Green Lights Abound For Fall Fertilizer
September 6, 2016 Now up for debate: How will the downturn in crop prices affect this fertilizer season? It’s been a question for many in the industry over the past few months, but stakeholders are also evaluating other factors that promise to play into fall applications, including weather, product supplies, logistics and cropping shifts.
Comments from some experts CropLife® contacted were surprisingly positive. “Frankly, we heard talk about expected application curtailments last fall when grain prices were pretty much in line with where they are today. Those cutbacks never really transpired,” says Andy Jung, Director of Market and Strategic Analysis with The Mosaic Co. He adds that over the late summer months his company has seen “pretty good” interest from growers securing fall fertilizer requirements.
Related: Precision Ag Aids Fertilizer Programs
In fact, Michael Langemeier, Ag Economist with Purdue University, doesn’t think nitrogen application rates will be impacted by projected crop prices. Though growers are projecting losses in his region, returns are still above variable costs of line items such as fertilizer, seed, pesticides, fuel, repairs, operating interest, and crop insurance.
It’s a different story further west. Dave Spears, Senior Vice President and Chief Marketing Officer with Mid Kansas Coop (MKC), Moundridge, KS, explains that with wheat as well as corn and soybeans taking a hit pricewise, growers are struggling.
“It’s very difficult to pencil a positive return on any crop right now,” he says. “Customers are striving to be as efficient as possible, and quite frankly, they’re discouraged.”
Spears’ team recently just started to visit customers to set up fall fertilizer programs — and offer financing terms to help growers through this time of very tight cash flow. Some producers are turning to federal loan deficiency payment (LDP) programs to help as well. “They really didn’t want to use that option again,” says Spears, but with wheat prices at $3-something (and under in some cases), they need to take advantage of the government programs available to them.
Adam Day, Account Manager and CCA with Northern Partners Cooperative in Mendota, IL, does believe that as farm revenue decreases, producers will need to make cuts in production spending. “Some may push off the decision-making until they have a clearer view of the pricing situation for next season and can make operating decisions within their budgets,” he says.
In Nebraska, customers are reducing some fertilizer applications and are showing more preference for anhydrous ammonia, notes Phil Ramsel, Vice President of Agronomy Division at Cooperative Producers, Inc.
Number Crunching
Fertilizer input costs have been a bright spot in growers’ tightening budgets. In the past two years, fertilizer expense has lead the reduction in corn and soybean costs of production, says David Widmar of Agricultural Economic Insights. He cites Purdue crop budgets which showed total variable costs down $33 per acre (-8%) from 2014 to 2016. Fertilizer costs alone were down $21 per acre.
Simply put, “fertilizer prices in 2016 were down a lot,” Widmar says. And certainly at the wholesale level, fertilizer prices are much lower than they were a year ago, or certainly two or five years ago, adds Mosaic’s Jung.
Where does this all leave retailers? Continuing volatility in both grain and nutrient prices has caused many retailers to be very cautious in their buying ahead of the fall application season, says Richard Downey, Vice President, Investor/Corporate Relations and Market Research at Agrium Inc. Current general market sentiment is that most fertilizers have either bottomed, or are near the bottom of pricing levels and are likely poised to rise, as they often do during a busy fall application season.
Weather, Logistics
Another production variable that’s had a positive impact this season is the weather. Stakeholders that CropLife visited with expected exceptional yields — some to the point of record harvests — thanks to favorable growing conditions in many regions.
In addition, this year’s crop is maturing ahead of normal, which could lead to an early harvest and extended fall application season, says Downey.
In fact, forecasters anticipate that favorable weather in key growing area will continue as rigs hit fields to harvest crops and put down product. “The expectation is that this will be a relatively good harvest season — the La Niña-like conditions will persist — so it should be relatively warm and dry. If growers can get the crop off in a timely manner they’ll put their crop nutrition down in the fall,” says Mosaic’s Jung.
Theoretically there’s going to be plenty of time to get soil testing completed, yield maps analyzed and potash spread, says John Christian, President of Green Valley Agricultural Inc., Wayland, MI, of the growers in his territory who have seen adequate rainfall, big yields and an earlier than normal harvest.
A huge harvest means that large amounts of nutrients have been tapped from soils, and they’ll need to be replaced for 2017. While fertilizer manufacturers and retailers felt product supplies are currently good, Jung said a “big demand pull” in North America to replace record nutrient removal could pose a challenge. In addition, Mosaic is also expecting strong demand from Brazil, where commodity prices for coffee, sugar and cotton have held up very well. The company also anticipates strong demand in India where after three years of drought, growers are experiencing a welcome stronger monsoon.
“There could be this bunching of demand all at the same time which then starts to strain the supply chain,” Jung cautions. “Producers can’t produce fertilizer fast enough to meet these short-term demand spikes. I would say that there is at least some possibility that we see some of those issues develop this fall in North America.”
Unfortunately, such a bountiful harvest may also pose a challenge for fertilizer logistics, and Jung compares this season to the fall of 2013/spring of 2014. “The supply chain struggled to move the really big harvest to the export terminals,” he says. “It was exacerbated by a bad winter. This winter’s La Niña may make conditions a little colder than average, and I think there’s at least a warning flag that logistics could be strained.”
Product supply and logistics truly get stretched when large volumes of fertilizer work get shifted to spring. “Growers really don’t care about logistical problems until it has an effect on the price of the product,” says Green Valley Ag’s Christian. “We had that issue two years ago and it could happen again.
“Getting resupply in the spring is difficult on the entire system because farmers can prepare fields and plant so fast, it makes managing inventories of certain fertilizer products very challenging, especially potash,” he adds.
On a positive note, the oil and gas sector is not nearly as busy as it was two years ago. “I think that’s taken some of the strain off of the logistics system,” says Jung. ”The industry is not moving as much frack sand or taking as much oil by rail as it might have been back then.”
One other factor that may impact fall fertilizer volumes is uncertain acreage increases or shifts for 2017. Looking at this year, spring 2016 saw a brief, strong rise in crop prices, spurring growers to plant more acres, notes Jeff Holzman, Director of Market Research at Potash Corp. “Fertilizer use was strong,” says Holzman.
Downey believes that corn acreage increase, in part, caused crop price declines. “These lower prices may result in a shift in crop acreage for next year, particularly a potential reduction in corn acres, which would impact fall fertilizer demand,” he notes.
In Kansas, there’s a sense that wheat acres are going to be down because of economics, says MKC’s Spears. Frustration with wheat crop prices — and failed weed control in soybeans — is leaving growers at a loss, uncertain about what crop to actually switch to.
Margins On Everyone’s Minds
Both growers and retailers may be frustrated with margins as the fall fertilizer season progresses.
Certainly the farmer margin is tighter than it has been over the last five or so years, says Holzman. “But when we do the ROI calculation, we still see that there is a very strong return for fertilization. It’s not that lower crop prices don’t have an impact, they do have impacts on farmer decisions and budgets, but relative to where fertilizer is today, we do still see good value,” he explains.
Mosaic helps growers calculate value as well. The company’s Website features a Plant Nutrient Affordability Index that looks at the relationship of crop prices (corn, soybeans, wheat) and fertilizer prices over time. “We see a pretty significant value opportunity for crop nutrients,” says Jung. “I think farmers and those that supply them with agronomic advice are saying the same thing.”
MKC’s Spears raises the tough topic of retailers’ margins. Over the past few years he’s seen margin compression across the country at the retail level, across the entire agronomy segment. “Some retailers take the approach that they’re going to try and save the farmer back into prosperity. That just doesn’t work,” he says. The trend started with seed and crop protection products, then carried over to nutrition.
He offers that if dealers are going to replace and renew assets — and continue to provide the people, the programs, the service the farmer wants — they need to make a return on the investment.
How they will fare in fall 2016 is uncertain. “Retailers are marginally optimistic that they will have a better fall than last year,” says Paul Reising, Senior Product Manager of Micronutrients with Compass Minerals. The overall fertilizer index has gone up a little bit. There’s signaling that the industry has corrected its prices with crop commodity prices.
“The elephant in the room is what farmers anticipate the corn price to be in 2017,” Reising says. “Farming is a cyclical business, and we’re on the downside.”
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