There's a one-ton elephant in the room where fertilizer dealers and farmers are in a standoff. Dealers think the animal is worth close to $1,000, while farmers calculate its worth at maybe half that price. Nobody seems ready to budge, but, by spring, everybody has to leave the room.

This predicament started last summer when dealers started to build fall and spring inventory while fertilizer and crop prices struggled to find a top. With corn worth more than $7.00 at the time, NH3 priced at more than $1,000/ton still penciled a profit for farmers.

Then the bottom fell out of crop prices and dealers were stuck with sheds of unsold product and no buyers. Supply and no demand led to severe price drops. In the 12 weeks between September 10 and December 10, 2008, anhydrous prices dropped 86.6%. Urea fell more than 70%. At the same time, fertilizer plants around the world started to shut down production.

“It doesn't make any difference how cheap fertilizer gets right now, the system is constipated. There's no room for fertilizer, regardless of price,” says Bruce Vernon, sales and marketing manager for Mid Kansas Cooperative, Moundridge, KS.

To make matters worse for retailers, the rules changed in 2007 and 2008. “There used to be flexibility in the market. If you had a good relationship with your supplier, they'd modify contracts and move product around if retailers were caught in a bad position,” says Ron Farrell, Farrell Growth Group, an agribusiness consulting firm in Liberty, MO. “But it's more difficult to change orders as the supply line gets longer. A large portion of the fertilizer used in the U.S. now is produced off shore rather than domestically. In 2008, retailers were told they had to take delivery on contracts or pay storage until they did. Many ended up with high-priced fertilizer that farmers were hesitant to buy.”

As the calendar turned to the new year, farmers were looking beyond the high-priced fertilizer stored in local sheds, to the discounted product that sat in barges on the Mississippi River and in cargo ships anchored in the Gulf.

“Farmers feel like they have the upper hand right now,” says Jeff Appel, risk management consultant with Russell Consulting Group, Normal, IL. “They're waiting for retailers to get nervous. But as we get closer to planting, farmers will start to lose their leverage.”

No one wants to guesstimate what fertilizer might cost this spring. There are simply too many factors that will affect prices locally. “In the southern plains states, I think we'll see NH3 at $600 to $650/ton, urea at $500/ton and DAP at $600/ton,” Vernon says. “UAN is the wild card. The U.S. is the largest consumer of UAN, and suppliers kept buying a lot of product through the high prices that they're still trying to find a home for.”

Doug Stone, senior vice president for sales and marketing, Terra Industries, Sioux City, IA, takes a little longer view of the prices farmers will likely pay for fertilizer. “If we presume that corn prices will range from $3.50 to $4.50/bu. for the next three to four years, I think we'll see urea price at $500 to $600/ton and NH3 at $800 to $900/ton,” he says.

It's simple to categorize the retail fertilizer industry as over-bought and over-priced. But it is more complex than that.

Certainly, there will be tens of millions of dollars lost by some retailers, according to Vernon. “But when some dealers were loading up with high-priced fertilizer, grain was high-priced as well,” he says. “Some co-ops and grain companies that couldn't afford to buy both bought grain and delayed fertilizer purchases until later. Unfortunately, some companies bought both and now they're competing with dealers who waited and bought lower-priced fertilizer.

“The market is the market. It doesn't care what retailers originally paid for fertilizer.”

Market vs. market share

That's the dilemma Appel sees for Midwest retailers. “Retailers will fight to the bitter end to keep customers,” he says. “But the ones who bought earlier are competing with dealers who did nothing and now can buy cheaper fertilizer. The biggest risk those retailers face is how much money they have to lose to keep customers. That second group can use their cheap fertilizer to either build their customer base with price as a weapon, or lock in some windfall profits. I think we'll see more localized pricing in 2009 than ever before, depending on when dealers made their purchases.”

Terra's Stone recommends that farmers who haven't locked in fertilizer prices for 2009 start comparing prices and get their supply put in place. “Sitting and waiting won't be a benefit,” he says. “Don't wait until March or April to buy fertilizer. You don't know what will happen to the market.”

There's the irony. Depending on spring weather, fertilizer prices could easily rebound to mid-summer 2008 levels again if demand suddenly reverses and supply can't keep pace.

“Prices should never have gone as high as they did, and shouldn't be as low as they are now,” Vernon says. High prices dropped demand, which dropped prices low enough that fertilizer producers around the world cut production. “Those tons of production that are shut down may be tons that the market needs,” Stone says.

Spring supply

A wet spring in 2008 only made the situation worse. With a delayed harvest and seasonal rains, only about 50% of the normal amount of fertilizer was applied in the fall.

“The reduction in fall-applied fertilizer could lead to a substantial increase in demand for spring-applied fertilizer, placing additional strain on the supply chain,” Farrell says. “We could see spot shortages of supply as a result of this increased short-term demand, which could mean some farmers may not be able to obtain all of the fertilizer they would like, when they would like to have it this spring.”

“Can the fertilizer distribution system handle two seasons of product in one season? We have always found a way to make it work,” Vernon says. “We've pulled a rabbit out of the hat three of the last five years.” But, he admits, the rabbit is a lot bigger this year.

“We've got 1 million tons of phosphate sitting in central Florida that needs to be in the Midwest by spring,” he says. “That's the equivalent of 10,000 railcars, or 153 unit trains. We don't have that many railcars available.”

Stone sees similar supply problems for nitrogen fertilizer. “In a normal fall season, 1.5 to 2 million tons of anhydrous are applied,” he says. “In 2008, about half, or 750,000 tons, didn't make it to the field. It will take 2 million tons of UAN to replace that 600,000 tons of nitrogen. We don't have enough railcars and trucks to move that much additional product to the field during a compressed spring season.”

“The spring season is always tight, and the current situation makes it tighter,” says Harry Vroomen, vice president of economic services for the Fertilizer Institute, Washington, DC. “It all depends on weather, railcar availability and international competition. Farmers playing the waiting game are taking a chance that product will be available at a lower price in the spring.

“You can't turn around worldwide fertilizer production overnight,” he continues. “It takes 10 days to get product to the U.S. Corn Belt from Trinidad and a month to a month and a half from Russia or the Middle East.”

Part of the supply chain

The volatility of 2008 will likely change the fertilizer industry forever. “In 2008 retailers took the market risk because they didn't have commitments or agreements with farmers,” Stone says. “They're going to be looking for ways to hedge that risk with growers.”

That's the way Vernon already does business. His fertilizer sheds are full of fertilizer, but farmers prepaid for all of it before he placed the orders. “I don't short the market,” he says. “There's product in the buildings, but I don't own it.”

Mid Kansas Cooperative offers customers a propriety program that allows them to lock in grain sales at the same time they purchase inputs. “We talk a lot about locking in and locking up and we haven't changed our strategy,” Vernon says. “We believe in today's market you need to take action on both sides. If you want to lock up fertilizer prices, then we suggest you talk to our grain-marketing folks at the same time. Those decisions are no longer independent.”

“Two thousand eight is going to drive change in the fertilizer industry and it will be uncomfortable,” Farrell says. “Most retailers will survive 2009, but they can't afford to take a second hit. That means they have to shift some of the risk, and benefits, to the farmer in the form of contracts.

“I think the market will stratify into two groups. About 20% of farmers will look for the lowest price and figure they can buy better than the industry without contract positions. The other 80% is going to look to be more fully integrated into the supply chain and put themselves in a priority position with their dealer to get the product they need at a price that the dealer and farmer can live with.”