Look to management, not markets, to cut fertlizer costs

By Cindy Snyder, Ag Weekly correspondent
Friday, January 2, 2009 4:46 PM CST

COEUR d’ALENE, Idaho - Even though wholesale fertilizer prices fell along with crude oil and corn prices the second half of 2008, producers should be planning for fluctuating fertilizer prices in 2009.

Gary Hergert, a University of Nebraska extension soils specialist at Scottsbluff, Neb., wouldn’t be surprised to see fertilizer prices go higher than last year’s levels.

Fertilizer is truly an international commodity, Hergert said, so what happens in the Middle East, India, China and in former Soviet Union Republics like the Ukraine (Yuzhny) influences local prices.

Beyond following world trends and locking in a good deal when one can be found, growers don’t have much control over fertilizer costs. As the price volatility in the commodity markets has shown in the last year, growers also don’t have much control over the prices they receive.

That leaves management as the best bet for controlling production input costs.

“The keys to maintaining profitability are to know your soil test levels and do the best job of fertilizer application to enhance efficiency,” Hergert said.

U.S. corn growers are already using nutrient efficiency to produce 74 percent more corn with 10 percent less nutrients, Ford West defines nutrient efficiency as using the right product at the right time at the right rate at the right place.

West has worked with The Fertilizer Institute, a trade organization, for 30 years. He believes escalating food prices earlier this year served as a wake-up call to the rest of the world that fertilizer has a role to play when it comes to food security.

“The use of fertilizer is directly related to 40 to 60 percent of the world’s food production,” he said.

Demand keeps growing

Fertilizer use is expected to jump from 175 million tons of nutrient to 200 million tons, all of that forecasted increase in fertilizer use is projected to come from outside the U.S. In fact, that projected increase is greater than total U.S. fertilizer use of 22 million tons.

“Fertilizer use in the U.S. has been flat for the last twenty years,” West told grain producers from Oregon and Idaho during their convention in Coeur d’Alene.

When corn acreage jumped to 93 million acres, fertilizer use increased slightly but not nearly to the extent competing countries are using fertilizer. About 45 percent of the commercial fertilizer used in the United States is applied to corn.

Volatility here to stay

West characterized 2008 as a year in which a lot of price discovery happened. As he pointed out several times during his 1-1/2 hour talk during the grain meeting, he discusses trends, not prices.

But the FOB Gulf Coast price for urea gives an example of what those trends were. In December 2007, urea was priced at $425 per ton. That fell to $375 per ton in March 2007, before climbing to nearly $600 in August 2008. By last month, the latest numbers available, urea had plunged to $200.

Fertilizer represents just 2 percent of the total ammonia used in the United States.

Ammonia is primarily used to make nylons, explosives and other compounds that are then used to make fibers, plastics and polyurethanes. These industrial uses of ammonia are seeing steep declines because of the economic downturn, which has slowed the construction and automobile industries.

Potash shows the same trend: rising from $275 per ton in December 2007 to nearly $800 per ton in September, and back to $300 per ton. Even micro nutrients have seen wild price fluctuations. Sulfur hit $820 a ton on July 1, but is trading at around $40 per ton now.

What happened? To use a technical economic term, demand destruction, West said, only half in jest.

“The price of fertilizer got high, you guys said, ‘We’re not going to use this,’ and it happened worldwide,” West said.

Not surprisingly, the peak in fertilizer prices occurred just weeks after the peak in corn prices. Falling energy prices are helping bring the cost of producing urea - most of which is produced using natural gas - down, but many fertilizer companies find themselves in the position of owning warehouses full of product purchased when prices were high.

The late, snowy fall in the Midwest has kept many growers from completing their fall fieldwork, and that means warehouses can’t move that expensive product out the door, West said. Some estimate fall nitrogen application in the Corn Belt was half of normal.

No matter how high fertilizer prices seemed to growers who were writing the checks to their local fertilizer dealer, West suspects those dealers were actually charging a blended price between the lower prices in March and the higher prices in June. Those same dealers are likely to charge a blended price on the way back down, including both the higher July prices and the lower November prices.

“Decisions about what fertilizer use was going to be in the fall of 2008 and the spring of 2009 had to be made in June and July because of the distribution system,” West said. “The inventory pipeline is full. We’ve got to get all of this high priced inventory cleared out of here. It’s going to be painful.”

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