Fertilizer pricing

[poorboy]

East of Calgary, at one of the new independants.

[crusher]

Thanks for the reply poorboy.

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No Name got dumped.

[cowman]

Just a short note on fertilizer pricing.
About 5 years ago there was a new outfit going around offering a great price on fertilizer. I took the quote into my local dealer and showed him. He opened up his books and showed me he couldn't even buy it for that price! His price allowed him a 12% markup over what he bought it for. Which is fair I believe?
Now here was a dealer who sponsored the ball and hockey teams, put on a customer appreciation day and was very involved in the community. Very honest and straightforward. Been there forever and wasn't going to bail out. So I went with him.
Guess what happened? The fly by nighter went broke in less than a year, ripped off a lot of farmers and spent some time in jail for fraud! It turned out he had also not been putting all the fertilizer on that farmers had paid for!
Now the next year when the wayward farmers came back to the local dealer, who do you think got treated best?

[TOM4CWB]

Cowman;

If we farmers had 12% markup over cost we would be VERY happy... there is simply not this much profit in the grain business.

6-8% is much closer to a reasonable number, which many will sell at... if they need a stable long term relationship with those farmers who they value a relationship with.

Cost control of our crop protection/fertiliser supplies is the most visible and easiest one of our costs we have a direct say in how much we pay.

It is critical that a fair cost is charged to farmers don't you agree?

[cowman]

TOM: Of course I agree that a fair cost is charged. The 12% figure was the difference between what he paid and what he got. Had nothing to do with his net. I suspect his net was about what he could have got in interest with a good GIC or other investment.
Retail typically has a markup of at least 40% so why would anyone think 12% was high?
Perhaps the lack of profit is what is driving a lot of Ag businesses out of business? Consider the machinery dealerships? How many have closed their doors in the last twenty years?
Now I assume someone must be making money on fertilizer or else no one would be making it. And competition is a good thing but there still has to be a profit in it or else you end up with one company(probably whoever has the deepest pockets). Then they will have a virtual monopoly.
I do realize we need reasonable fertilizer prices with the low prices for grain we have to work with. We also need honest reliable dealers who can make enough to stay in business?

[TOM4CWB]

Cowman;

If suppliers have a high debt load, high overhead costs, and low volume... they will not survive.

But this is exactly the point about our farms as well...

We all would like 12%... the fact is that there is not this much margin available in the business, either farming or as a supplier... and I am talking gross margin... the net margin on most supplyers products is about 2%, or they don't get the business, even with average overhead costs!

VOLUME pays for fixed costs... in either business!

[cowman]

I guess you are right Tom. Which is why we have few new dealers and few new farmers! I mean why would anyone want to invest in a business that nets 2%? With that rate of return I can understand why we have fewer suppliers all the time...and fewer farmers?

[cowman]

Oh and TOM how were your crops this year and how did the straw business turn out?

[AdamSmith]

The price of fertilizer is priced to what the Illinois Corn farmer can afford. Just like Combines and Tractors the majority of North American customers for fertilizer are American based. With trend line corn yields at around 143bu. and top growers yielding over 200bu. along with an LDP top up, these growers can easily justify much higher fertilizer costs than prairie wheat and canola growers.

Also, I haven't seen any sales stats but I suspect that fertilizer usage has been trending higher here on the prairies even as prices have sky rocketed higher.

A combine in 1986 was worth $80,000 (?)
today they are approaching $500,000.

I payed $16000 cash for a 4x4 pickup in 1986. Today they are worth $50000 .

The reason these prices still work for JD, CIH, NH, Ford, Chevy and Dodge is because the earning power and wealth creation capacity of the majority of North American farmers has been able to keep pace. Trend line corn yields, bean yields and US wheat yields have all been going up. Canola yield have also been rising steadily over the last fifteen years. CWRS wheat is the exception.

Demand for corn and beans have also kept pace with supply increases. CWRS wheat demand has fallen in this same time period. The CWB has predicted that demand for Canadian wheat will remain stagnent over the next five to ten years causing our market share to plumett because overall world demand for grains will increase.

So, either our product (CWRS wheat) has little growth potential or our self proclaimed Wayne Gretzky's of grain marketing are really the Marty McSorley's. Either way we better change the way were doing things or fertilizer prices are going to be a greater and greater burden for prairie grain growers.

[Everest]

Adam Smith:

As I contemplate your economic dissertation above, I am left to wonder if perhaps you are the REAL Adam Smith. Except I thought he passed onto his reward in the late 1700’s. And little would have he known about commercial fertilizer, Fords or Chevy’s, and certainly nothing about the Canadian Wheat Board. So I guess I have to conclude that you are not him. Amazing though, how his 18th century theories apply so well to today’s realities.