From www.agriweek.com:
WATCH OUT FOR THE FERTILIZER TRAIN WRECK
January 19 2009
The current fertilizer situation is unprecedented. Roughly speaking, nitrogen fertilizer prices doubled between early 2008 and the North American planting season, rose further into the summer and then dropped 60% or more between September and year-end. Now the question for manufacturers, dealers and farmers alike is whether prices will go down further, stay about where they are or rise again. Absolutely nobody can predict which way things will go. However it looks far more likely that prices will rise or remain similar than that they will drop.
Somewhere between 10 and 20% of North American nitrogen production is currently shut down because there is nowhere to store the product. Storage is stuffed with material that should have been bought and applied last fall. Three things combined to reduce fertilizer use by at least 60% after the 2008 harvest: the late harvest season in most places, the jump in fertilizer prices and the slide in grain and oilseed markets. The late-2008 price drop was the direct result of the collapse in retail demand. Buying was temporarily suspended by enough end users to completely disrupt the supply chain.
Imports will take a bigger share of the North American market than never, and imported supplies are a kind of safety valve against domestic shortages in Canada and the U.S. But world fertilizer supplies are tight. Fertilizer use in key areas, especially India and China which are desperately trying to increase their crop production, will be equal to that of 2008 or higher. Most world crop prices are still high enough to encourage maximum yields, which will maintain and even increase offshore fertilizer demand. Exportable supplies are lower. China, traditionally a major exporter, has been completely out of the international fertilizer trade for the past year because of government policy to increase crop production and preserve fertilizer supplies for its farmers. To be sure, financing and credit problems may impact on demand but various countries are taking unusual steps to help farmers.
Because so little fertilizer was applied last fall, the process of producing, distributing and applying fertilizer to the land that would normally occur over seven or eight months will have to be compressed into perhaps three or four months. The transportation and distribution system does not have the capacity to do this in an orderly way. Possible variations in planted area, the mix of crops and rates of fertilizer use are actually less important than the sheer task of getting fertilizer from where it is produced to where it is needed: supply, in other words.
Historically, fertilizer prices are only partly determined by production costs and the price of natural gas. They also respond to supply and demand, internationally, nationally and regionally. Tight supply, regardless of the cause, inevitably leads to higher prices.
For fertilizer prices to drop into spring or even remain near current levels would be not only counter-seasonal but would also require an unprecedented drop in spring fertilizer use in North America and therefore an excess supply. Right now the fertilizer market is trying to stimulate demand in the face of stern buyer resistance. As spring approaches, fertilizer buying will begin to get urgent and if it becomes obvious that prices have bottomed, all the elements are present for a surge in demand that could easily bring prices back up to the year-ago highs, or at least most of the way there. It appears very risky for farmers to hold off buying fertilizer and taking delivery any longer on the chance that prices might go lower. Any further downside is very limited while the upside in prices could be open-ended. Last week there were already reports of price quotations going higher.
The situation gets more threatening the longer it takes for fertilizer to start to move, both in terms of sales and physical transfer into farm storage. Manufacturer and particularly dealer inventory has to be cleared of the high-priced product that went in when normal sales and use patterns were expected.
Though more fertilizer storage has been built in the past few years, inventory typically has to turn over several times during the spring season. It will have to start doing so very soon.
WATCH OUT FOR THE FERTILIZER TRAIN WRECK
January 19 2009
The current fertilizer situation is unprecedented. Roughly speaking, nitrogen fertilizer prices doubled between early 2008 and the North American planting season, rose further into the summer and then dropped 60% or more between September and year-end. Now the question for manufacturers, dealers and farmers alike is whether prices will go down further, stay about where they are or rise again. Absolutely nobody can predict which way things will go. However it looks far more likely that prices will rise or remain similar than that they will drop.
Somewhere between 10 and 20% of North American nitrogen production is currently shut down because there is nowhere to store the product. Storage is stuffed with material that should have been bought and applied last fall. Three things combined to reduce fertilizer use by at least 60% after the 2008 harvest: the late harvest season in most places, the jump in fertilizer prices and the slide in grain and oilseed markets. The late-2008 price drop was the direct result of the collapse in retail demand. Buying was temporarily suspended by enough end users to completely disrupt the supply chain.
Imports will take a bigger share of the North American market than never, and imported supplies are a kind of safety valve against domestic shortages in Canada and the U.S. But world fertilizer supplies are tight. Fertilizer use in key areas, especially India and China which are desperately trying to increase their crop production, will be equal to that of 2008 or higher. Most world crop prices are still high enough to encourage maximum yields, which will maintain and even increase offshore fertilizer demand. Exportable supplies are lower. China, traditionally a major exporter, has been completely out of the international fertilizer trade for the past year because of government policy to increase crop production and preserve fertilizer supplies for its farmers. To be sure, financing and credit problems may impact on demand but various countries are taking unusual steps to help farmers.
Because so little fertilizer was applied last fall, the process of producing, distributing and applying fertilizer to the land that would normally occur over seven or eight months will have to be compressed into perhaps three or four months. The transportation and distribution system does not have the capacity to do this in an orderly way. Possible variations in planted area, the mix of crops and rates of fertilizer use are actually less important than the sheer task of getting fertilizer from where it is produced to where it is needed: supply, in other words.
Historically, fertilizer prices are only partly determined by production costs and the price of natural gas. They also respond to supply and demand, internationally, nationally and regionally. Tight supply, regardless of the cause, inevitably leads to higher prices.
For fertilizer prices to drop into spring or even remain near current levels would be not only counter-seasonal but would also require an unprecedented drop in spring fertilizer use in North America and therefore an excess supply. Right now the fertilizer market is trying to stimulate demand in the face of stern buyer resistance. As spring approaches, fertilizer buying will begin to get urgent and if it becomes obvious that prices have bottomed, all the elements are present for a surge in demand that could easily bring prices back up to the year-ago highs, or at least most of the way there. It appears very risky for farmers to hold off buying fertilizer and taking delivery any longer on the chance that prices might go lower. Any further downside is very limited while the upside in prices could be open-ended. Last week there were already reports of price quotations going higher.
The situation gets more threatening the longer it takes for fertilizer to start to move, both in terms of sales and physical transfer into farm storage. Manufacturer and particularly dealer inventory has to be cleared of the high-priced product that went in when normal sales and use patterns were expected.
Though more fertilizer storage has been built in the past few years, inventory typically has to turn over several times during the spring season. It will have to start doing so very soon.
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