Some farmers have it, and other farmers don’t. Some have paid high prices for it, and others are hoping they will not have to. Fertilizer is the topic of many coffee shop conversations, as well as hours spent on working on crop budgets, and probably a few sleepless nights. Tough decisions will soon have to be made, but prices will depend on the demand this spring.

The upward move in fertilizer prices can be traced back about 7 years says USDA economist Wen-yuan Huang in the latest Fertilizer Outlook, but they increased sharply the past two years. In 2008, nitrogen climbed about one-third in price, while phosphate and potash doubled, which Huang says resulted more from global economic issues than from domestic supply and demand. US production of fertilizers has declined and farmers have had to depend upon imports of either fertilizer or ingredients to supply the growing demand.

In the 10 years prior to 2008, domestic fertilizer production capacity declined 42% and annual production dropped 37%. The infrastructure had been underutilized and was being idled about the time that natural gas prices began to rise, which pushed up nitrogen production costs. Similarly, US production of phosphate declined along with production capacity because of low profits and declining export demand. The US only produces 16% of the potash it uses and imports the rest, primarily from Canada. Consequently, fertilizer is a global commodity, but the US is one of the largest importers, leading the world in nitrogen consumption, and is in second place for potash imports.

With the nitrogen price linked to the price of natural gas, but its cost to agriculture is also dependent on the cost of electricity and petroleum, both of which have experienced volatile pricing structures. Since 2000, natural gas has risen 550% and oil by 970%. Transportation cost is 22% of the expense in getting ammonia shipped from the Caribbean into US Gulf ports and 50% of the cost of Russian ammonia. In the past 3 years rail rates increased 63% along with a 44% railroad fuel surcharge added last July.

Complicating the matter had been the falling value of the dollar, which made imported ammonia and potash more expensive. Another issue is the fertilizer export associations, and since they are global in nature, are shielded from anti-trust rules according to USDA economist Huang. And yet, another factor is the concentration of fertilizer production in just a small group of countries. Canada, Russia, and Belarus control potash, and the US and China control phosphate.

When the global economy expanded in 2007 and food demand outstripped the immediate food production capacity, the demand for fertilizers increased as well. The current weaker demand is expected to strengthen and fertilizer demand will increase over the long run. US farmers used high commodity prices in 2007 and 2008 to increase their purchases of fertilizer and maximize returns. Those commodity prices insulated farmers from the impact of the higher costs of fertilizer. But now commodity prices have fallen and the insulation is thin against the fertilizer prices, which have not fallen in tandem with grain prices.

Currently, fertilizer inventories are low, in part because of the additional 15 million acres of corn and 3 million acres of wheat planted in 2007, consuming 15% of the normal nitrogen carryover, 27% of the phosphate carryover, and 49% of the potash inventory. Huang says the US fertilizer industry is not equipped to meet a surge in demand, and when foreign demand entered 2008, fertilizer prices rose rapidly.

Huang says September's nitrogen prices were 36% above April 2008, with phosphate and potash about 93% higher, before the price decline began in October. The softer winter market was attributed to lower global demand, reduced US application last fall due to weather, increased supplies created during last summer, a decline in natural gas prices, and farmers postponing purchases hoping for lower prices. But the USDA economist says prices may not remain soft:
(1) Many of the causes of the recent spike in fertilizer prices, such as natural gas price movements and expected growth in global demand, could still place upward pressures on fertilizer prices in spring 2009;
(2) In response to low fertilizer prices, the U.S. fertilizer supply is expected to decline due to production cutbacks by manufacturers and worker strikes in potash plants in Canada;
(3) U.S. fertilizer imports are expected to decline given the current low prices and congested distribution supply chains in the United States
(4) Fertilizer demand will likely stay high. Current low fertilizer prices, projected relative crop prices and the government’s continuing ethanol mandate may favor corn planting in the spring.

For the spring, USDA's price predictions are:

Nitrogen—because of strong Chinese and US demand expected from feed and food grain production, tighter nitrogen supplies are expected in spring 2009, and there could be some additional upward pressure on nitrogen prices.

Phosphate—Tight supplies due to limited U.S. production of DAP and MAP, coupled with high production costs and expected strong global demand, may keep phosphate prices above their historic trend levels this spring.

Potash—Most of the potash consumed in the US is produced in Canada, which may not be able to produce enough to meet short run demand. However, a recent supply contract of $817 per ton is expected to become the benchmark wholesale price for potash marketed in 2009.

In the long term, USDA says demand for fertilizer will continue because of the growing world population and a return to a better economy, but higher energy costs will keep upward pressure on fertilizer prices. The US access to supply is good, and future coal gasification plants will help increase the supply of natural gas to produce ammonia.

Summary:
The global nature of the fertilizer industry, along with current economic forces here and abroad, have combined to make agricultural fertilizers more scarce and higher in price. While winter prices were soft, spring demand is stronger and costs of fertilizer are not expected to decline much, if at all.