WHAT A difference a decade has made in the fertilizer industry. U.S. production declined sharply in the middle of the 2000s, with several facilities being mothballed. One example: Phosphate rock production saw a 30% decline in U.S. production from its peak in 1996. Although the sharp increase in product prices in 2008 drew some investment dollars back into U.S. facilities, production has not returned to decade-ago levels.

Production capabilities have developed in other parts of the world, making North American producers work harder to remain competitive. China, for example, has transitioned from being a big net importer to a large net exporter of phosphate fertilizer. The U.S. industry bore the brunt of this development because it had supplied about 95% of China's phosphate imports just a little more than a decade ago.

Fertilizer wars

Becoming a bigger fish in the global fertilizer market is clearly the goal of several North America manufacturers, as evidenced by this past year's takeover saga involving CF Industries, Terra Industries, and Agrium Inc. Although numerous stock offers and much legal maneuvering have stretched each of these two battles for more than a year, no resolution has come to either — yet.

In January 2009, Illinois-based CF Industries made its first of many offers to buy Terra, the Iowa nitrogen manufacturer. But Terra's answer then and to successive offers was “no.” This fall CF even managed to get three of its own candidates elected to the Terra board of directors. In December, Terra rejected CF's eighth offer.

Some analysts expect the negotiations may continue, but in a less public manor. In an odd twist in late 2009, CF reduced its holding of Terra stock from 7% to just below 5% so that the company no longer has to publicly disclose any contact with Terra.

Yara, the world's largest fertilizer manufacturer, based in Norway, also has been considered as a possible bidder for Terra, but late last year, the company's CEO, Joergen Ole Haslestad, was quoted by Reuters as saying that, while the company had considered it, “we had no interest in being in a bidding war in the U.S.”

In February of 2009, five weeks after CF made its first offer to buy Terra, Calgary-based Agrium made a play for CF, offering to buy all CF capital stock for $72 a share in cash and Agrium stock. The CF board rejected the offer. In June, CF shareholders tendered 62% of the outstanding shares in favor of a second Agrium offer. But CF management has continued to reject all offers. Agrium's next strategy appears to be nominating a slate of directors to stand for election to CF's board at its 2010 annual meeting.

Conservative approach

The fact that no deal has been made in either of these takeover attempts is probably a reflection of the lingering conservatism of investors after the 2008 economic fallout, says Roger Ginder, Iowa State University agricultural economist. “Shareholders will need a compelling reason to support these deals, and they may not think consolidation is in their long-term best interests,” he says.

He concedes, however, that the broader, global focus that the industry has taken in recent years has put more emphasis on fertilizer as a commodity. “With that change comes greater price volatility and market risk, all along the supply chain,” he says.

“Changing attitudes about how and when dealers and farmers buy product is probably more significant than potential manufacturer consolidations,” says Jeff Greseth, director of sales, Crop Nutrients, for CHS. “It's already necessary to buy product from other parts of the world. The bigger challenge is at the retail level — workng with dealers who are no longer willing to take big positions in the market before having the sales, and growers who are still hesitant to make buying commitments farther out.”