David Bennett, Associate Editor

December 9, 2008

3 Min Read

Over the years, as grain margins have been crunched or pressured, many elevator facilities have relied more heavily on fertilizer divisions for profit.

“Fertilizer buying groups have formed and a lot of custom application equipment” has been purchased, said Jeffrey Berg of Minnesota-based agriculture appraisal company, Crown Appraisals, Inc., at the recent American Society of Farm Managers and Rural Appraisers annual meeting in San Antonio.

“Farmers can buy chemicals about anywhere, but if you’re offering agronomic services and custom application, you can manage to keep margins higher.”

Seed sales have also become “really important for elevators. They can make 12 to 16 percent gross profit margins handling seed.”

Another trend in the fertilizer industry is large, regional, shuttle-train receiving fertilizer facilities. These are being constructed across the entire Midwest — “being built by the dozen. These things are 20,000 to 40,000 tons of storage capacity.”

Many times, a group of smaller cooperatives merge and build one of the regional fertilizer facilities and close down some of the smaller, less efficient facilities.

“Even with $3.50 diesel, it’s cheaper to haul the fertilizer 30 miles to the application equipment than to maintain 1,200-ton (satellite) plants around the shuttle receiver.”

Also, there are sometimes storage agreements “with Mosaic, or whoever the fertilizer producer is, to rent 10,000 tons of storage capacity in the facility. They pay rent and Mosaic may fill and re-fill that 10,000 tons several times a year.”

Berg ran into an interesting situation last June. “I was sitting in the office of the manager of a regional 50,000-ton facility. He got a call the day before from a supplier saying, ‘I can put 60 percent of the potash you used last year into your facility in August. Here’s the price. Do you want it?’”

The manager asked what the alternative was, if there was a choice. The supplier responded, “‘It’s just if you want it, or not. A simple yes or no answer. If you don’t want it, I’ll have it sold to someone else in an hour. If they don’t want it, I can sell it for more by exporting it.’”

The supplier wasn’t bluffing. Economies in India and China are creating a middle class. “The first thing they want to do when they have more money is eat better. That means protein, means meat, means more corn, and that means fertilizer.”

Did the manager take the offer? “Oh, absolutely! Absolutely. And then he turned right around and spent the rest of the day talking to large farm customers and sold it all. He made $100 per ton and transferred the risk.”

The price for phosphorus and potassium has more than doubled in a year. “Retail prices are in the $1,000 to $1,200 per ton range. There are facilities full of that high-priced commodity. If they don’t have it sold to farmers, they could lose hundreds of dollars per ton if the price of fertilizer nosedives and they are forced to sell at the lower price.

“Now, a lot of them don’t carry that kind of risk and don’t speculate with that many tons. You can assume a lot of those tons are already contracted and paid for by farmers.”

Berg pointed out that Cargill is a major owner of Mosaic — “perhaps 50 percent. Mosaic came up on the market several years ago. I don’t know what I was thinking. It came up at $7. This summer, it was up to $140 per share. Yesterday, it was at $31.50. It’s come down that hard.”

However, even with the price drop, it will be very expensive to put in the next crop. “Fertilizer prices haven’t dropped like fuel prices have. And seed prices haven’t dropped.

“It’ll be very interesting to see if there’s enough downward pressure in the fertilizer market so the fertilizer price to the producer is lower next spring. With the lower commodity prices, it could be a real struggle to make money next year.”

e-mail: [email protected]

About the Author(s)

David Bennett

Associate Editor, Delta Farm Press

David Bennett, associate editor for Delta Farm Press, is an Arkansan. He worked with a daily newspaper before joining Farm Press in 1994. Bennett writes about legislative and crop related issues in the Mid-South states.

Subscribe to receive top agriculture news
Be informed daily with these free e-newsletters

You May Also Like