Fertilizer Industry Battles to Keep Supply Afloat

Jeanne Bernick

9/9/2004

For some time now, Mark Tullis has felt a growing knot in his stomach. He’s truly anxious about meeting with his farmer-customers this fall to discuss their fertilizer purchases.

“The sticker shock is really going to get them,” says Tullis, agronomy manager for North Central Co-op in Wabash, Ind. Urea is already about $60/ton higher than in 2003, potash is nearly $30 higher and phosphates are $20 to $30 higher, Tullis says. Anhydrous ammonia is the best value out there, yet it’s up $40 over last year. “And to be honest, we’re very, very worried about having enough product in a timely fashion,” Tullis adds.

Without a doubt, the U.S. fertilizer industry is facing a crisis situation. Natural gas, which can account for 90% of the cash cost of manufacturing ammonia used in all nitrogen (N) products, remains volatile and at nearly triple its price during the 1990s. The resulting demise of domestic N fertilizer production (see sidebar) has pushed N prices at the farm level to near-record highs.

At the same time, profitable grain prices have increased fertilizer use, so inventory levels are low “from dealer to distributor to manufacturer,” says David Centko, senior analyst with fertilizer consulting firm Blue, Johnson & Associates Inc.

“Domestic fertilizer supply is typically replenished from offshore producers, but global demand is competing for supply and keeping world prices,” says Centko. Brazil leads this demand, with a 19% increase in fertilizer use last year.

Meanwhile, production outages in several major export plants in the former Soviet Union, Caribbean and Southeast Asia have limited offshore fertilizer availability. “A real transition is taking place in the industry,” says Mike Rahm, vice president and senior economist for Cargill Crop Nutrition. “Fertilizer markets are now global, and a large number of factors, from exchange rates to agricultural trade policies, can affect demand, supply and price.”

Import impact. Now that the United States is transforming into a net importer of fertilizer products, logistics problems are mounting, says Centko.

“U.S. railroads, trucks and barges are having trouble handling the increased flow of imports in a timely matter,” he says. “And when fertilizer does get where it needs to go, there may be storage limitations.”

Such logistical issues could cause changes in the form of nitrogen used in the U.S., says Rahm. Urea may become the leading choice of fertilizer because it can be transported more efficiently than anhydrous ammonia or urea ammonia nitrate (UAN) solution. At the retail level, the industry is moving from just-in-case supply to just-in-time, says Rod Schroeder, vice president of Heartland Sales for Agriliance, which markets fertilizer products through local cooperatives and independent dealers.

“The whole fertilizer chain has lowered inventory levels because no one can afford to carry extra inventory,” says Schroeder. “This means the industry will need to do a better job of forecasting acreage and bringing in a mix of imports to cover it.” Although 95% of Agriliance’s product is still domestically produced, the company’s imports are growing, says Schroeder. Just this year, Agriliance contracted for 11 ships loaded with urea from Kuwait.

Many fertilizer retailers are preparing for the influx of imports by building large storage facilities. Agriliance is working with several local cooperatives to build large dry fertilizer facilities that could take in unit trains of urea and ensure availability where the demand is in season.

“Dealers are realizing that they can’t just get a rail car of urea delivered to them in two days from a factory in a neighboring state,” says Rahm. “Their suppliers have to go out and buy a vessel from the Middle East, Venezuela or Trinidad and then load product onto unit trains and fill up their own warehouses.”

Further consolidation. although high fertilizer prices have helped some domestic nitrogen manufacturers who have lacked profits for years, volatility in natural gas is still creating an uncertain business environment for most suppliers. “Consolidation in the fertilizer industry will likely continue,” says Centko.

Last month, leading N fertilizer manufacturer Terra Industries announced that it would purchase bankrupt Mississippi Chemical Corporation. Mississippi Chemical’s 50% interest in an ammonia production facility in Trinidad will significantly lower Terra’s production costs in this high natural gas environment, says Michael Bennett, Terra president and chief executive officer. Terra plans to separate Mississippi Chemical’s N and phosphate business and sell off the phosphate business.

Meanwhile, Cargill and IMC Global are set to merge their phosphate, potash and N assets to create the second-largest global fertilizer operation. The new publicly traded company, called Mosaic, will have 30% market share in the U.S. phosphate market. Cargill takes on the financially troubled IMC Global at the expense of spinning off one of its core businesses into a publicly traded company for the first time.

In an effort to prevent further downsizing, the fertilizer industry has called on the U.S. Department of Energy and Congress to enact policies to stabilize the supply/demand balance for natural gas. Proposed policies include opening lands for drilling and providing incentives for facilities with dual fuel capability to switch away from natural gas.

Bennett says he can’t overemphasize the need for the government to act immediately on natural gas issues. “U.S. natural gas markets are in a full-blown state of emergency,” he says.

Tectonic shifts for N

The last high-priced energy cycle walloped manufacturers of nitrogen fertilizer: More than 20% of the ammonia industry has been sidelined since 2000, in part because of escalating natural gas costs. This time around, survivors are older, wiser and revamping their strategies, says John Johnson, chief executive of CHS, the country’s largest cooperative, and chairman of the board of fertilizer giant CF Industries.

The stakes are high. Farmland Industries’ massive fertilizer losses—combined with a debt-to-asset ratio of about 90%—contributed to the cooperative’s bankruptcy in 2002. Cooperatives with more conservative debt levels weathered the storm, Johnson notes. CF Industries—the fertilizer consortium owned by CHS, Land O’Lakes and six other North American cooperatives—lost $450 million between 1998 and 2003, but lived to fight another day. Even with higher natural gas prices in 2004, the consortium could make a significant profit this year.

The U.S. now imports more than 40% of its urea needs. “The U.S. fertilizer business is experiencing a real downsizing,” Johnson observes. “Eighty percent of the cost of nitrogen is natural gas, and that’s been running in excess of $6 mm Btu here. A lot of places in the Middle East or Trinidad, they’re paying only $1 mm Btu. So even with transportation costs, we can import foreign product for the equivalent of only $2.50 to $3. “Domestic manufacturers are troubled by our willingness to import, but we have to compete with those who do,” he says. “We know farmers won’t pay more just because products are made in the U.S. From a grower’s point of view, they should encourage more imports because imports are keeping their prices lower.”
—Marcia Zarley Taylor

Cost control

Lock-in loads. While manufacturers scramble to meet the challenges of a changing industry, retailers and producers have few risk-management tools to protect themselves. However, retailers, manufacturers and farm cooperatives now are able to manage price risk via the Chicago Mercantile Exchange’s (CME) new fertilizer futures contracts. Contracts are available for fertilizer products DAP (diammonium phosphate), UAN and urea.

And to help dealers better manage fertilizer supply, Agriliance has created an online application called CN Exchange, which allows its dealers to lock in supply at a certain price and know it will be delivered at that price in a set delivery month. “With CN Exchange, dealers and their farmer customers can build a portfolio of inventories and manage supply risk with forward contracts,” says Bruce Vernon, marketing director for Agriliance’s Heartland Crop Nutrients Marketing. Dealer accounts that signed up for the program early on have enjoyed a $25 to $35/ton advantage, Vernon says.

North Central Co-op agronomy manager Mark Tullis has been using CN Exchange for more than a year. He likes the fact that it allows him to multiply his storage capacity. “We can buy into the future based on historical needs without having to have the product here,” Tullis says. “It allows us to go to the market a little more aggressively.” With the probability of $370/ton ammonia this fall, Kerry Jacobson, agronomy manager for Northeast Iowa Cooperative, has been using the CN Exchange to purchase product earlier in hopes of better pricing for farmers.

“I’m telling producers to come and talk with me early about their fertilizer needs,” says Jacobson. “My best price will be on a first come, first serve basis. When I’m out, I’ll have to go with the market value.”

Even with high fertilizer prices, farmers will lose out if they skimp on fertilizer, cautions Joe O’Connor, agronomist with fertilizer company IMC Global. “We’ve had a pretty good growing season, so crops are going to remove a lot of nutrients from the soil. “Farmers who cut back on fertilizer will easily limit their yields by 10% to 20%, which may not be enough margin to cover costs.”