Asked to describe the current fertilizer market, one Mississippi fertilizer dealer responds, “The only solid thing I can say is prices are rising so fast it'll make your head spin. Everything is hopping. The barge market is going up so fast it's incredible. Yesterday, I was told forward pricing for one product was around $303. Today, the forward pricing is now no lower than $310. That's in less than 24 hours!
“It's hard to tell farmers anything concrete beyond the fact that the market is volatile.”
Amid such turbulent markets, fertilizer dealers are skittish about giving advice. Of the half-dozen fertilizer dealers and brokers — from both Mid-South and national companies — interviewed for this story, only one was willing to have his name used. The others were either under strict company orders not to speak with the press and/or fearful their comments would improperly influence producers' purchase decisions.
“Whatever the hell I predict will probably be wrong and I'd hate to leave farmers in a bad spot,” says an Arkansas dealer. “The truth I tell today might be a lie tomorrow.
“Right now, there are a lot of farmers we've informed about the situation, about the exact prices. They want advice but it's hard to offer.”
Some are buying now in fear that prices will continue to rise. “And that may be the right decision. Others are saying, ‘I'm waiting to see if prices turn back down,’ — and maybe they're right. I certainly hope those waiting for it to turn are correct. But, right now, I don't see much chance of that.”
Whether on or off the record, all point to increasing world demand as the key driver in rising fertilizer prices. “Countries are finding their stocks-to-use ratio has fallen to, basically, nil,” says Don Couvillion, a district sales manager with Potash Corp., who is based in Louisiana. “It's the lowest it's been in years, if not forever.
“These countries understand they must feed their citizens. Combine that with countries abroad having an increased standard of living and that's put pressure on fertilizer.”
Some people point at ethanol as the foundational cause of higher fertilizer costs. But the food sector is what's causing the tightening, says Couvillion. Ethanol is only the icing on the cake.
“The standard of living overseas is increasing. As that happens, folks want more red meat. That means the demand for grains and protein to produce that red meat rises. One way to produce more food is to provide plants the nutrients they need to maximize yield.”
As a result, India, China and the Middle East are all in the fertilizer game at unprecedented levels.
Another factor in rising fertilizer costs is freight. “Freight is part of the product price equation and escalating energy prices hurt any chance to keep fertilizer prices down,” says a dealer at a large, national fertilizer company. “And we're limited with availability of railcars, barges and trucks. It costs big money to run a truck. It costs to build railcars, to build barges. Nothing is cheap.”
Over the last three years, or so, several things stand out, says the national dealer. “For the longest time, potash prices hovered around $100 to $130 per ton. Now, potash prices are over $300 per ton.
“One of the things that's happened is the rest of the world has discovered that potash is a valuable food source for plants, that it enhances yields. All of a sudden, these countries — China and India particularly — have woken up and said, ‘We've only got a certain number of acres and normally make, say, 200 pounds of lint per acre. But if we use phosphate and potash, we can bump those yields up big-time. Let's get to it.’”
Historically, the developing nations have been “rather backward” in their agronomic practices, he says. Now, with growing populations and information flowing easily, those countries want to improve farms.
“And these countries have more money to improve those farms. China is a perfect example. They're in the midst of an industrial revolution, they have more funds available and they don't mind spending it on food. That's put the squeeze on fertilizer. Improved lifestyles around the world have helped cause this.”
The Mississippi dealer says the sobering truth is that whatever is done in the United States won't make that big of a difference in the market.
“More and more, we're going to have be attuned to what's happening overseas.”
The same factors in play when fertilizer prices jumped last spring are simply tightening the screws even more now.
“Compare last fall coming into the start of this growing season,” says the national dealer. “Lots of people were saying, ‘Sooner or later, these prices will back up.’ But no. We were at record prices last spring and now, we're $100-plus higher!
“I hear from people saying, ‘I'm not buying now. I'm going to wait and the price will come down.’ Well, maybe so. But I don't think that'll happen.”
The national dealer's biggest concern “is with P and K. If the Midwest throws up its (collective) hands and says, ‘I quit with potash,’ that would help the price. Things would stabilize — there wouldn't be a $30 swing in price.”
However, consider this: a major Russian potash producer has already put in writing that, come Jan. 1, its price will go up $50 per ton.
“Fifty bucks! And that's after going up $30 on Dec. 1. That's an $80 jump in just weeks. The potash producers from Canada will surely follow suit.”
Couvillion has been alerted to the same information. “Right before you called, my company sent me some data on the big Russian potash producer announcing new, higher prices. For example, for standard muriate potash sales in spot Asian markets, the price will move from $360 to $400. In Brazil, delivered January 2008, the prices will move from $345 to $355 up to $400 to $410 for granular muriate potash.
“Now, those prices are for a metric ton of product. Take 10 percent off that and that's what potash will cost delivered to a Brazilian port — so $360 to $370.” A year ago, the same ton would have cost around $250.
With fertilizer prices rising, is there any chance new mines will be opened or mothballed fertilizer plants brought back online? “That may be a possibility on the nitrogen side,” says Couvillion. “But on the potash and phosphate side, that isn't possible. We're running the potash business up north about as fast as possible. Manufacturing is maximized.”
All interviewed say new potash and phosphate production can't be easily done. “You can't even get it up and running in six months or a year,” says a second Mississippi dealer. “A good potash mine would probably cost $2 billion to get going. That's an astronomical cost and helps explain the slow pace. And that doesn't even address the potash reserves, oil, and the rest. The same is true with the rock phosphate — you must have the ore.”
Nitrogen, meanwhile, is a horse of a different color. There's more nitrogen produced and more plants throughout the world and natural gas is available in most countries. Even so, barriers remain.
“To bring an old plant back, you must also consider having to refurbish it,” says Couvillion. “Nine out of 10 of them have probably really deteriorated since being shut down.”
Beginning in 2008, there will be more new nitrogen plants opening in the Middle East. Those will increase the worldwide supply of urea, particularly. In 2009, another group of nitrogen producers will come on stream.
“I suspect that over the next five years, urea will trade for less than potash,” says the national dealer. “That's simply because we have the capacity and the Middle East producers are willing to use their gas to manufacture urea. They're burning gas, flaming it up, continuously. Every N product starts mainly with natural gas. They have it and they're going to exploit it.”
So will fertilizer prices ever go back down? To a man, sources say it's unlikely before next season. And when speaking of future prices, most prefer the word “stabilize” instead of “drop.”
“Unless something odd happens, there are more price increases to come,” says a Mississippi dealer. “Your story isn't likely to make farmers happy. But that's the truth.
“The light at the end of the tunnel has to be farmers' commodity prices. Fertilizer is more expensive, but so are soybeans and wheat. With ethanol, I suspect those farmers' commodity prices will continue to be strong. That's their only hope.”
“Let's face it: who thinks we'll see $1.50 gasoline again?” asks Couvillion. “It's at $3 and there's talk about it rising to $4. Diesel here is $3.22 a gallon.
“We're on a new plateau in a new world, a plateau in our standard of living. People cannot continue to pay higher prices while the money they're putting in the bank stagnates. Something has to give.”
The national dealer says he's constantly queried on future prices. “Will potash go back to $120 per ton? Probably never. Potash is a resource that's had an expanded market and potash-producing companies will surely manage their inventories in a manner that won't allow a glut of potash.
“I think, particularly with potash and phosphate, there will be some price corrections coming. But I don't see those corrections until after next spring.”