built it twice as big.” In fact, the company is looking at further expansion projects.

The hunt for potash is particularly challenging. “Even though we can store two-thirds of a season’s requirements, we’re having to allocate more time than ever on this search process,” he says. “There are fewer suppliers willing to sell, pricing is no longer negotiable, decisions must be made immediately, and quantities are limited — rather than buying barges, which is our norm, we’re now buying 500- and 1,000-ton lots.”

Companies that blend their own fertilizer should look for ways to reduce shrink, notes Sutton.

And as mentioned earlier, dealers have been taking advantage of appreciating product values, charging fair-market prices for nutrient inputs.

“We’re going to have to be willing to change,” says Swinney. “We need flexibility in buying ahead, finding the cash to buy ahead, selling off some of our risk through prepaids with customers, and controlling our risks in receivables.”

What’s Ahead

Opinions are mixed as to what the future holds for the fertilizer market.

Availability. While nitrogen and phosphate are still accessible, Stegmann notes the supply/demand balance for potash is extremely tight — and has the potential to go higher. “If there was any nutrient I was comfortable to buy today if I wasn’t going to use or sell till next spring, it would probably be potash,” he says.

Cash flow/capital requirements. Cash flow will continue to be a challenge at multiple levels of the market chain. And Stegmann points out “so much more money” is needed for dealers to operate at the same level they’ve done in the past because products cost two, three, and even four times as much.

Companies that also do business in grain will especially feel the pinch. “If you’re doing any forward buying of grain from customers, you need to get some pretty significant cash flow to buy $6 corn and $14 beans and maintain a futures position with the carries in the fertilizer market and the margin call that goes along with this volatility,” says Heartland’s Coppess.

Prices and risks. Stegmann believes costs will remain at current levels for at least another season and would link high fertilizer prices to current high grain/food demand and costs.

“I think prices are going to continue to go up at a pretty rapid pace, based on the projections I’m looking at,” says Coppess. “We could see another 20%.”

Stegmann would caution that as fast as the price of fertilizer has gone up, it can come down equally as fast. “It’s fairly easy to make good money in an appreciating market, but you’ve got to remember that if we’re not careful, we can give it all back on the other side as it goes down,” he says. Coppess wonders if his company should be buying ammonia at $1,200 per ton now for the spring of 2009. “Is there any dynamic that could come to play and all of a sudden those prices start tumbling after we take our position?” he questions.

Be encouraged. Such risk management is complex and difficult, even for the experts, Stegmann believes. “We’re good businessmen, but we’ve got a company to run, and we don’t have economists on staff to give us inside advice. We’ve found ourselves, particularly in the last year or two, spending so much time trying to understand the market that it’s left us less time to run our business.”

No matter the market situation, dealers we talked to were adamant that the days of business as usual are over. Wilbur-Ellis’ DeYoung says, “The challenge will be not to do what we have always done, but to take production up several levels.”

Swinney agrees: “We’re going to have to be willing to change,” he says. “What we did five years ago is simply history,” and can’t be relied on.

“But I think it’s also the most exciting time we’ve seen in agriculture,” says Stegmann. “The best operators are going to emerge from this period of time stronger and healthier and better than ever with more opportunities than they can imagine.”

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