Jubinville "wrestles" with fertilizer outlook

Here is a special treat for Grainews readers and everyone else. This is the long version of Mike Jubinville's market column for the August issue, which just went to print yesterday. Here is Mike's take on fertilizer prices heading into 2009, written July 18:

I’ve wrestled real hard with this subject. Many growers are concerned enough about production and marketing issues for 2008 crops, but now we are already being forced to consider 2009 production, especially as it relates to seemingly runaway rising production costs.

And when it comes to fertilizer issues, I’m afraid there just is no easy answer to this one. Many readers have called or e-mailed these past few weeks in particular, wondering what to do about fertilizer for next year. The sudden surge in interest lately has taken me aback, so I started calling around a few contacts in the retail and wholesale trade for some perspective on the fertilizer market outlook.

My conclusion from these talks: again, no easy answers. From a supply/demand perspective, North America needs to be considered a “continental” market. There is no boundary at the border with respect to the fertilizer market. Growers in Saskatchewan compete for available nitrogen product with growers in Manitoba and Alberta the same as we must compete with demand from growers in Illinois and Iowa. It’s one big unhappy market for the grower these days.

And to make matters more difficult and complicated, North America is net deficit in nitrogen (N) supply. With fertilizer plant and production rationalization over the past decade, the U.S. for example must import 50 per cent of the N it now consumes per year. Two dozen nitrogen plants permanently shut their doors since 2000, and seven phosphate plants have between 1999 and 2006. A handful of domestic ammonia plants are scheduled to reopen in the next few months, but since so much fertilizer manufacturing capacity has moved offshore, prices for natural gas and oil don't dictate fertilizer prices quite like they did only five years ago. And again, we are a continental market, so despite good N production capabilities here on the Prairies, we must compete for that supply within the grander continental context.

Global demand soars

Steady increases in population and continued strong economic growth, particularly in large and rapidly developing countries such as China and India, are boosting the demand for more protein-rich and grain- intensive food. In addition, persistently high energy prices are driving the rapid development of large biofuels initiatives in nearly every energy-deficit or grain-surplus country around the globe.

That combination is fueling an increasingly strong nutrient demand outlook. For example, the International Fertilizer Industry Association (IFA) in June projected that world nutrient use will increase more than 21 million tonnes from 2006 to 2011. (See the chart.)

To add further to such a development, growers here in Canada and the U.S. can be rendered at a competitive disadvantage in the offshore N market. For example, in Argentina urea has been capped at US$410 per tonne, while government packages in Brazil and India assist funding for fertilizer use. China is a country that in previous years has been a net supplier of N. Not in the year going forward though as government policy changed two months ago to restrict exports out of that country, further contributing to an increasingly competitive global market for fertilizers. 

So when China's recent earthquake knocked out some of the country's urea capacity, fertilizer buyers here in North America felt the tremors. And the fertilizer industry continues to watch nervously as the Chinese government's moves to discourage fertilizer exports by slapping a 135 per cent tariff on exported product.

So in a nutshell for as far as I’m willing to project, relief from the high cost of fertilizers seems limited for the year ahead and perhaps years into the future. We have typically seen a seasonal tendency to the ebb and flow of prices and supply/demand relationships each year. Following the heavy demand of spring usage here in North America, there is a tendency for prices to lighten up offering the best pricing opportunities of year typically in the summer to early fall season. In nine years out of 10, fertilizer prices are cheaper in the fall than the following spring.

This year, who is really to say. We are seeing an exceptional year across the board for commodity markets and perhaps a seasonal lull in price will not be seen this year. The price trend at this time remains flat to higher.

Will prices rise?

Should growers be pricing fertilizer for 2009 requirements in this charged environment? Like you, sticker shock gives me “deer-in-the-headlights” paralysis. Talking to a couple of independent Prairie fertilizer retailers, they certainly acknowledge the high priced situation the market currently finds itself in. They're having the annual debate on whether enough supply will be available for the next growing cycle. 

However, to a man they also believe that a certain large grain company has been calling up growers and further stirring the pot, suggesting growers better get something done soon before the next round of price increases.

Are higher prices yet to come? Well certainly that is a good possibility. Should we all be panicked into action? That I’m not so sure of. I’m still thinking some measure of lull can yet develop in the summer months to perhaps at least give us some slightly better pricing opportunity, but that’s nothing more than a hunch at this time.

Fertilizer costs have recently stabilized because...

(a) prices are high,  

(b) nobody knows what price will adequately ration demand, and 

(c) users in aggregate don’t yet have conviction that high commodity price is to likely hang-around longer than thought. 

World ammonia prices increased sharply toward the end of June. The prospect of added supply from the Terra plant at Donaldsonville, Louisiana and reduced corn sidedress demand due to bad weather in the U.S. Corn Belt were unable to overcome the effects of reduced supply from the loss of production from the Burrup plant in Western Australia and more than a few plant maintenance turnarounds in Russia, Eastern Europe and North Africa.

Ammonia prices increased by $75 per tonne to US$585 to $590 cif (cost and freight) Tampa. Medium term, Indian demand could drop sharply and plants returning to production after turnarounds could begin to offer ammonia at lower prices.

That said, strength in the urea market is maintained at this time with demand from South American and Southeast Asian markets...and those buyers have few options with China no longer a source of supply given their recently introduced export restrictions and only limited volumes available from Indonesia. 

Phosphates have become a huge expense, as growers globally feeling the price pinch seem to be skipping or sharply reducing application where possible. While too early to tell, lower phosphate demand could help offset a potential lack of Chinese 4th quarter exports. 

What to do

What happens next in this market is a difficult call. Prices rose in June when normally we’d begin to see a break. I'd like to think we'll see another dip before it's over. 

However, I don't see fertilizer being less expensive over the winter and next spring than I do now. Into the foreseeable future, supply growth cannot resolve the 2008-09 supply/demand imbalance, which means resolution must come from demand rationing. As such, given prevailing global commodity price, export restrictive policy (as in China), fertilizer-use subsidies in some countries, current prices are still not high enough to get the world demand rationing job done.

So we don’t expect any sustained turn lower for this market. The question is whether the carrying costs justify contracting it now.

If a grower does have spare cash on hand to make fertilizer procurement part of one’s near-term plans...then perhaps that would make some sense and I say go ahead on lock some in.

But if in doing so, a grower with tighter cashflow requires large debt financing to accomplish this task for a return on investment that is still 18 or so months out, then I’m likely to hold off. 

Fertilizers are a very expensive investment these days, and you folks know that more than anyone. At this time with the highest input costs in history and little ability to lock in prices for your crop output, it just seems to me as though the risks may be a bit too high if buying fertilizer requires assuming a large debt load at this time. What happens if crop prices start falling off in 2009? Then we could see a real margin squeeze.

As you can see, no real solid answers to this one. My only opinion is to buy it if cashflow can absorb it, but maybe sit tight if it means going heavily into debt. 

In any event, in locking in some portion of 2009 input costs, consideration must also be given to locking up profit margin on a chunk of crop with forward sales this summer — ideally on further weather adversity. There is a chance of lower commodity prices in one year and being long expensive fertilizer outright is just as risky. 

And finally, if you have not already done so, start working closer with your chosen fertilizer retailer. Work on payment, pricing and storage flexibility where available, and have them help you keep closer tabs on an opportunities which may materialize in the weeks ahead.

Oh, one last thing. I suspect if fertilizer costs remain higher, grower interest in 2009 to shift more acres towards crops such as peas, lentils and oats will increase. Early consideration towards longer-term pricing opportunities must them be given as well as seed and inoculant costs and availability in a year’s time.