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Corn+Soybean Digest

Sticker Shock

The decision to buy fertilizer has become a guessing game — not unlike the traditional anguish of when to sell corn and beans.

The days of fixed prices are gone and so are many of the American manufacturers that used to stabilize the market. Today's market is worldwide and just as unpredictable.

Do you know that the U.S. now ranks third behind China and India in fertilizer use? Single contracts for millions of tons of fertilizer aren't unusual for those countries.

Do you know that the U.S. now imports half the nitrogen (N) fertilizer it uses? Fewer than 10 years ago the U.S. produced 85% of its N, but more than 25 plants have gone out of business and others are idle. Cheaper natural gas has pushed that production to the Caribbean and Arab Gulf (see chart, right).

You probably know average fertilizer prices reached an all-time high in April this year. But, do you know the same thing is likely to happen in 2008? The ethanol boom and resulting increase in corn acres is part of the reason. A 19% increase in corn acres in 2007 adds pressure to the N market around the world.

It's perhaps most important that you know that as the risk of ownership grows in the fertilizer industry, everyone involved is looking to shift that risk to the farmer.

“Price volatility makes everybody nervous,” says Bruce Vernon, sales and marketing manager for Mid Kansas Cooperative Association (MKC), Moundridge, KS. “It's a hot potato that nobody wants.”

How hot? Eastern Indiana farmers will see DAP prices this fall up $173/ton compared to last fall, and potash prices have jumped $67/ton at the same time, according to Dan Weber, vice president of agronomy for Ceres Solutions, an LLP of three Indiana co-ops headquartered in Crawfordsville, IN.

The hottest potato is N. “When we compare 2007 fall prices to fall 2006, the price swing is roughly $140/ton for anhydrous ammonia, $165/ton for urea and, less dramatic, $110/ton for UAN because there are few units of N/ton,” Weber says.

In northern Illinois, ammonia prices have jumped 27% from fall 2006 to fall 2007 (25¢/unit to 33¢/unit) and UAN increased 44% (35¢/unit to 50¢/unit), according to Norm Larson, agronomy sales manager at Elburn Coop in Sycamore, IL. “The prices are constantly changing. Generally up,” Larson says.

Big price swings mean big risks for dealers. “In 2006, Hurricane Katrina was driving prices up so we locked in our price,” Weber says. “Then the market softened as weather pushed us to more soybeans and fewer corn acres. We had a large inventory of expensive fertilizer that we had to write down. Then in 2007, the market went up again.”

Of course, it can work in their favor. “We booked more than half of our spring 2007 UAN to our growers in fall 2006,” Larson says. “It turned out to be a good deal for some; the price went up $91/ton, or 41%.”

The result is fertilizer dealers are cautious buyers and quick sellers. They're spending more and more time on farms to lock in deals that take the price risk off their books.

“We used to fill our bins and hope we didn't run out,” says Weber. “If we needed more we could buy it.” That's tougher to do when your supply is half way around the world and there are far bigger customers bidding on the same product. “In May there wasn't any urea coming into the U.S. because other countries had higher prices,” adds Vernon.

This all started in January 2000 when natural gas prices tripled,according to MKC's Vernon. “That started the first wave of concern in the U.S. Plants shut down rather than losing money, and the production shifted to offshore countries where natural gas remained cheap,” he says.

The situation only got worse when Farmland Industries declared bankruptcy in March 2002. “They were probably 25% of the Midwest fertilizer market and one of the largest producers in the U.S.,” Vernon says. “Koch Industries, Inc., bought the Farmland production plants and kept with their philosophy of selling regionally.”

Before that time, the U.S. was over-supplied with fertilizer, according to Vernon, and manufacturers provided price guarantees to dealers to make sure their production was sold. Dealers could buy at their convenience and be confident that if fertilizer prices dropped, they would be refunded the difference.

But, those days are gone. Today's market isn't unlike the land rush in the early days of U.S. history. There's limited supply, plenty of buyers and certainly no price guarantees.

With supply less certain, dealers are locking in purchases much earlier. While that provides some price protection, it also dramatically increases the cost of ownership. “We've pushed our buying pattern forward four to five months,” says Weber. “This April we were already buying for our fall supply and also for spring 2008. That ties up a lot of money a lot earlier in the year. We've got to consider the cost of ownership and the risk of ownership.”

Let's be buddies. Dealers, logically, don't want to handle that risk alone. And, they're more than willing, in fact driven, to share it with you. “We're trying to figure out programs to partner closer with customers,” says Weber. “We can't afford to base our purchases on historic usage.”

Adds Vernon, “We consider buying fertilizer every day. But, as we lock in our buying price, we look to lock in our selling price.” His UAN is sold out through December.

“We go out and talk about time and price, and that price is only good for 24 hours,” says Larson. “The market is that volatile and we can't afford to get caught short. We have to offload that risk.”

The results are predictable. “Farmers are shocked at the dollars they're going to be spending,” Larson says. “They have to reprioritize how those costs fit into how they grow their crop. Most farmers are still getting used to the shock of where prices are. They're looking for direction.”

“More farmers are looking to lock up inputs as they sell crops,” says Vernon. “And, we offer other options to help them control costs. We offer a plan for direct-to-farm semi loads of fertilizer and a similar cash-and-carry program for chemicals.”

Off-season buying can save you money, as well. “There are two good buying cycles when there's not much fertilizer going on the ground,” says Vernon. “Usually prices are lower in July and August, and again from Thanksgiving to Christmas. By mid-January prices start responding to market demand.”

The ultimate risk for farmers may be waiting for the bottom-dollar price. The worldwide supply/demand equation has reached the point that supply won't be guaranteed unless you've locked in your purchases in advance.

“In the fertilizer business, high prices are a sin, but not having product is a mortal sin,” says Weber. “We were on the edge of running out of product this spring for farmers who hadn't locked in their needs. We scrambled and every farmer got fertilizer, but it may not have been the preferred choice of N.”

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