THE TIME when you can amble into the fertilizer dealer just before planting season to buy fertilizer is coming to an end.
In the future, dealers, their hands forced by industry changes beyond their control, will ask you to commit to purchases well in advance of your needs. They'll want you to put your money on the line ahead of time as well. If you're not comfortable with ponying up for fertilizer months in advance, you may not find it available when you want it.
That's the picture of a changing fertilizer marketplace painted by Bruce Vernon, head of crop nutrients marketing for Agriliance, the largest fertilizer distributor in the Corn Belt.
“With the price volatility the way it is, nobody is going to put fertilizer out in the marketplace just hoping somebody will buy it later,” he says. “Out of necessity, the farmer will have to take on some of this risk.”
Dealers are caught in the middle between manufacturers and distributors on one side and growers on the other. Over the past couple of years, increasingly ag retailers have been telling customers they will have to begin booking ahead or suffer the consequences. But growers have been reticent to change their buying habits. Steady nitrogen fertilizer price declines since record highs early last winter have emphasized the risk of adopting the new approach — and made it harder to swallow.
“Our customer hasn't had an availability issue, but that is what we are facing down the road,” says Doug Wright, purchasing manager for Mid-Kansas Cooperative, a large agricultural retailer in central Kansas. “Until they feel that crunch, they are just going to hear this warning as a sky-is-falling threat. We don't know when we will be in a position of having fertilizer supply interrupted, but we think it will happen.”
Dodging a bullet in 2006?
According to Vernon, a fertilizer shortage was narrowly averted in 2006. “This year it didn't break, but it was set up to,” he says.
Sales started slow last winter because of high prices following domestic natural gas disruptions from Hurricane Katrina. Sales didn't start moving until late January and February, when the U.S. price of natural gas fell and nitrogen prices began to drop. Because buying was delayed, distributors and dealers, who are increasingly dependent on imports from the Middle East and elsewhere, weren't able to procure enough supplies to handle normal fertilization rates.
“There would have been a shortage if farmers had applied normal N rates,” Vernon says. Early estimates show that nitrogen utilization will be down 10 to 12% this year, with phosphorus and potassium down 20 to 25%.
Urea that arrived in the U.S. on the tail end of the application season — just in the nick of time had farmers followed normal fertilization practices — has ended up being re-exported.
Behind the change
A number of factors are behind what Vernon and other industry insiders see as the need to change fertilizer buying practices. These factors include growing worldwide demand for fertilizers, as well as high U.S. natural gas prices, which have reduced domestic nitrogen manufacturing capacity and increased U.S. dependence on imports.
Volatility of U.S. natural gas prices is a third critical factor, because natural gas is the major component in nitrogen fertilizer and world fertilizer prices are pegged loosely to the U.S. natural gas market.
Because of increased price volatility and the resulting higher risk of loss of value of inventories, manufacturers and distributors have tightened sales practices in recent years. Instead of having ample supplies on hand for anticipated needs, they have held back on booking fertilizer until it has been sold. The potential for shortages emerges when these changes are overlaid with longer lead times to procure fertilizer — between 45 and 75 days from loading from a plant in the Middle East to major distribution facilities in the Midwest.
“In the past, we had ‘just-in-case’ inventory,” Vernon says. “We've gone from ‘just-in-case’ to ‘just-in-time,’” he says. “It is hard to do just-in-time with a bulky product like fertilizer.”
“We have been telling our customers that the domestic fertilizer industry is going the way of crude oil,” says Wright, the Kansas ag retailer. “We are an import-dependent country. We have to begin to procure supplies months in advance for this system to work.”
New buying tools
To help stimulate more interest in advance fertilizer purchasing, Agriliance will begin offering a grower version of its Crop Nutrient Exchange (CNX) to participating agricultural retailers beginning this fall. In turn, dealers will offer the service to their customers. CNX, which is three years old, is an online buying tool for ag retailers that offers up to 600,000 tons of fertilizer daily at various locations for immediate delivery, or delivery up to 14 months in the future. All major nutrients — except ammonium nitrate — are available.
Retailers who offer the service will have the ability to market current and future fertilizer inventories to their customers online. Agriliance hopes that offering the new service will help both itself and retailers by providing a convenient a way to make purchases.
Wright says dealers may also need to work on ways to offer hedging tools to help growers manage the price risk on contracted fertilizer. “We are exploring new ideas for minimizing risks on fertilizer input costs both for our business and to make them available to our customers,” he says.
Hedging tools currently aren't widely available and aren't very attractive. Because of a lack of liquidity, Chicago Mercantile Exchange fertilizer futures contracts, though available, aren't practical. The large international Direct Hedge Exchange, based in Switzerland, isn't workable for many retailers, much less a grower, given its 5,000-ton contract size, Vernon notes.
Wright and his company have examined hedging using natural gas options against anhydrous ammonia purchases. The company also has looked at over-the-counter option strategies that might allow it to bundle fertilizer purchases and price protection in a single product. But neither approach is ready for prime time at this point.
“The manufacturer and the distributor cannot afford the risk of manufacturing and buying fertilizer unless it is sold,” Wright says. “Now retailers have to take on that risk to have the product to supply to the customer. If retailers haven't forward contracted with the customer, or hedged their risk some other way, the risk to us is immense.
“After the beating farmers and the industry took this spring on forward contracts and the devaluation in the marketplace, we have got to find a way to do this.”
NITROGEN PRICE OUTLOOK
Volatility is the only thing certain about nitrogen prices
By David Hest
THE VOLATILITY that led to last winter's post-Katrina nitrogen fertilizer price run-up — and falling prices this spring and early summer — makes forecasting prices a challenge.
By the time you read this, a Katrina-like event may have jolted the market or may be just around the corner. Or prices, which had been flagging for months when this was written, could continue to soften.
Volatility is a huge challenge for virtually all the players involved in the fertilizer market. That's because the potential for dramatic changes in the value of inventory makes decisions to manufacture or procure fertilizer risky, says Bruce Vernon, Agriliance director of crop nutrients marketing.
And volatility is not going away anytime soon.
“We believe that the extreme volatility we have seen in the past year is the new ‘normal,’” Vernon says. “It isn't a one-year situation.”
Vernon says, in the coming months, nitrogen prices again will be highly volatile.
“We are one event from turning eroding prices around on a dime: one hurricane, an unfortunate event in the Middle East, an inordinately hot summer that drives up natural gas prices,” he says. “If we don't get that single event, prices will keep eroding for some time.”
Three new urea plants in Egypt, Saudi Arabia and the United Emirates have come online in recent months, well ahead of schedule. Together, the plants have the capacity to export about 2 million metric tons of urea, enough to help keep urea prices soft, despite continued growth in world fertilizer demand. Unless, of course, unexpected events intercede.
Soft nitrogen prices are likely to put additional pressure on domestic fertilizer manufacturers. They may respond by curtailing production or permanently shuttering plants. This would bring supply and demand back into tighter balance, until the next round of urea plants now under construction or on the drawing board begins production. A half-dozen urea plants — mostly in the Middle East — are scheduled for completion by the end of 2008.