Fertilizer prices: Many factors to consider

Fertilizer continues to be the most volatile crop input cost and management of this input may be the difference in being a low-cost or high-cost producer.

Fertilizer prices are lower compared to last year at this time and many producers are asking if this is the right time to buy.While it is hard to know exactly what direction and when prices will move it is smart to keep up on important fertilizer fundamentals.

Healthier farmer balance sheets and continued positive crop profit prospects have signaled the global marketplace to increase planted acreage.

Price margins

These same factors have also caused producers to maintain or increase fertilizer application rates, which has led to strong global demand. On the flipside, potentially large northern hemisphere crops have dampened prices which may lead to tighter profit margins in the short to medium term.

These tighter margins may be a precursor to more judicious use of fertilizer as producers look to cut input costs. Nitrogen (N) retail prices have decreased year-over-year for all three commonly used nitrogen fertilizers in Ohio.

Urea ammonium nitrate (UAN) 28 percent nitrogen price has decreased approximately 15 percent while anhydrous ammonia (NH3) price has decreased 24 percent since a year ago.Urea prices have declined approximately 25 percent at the retail level. Nitrogen fertilizer price fundamentals are slightly different for the three primary nitrogen fertilizers used in Ohio as their supply and demand differs around the world.

Impacting nitrogen

Issues impacting nitrogen fertilizer prices are crop profit margins, specifically corn profit margins, and nitrogen fertilizer production expansion both domestically and globally.

These two primary fundamentals should dictate nitrogen fertilizer prices in the short to medium term as they will be the primary determinants of the supply-demand balance.

Potentially lower corn profit margins due to lower global corn prices and somewhat “sticky” crop input costs will possibly dampen N fertilizer demand. This result may lead to supply outpacing demand and may weaken prices.

We may already be seeing nitrogen prices react to lower corn prices and lower potential net returns in 2013 and 2014 as nitrogen manufacturers attempt to move product in an ever-increasing wait-and-see marketplace. The other primary fundamental issue impacting nitrogen fertilizer markets is actual and proposed expansion in nitrogen manufacturing both domestically and globally.

High margins

A combination of lower domestic natural gas prices (the primary ingredient in manufactured nitrogen fertilizers) due to the expansion of natural gas extraction and the recent period of relatively high net profits in crop production have led to high margins in nitrogen manufacturing.

Plants expanding

These high margins have led to a number of brownfield expansion and greenfield (new manufacturing site) development proposals.Industry sources report that 30 nitrogen manufacturing expansions or new constructions are being considered in the U.S. alone.

The same industry source reckons that less than half will be finished. With lower potential crop margins affecting demand and more manufacturing capacity globally affecting supply, the short and medium term prospects for nitrogen prices appear to be flat to lower.

Price increases

Factors that may lead to N price increases include large corn acreage prospects for the U.S., and strong crop farm balance sheets.

Factors that may lead to N price decreases include lower crop prices leading to tighter margins, low domestic natural gas prices, more domestic N production coming online (in Louisiana and Georgia), and more domestic N production to potentially be built — approximately 9.3 million tons (present capacity 13 million tons).

The retail price of potash has declined approximately 12 percent since a year ago. The potash industry essentially operates as a duopoly (two firms, in this case, two consortiums, with dominant control of the market) with Canpotex (Canadian Potash Exporters – Members: Potash Corp., Mosaic, Agrium) and Belarusian Potash Co. (Members: OAO Uralkali and OAO Belaruskali) controlling much of the global potash supply.

Supply matching

One estimate is that these two entities control 70 percent of the global potash. In recent years these two entities have used a strategy known as “matching supply with demand.”

In other words, they have curtailed supply to keep potash prices at relatively high levels. This strategy has worked well enough that some analysts contend that the potash mining and manufacturing business has had margins of up to 75 percent in recent years.

But all of that may be changing. On July 30, Russia’s OAO Uralkali’s board of directors announced that it would no longer export potash through Belarusian Potash Co. (BPC).

This most likely will change the dynamics of the global potash trade and has already impacted global prices.Vladislav Baumgertner, Uralkali CEO, cited violations of the exclusive exporting arrangement by their partner, Belarusian Potash, as the reason for Uralkali’s decision to leave the consortium.

Decree No. 566 by the Belarusian President on Dec. 22, 2012 canceled the exclusive right of BPC to export Belarusian potash.

Following this decree, Belaruskali has made a number of export deals outside of BPC. Baumgertner, Uralkali CEO, has stated that that this is not a temporary fall out between Uralkali and Belaruskali and that Uralkali will pursue a volume over price strategy to meet profit goals.

He has also been quoted stating that the international potash price may decline up to 25 percent in one interview. Potash Corp. CEO William Doyle has downplayed the breakup of the other potash consortium first of all stating that the break-up would be temporary and that “logic would prevail.”

He also stated that no one producer can determine price in response to Baumgertner’s assertion of global price declines. With the recent arrest of Baumgertner at the hands of Belerusian authorities, the messy affair in eastern Europe is far from over.

And although Baumgertner has been moved from jail into a house arrest setting, he still remains in Belarus as of this writing.

Analysts speculate that it may come down to a confrontation between Russian President Vladamir Putin and Belerusian President Alexander Lukashenko.

The bottom line is that with the break-up of BPC (temporary or not), the global potash market price has declined. Midwest wholesale prices have declined $25/mt and more in some areas.

The short term prospects will likely be dictated by the consortium events and potential crop returns (dictated by crop price levels) for 2013 and prospects for 2014. The fundamentals suggest flat to lower (possibly much lower depending on Uralkali’s export activities) potash prices through the end of the year.

Another important long term supply and demand issue in the potash industry is BHP Billiton Group’s announcement Aug. 20 that it will invest an additional $2.6 billion in the Jansen Potash project in Saskatchewan.

Jansen may be the world’s best undeveloped potash resource and may be capable of supporting a mine with annual capacity of 10 million metric tons for more than 50 years.

Factors that may lead to K price increases include strong crop farm balance sheets, and the fact that Canpotex members may further curtail production.

Factors that may lead to K price decreases include lower crop prices leading to tighter margins.

Outlook information presented here was developed with data from AEDE research, the Energy Information Administration, USDA, other land grant research, futures markets and retail sector surveys.

While gauged to the best of this author’s capabilities, forward looking statements contained in this document may prove to be incorrect due to changes in supply and demand and other political and economic related events.

About the Author

(Barry Ward is the leader of production business management in the Ohio State University Extension’s department of agricultural, environmental and development economics.) More Stories by Barry Ward

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