The old saying that what goes up must come down is proving to be true once again in agriculture. But few who watched fertilizer prices rocket into outer space last winter and spring expected them to fall as quickly as they have in recent weeks.

Last spring, farmers experienced widespread cases of “sticker shock” as they watched anhydrous ammonia explode to $1,000 to $1,200 per ton with the prices of products like diammonium phosphate and muriate of potash following close behind.

Now, wholesale prices of anhydrous have fallen to the $500-per-ton range while urea has dropped from $850 per ton to $350 per ton, DAP from $1,100 to $600 per ton and muriate of potash, much of which is imported into the United States from other countries, from $900 per ton to about $800.

Last year's startling jump in fertilizer prices occurred because of a “perfect storm” in the energy markets and the U.S. and world economy, says David Asbridge, an analyst with Doane Advisory Services in St. Louis and a speaker at the recent Integrated Crop Management Conference at Iowa State University.

“We had a bunch of mild winters in a row, and it wasn't too much of a problem,” said Asbridge, referring to the rise in natural gas prices that began to occur early in this decade. “All of a sudden it got cold, and it became a big problem.”

Asbridge said natural gas prices surged $15 to $20 per million BTUs (1,000 cubic feet). With most of the world's ammonia fertilizer being made with natural gas (China uses a coal gasification process) the price increases sent shock waves through the fertilizer manufacturing sector.

“It can be disconcerting when you're used to $2 natural gas and all of a sudden it goes to $20,” said Asbridge. “Adjustments had to be made in our situation here in the United States. We saw the capacity to produce ammonia and urea drop off dramatically during this time period. It's beginning to level off a little.”

While the capacity to produce nitrogen fertilizer was stagnating or declining, world demand was growing with fertilizer use in China and India climbing faster the rest of the world combined. The declining dollar and record high freight rates also contributed to the turmoil in the fertilizer markets.

Besides the increased demand from its farmers, China added to the problem by trying to manage supplies. “World prices jumped $200 to $250 per ton after China implemented an export tax increase in late April and supplies tightened even more,” Asbridge noted.

Those higher fertilizer prices have led to new projects for increasing nitrogen production. Countries that have relatively cheap supplies of natural gas are building nitrogen-producing facilities, enough to increase the world supply from the current 105 million to 110 million metric tons to 125 million metric tons over the next 10 years.

“Over the world, fertilizer is priced in dollars,” Asbridge said. “With the dollar getting weaker and weaker, what happened was that just to stay constant the price of fertilizer had to go up. Now the value of the dollar is beginning to perk up a little bit and that is having an impact on fertilizer prices.”

The declining world economy has also had an impact on freight rates. “Last spring, leasing a freighter to ship fertilizer from Kuwait to the U.S. Gulf Coast cost $250,000 a day. Today the price had dropped to $10,000 a day.

High corn and wheat prices in 2007 and the first half of 2008 and the subsequent drop in futures prices also contributed to sharp rise in the price of crop nutrients and may now be helping lead those prices back down.

Now that prices for corn, soybeans and other commodities have declined 50 percent since last summer, wholesale prices for fertilizer are dropping as well, although retail prices have yet to fall he said. Wholesale fertilizer prices began to decline about two months ago, generally after the time farmers applied fall fertilizer to their crops.

“The reasons for the decline involve much more than just crop prices. Natural gas prices have declined from more than $11 per million BTUs to around $6 per million BTUs in recent weeks. Natural gas typically accounts for 80 percent to 90 percent of all input costs for making anhydrous ammonia.”

The economic slowdown has taken some of the pressure off natural gas prices and reduced the demand from other manufacturing sectors for sulfur and phosphate rock, said Francl.

Potash prices appear to be retreating much slower, if at all, because more than 90 percent of the potash used in the United States, is imported, mostly from Canada but also from some European and former Soviet Union countries.

A strike at three mines in Canada and the collapse of a mine in Russia has reduced the available supplies of potash and kept prices relatively high for potash. The weaker dollar has also kep prices up.

Analysts say it's difficult to gauge how much demand farmers will place on the fertilizer industry for its products in 2009 and, thus, how much pressure will be on prices for nutrients. In times of high prices, growers typically cut back on phosphorus and potassium, especially if soils have been maintained at high test levels for P and K.

Asbridge says the world demand for DAP and MAP (mono-ammonium phosphate) has been growing, rising almost 5 percent between 2001 and 2007. Almost all of that increase has been in China and India where cotton farmers have doubled their production in recent years.

“India has become the swing player,” says Asbridge. “It now accounts for 30 percent of the total world DAP trade. Brazil would be next except that farmers in that country are experiencing severe credit problems.”

Potash demand has been more up and down with world production and trade rising in 2005 and 2006 before leveling off with the price increases of recent months.

Planting decisions will impact demand in the coming months, he said, with soybeans offering growers a cheaper crop if financing becomes difficult to obtain. Asbridge says the fertilizer expense for soybeans will be significantly less ($25 per acre) than for corn ($198 per acre) if current price forecasts prove accurate.

“We will have to see corn prices pick up during the winter to bring more corn acres into the picture,” he said. (He was forecasting farmers could plant 89 million acres of corn in 2009, up from 85.9 acres in 2008 and that soybean acres could increase slightly from 75.9 million to 76.5 million acres when he spoke at Iowa State in mid-December.)

On the other hand, if farmers opt for more soybeans, the situation in the farm supply business could get interesting in the remainder of the winter and spring months.

Francl said fertilizer dealers with large, high-priced inventories could be in a difficult position this spring due to indications by farmers that they plan to plant less fertilizer-intensive crops such as corn and cotton.

To compete, fertilizer dealers will have to “cost average their prices down” by averaging the inventories they bought when N, P and K were selling in the neighborhood of $1,000 per ton with lower-priced future inventories, Francl said.

“Farmers would be well-advised to hold off their spring purchases for as long as possible. The inherent danger in such a strategy is that a spring rush may cause supply bottlenecks. However, nitrogen products can be applied to row crops in the form of side dressing later in the spring.”