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Prices May Hit the Floor Soon

Fertilizer prices spiked during the 2008 growing season, and the market has left manufacturers, dealers and growers in a tight spot. Prices peaked around September and then dropped off as the economy slowed down, leaving dealers holding the bag and growers deciding whether to pre-pay or chance lower prices when the season begins.

There were many causes for the market’s instability last year, said Bill Whitaker, president of the agribusiness group of J.R. Simplot Co. One of the key drivers was China. The United States produces between 45 percent and 50 percent of the nitrogen consumed by U.S. growers, with China producing the rest. But the Chinese government wanted to ensure its growers had access to fertilizers, so a 135 percent tariff was slapped on fertilizers. With the industry already operating on 30- to 40-year lows, the removal of Chinese nitrogen drove prices upward.

Demands on the fertilizer industry have been increasing for 15 years. Since 1993 fertilizer use has steadily increased, and Whitaker estimates an additional 3 percent to 3.5 percent growth this year. Most of that growth is in nitrogen, but potassium and phosphorus also have expanded.

“This kind of growth is really going to tax the fertilizer industry,” he said.

Nitrogen that isn’t produced in the United States comes through the Gulf of Mexico at the Port of New Orleans from China and the Arabian Gulf. Potassium comes from only two production sources – Canada and Russian republic countries – so there was less adjustment in that market. Phosphorus is produced in Saudi Arabia, North Africa and China, as well as Florida, but pollution and other issues have affected U.S. production.

"This will make us more vulnerable in the future," Whitaker said.

Manufacturers were paying about $800 per ton for ammonia in September, but by January that price had dropped to around $200 per ton. Diammonium phosphate (DAP) hit $1,000 a ton in September, but was selling for only $350 a ton in January.

The dramatic price drop was the result of a perfect storm in the industry. Growers held off on applying late-season fertilizers, which left dealers with expensive product. And with prices so high, the Indian government, which subsidizes its growers’ fertilizer needs, pulled out of the market because prices were too high. It’s estimated that nitrogen demand was off 20 percent, and phosphate and potash demand may have been as much as 50 percent off. The drop in demand and high stocks on hand meant manufacturers were over-producing, so plants were slowed.

Prices corrected downward sharply and are close to bottoming out, Whitaker said. But demand will be high this spring because growers didn’t apply in the fall and there will be more global demand. The problem is growers won’t buy the old stock dealers are holding because it’s too expensive, and dealers won’t want to take a loss on products.

“There is a big game of chicken going on right now, and I don’t know who wins it,” Whitaker said.

He doesn’t expect prices to hit the highs of last season, but growers will have to work with their dealers to get the best price.

“I don’t know how to coach you on your next move, but have real close communication with your fertilizer dealer,” Whitaker said. “We really believe that relationship the grower has with the dealer is important.”

Originally posted Wednesday, Mar. 11, 2009

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