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Perfect Storm for Fertilizer Prices

By Susanne Retka Schill | May 09, 2008
It isn't only grain prices that are skyrocketing these days. Prices for all three major plant nutrients—nitrogen, phosphate and potash—have climbed dramatically, as well.

The market for diammonium phosphate in Tampa, Fla., for example, was $1,100 per metric ton in early April, compared with $255 in January 2007, which doesn't include transportation costs in a farm or retail margin. "When you see price increases of this magnitude, it's not just one fundamental driver," says Mike Rahm, vice president for market analysis and strategic planning for Minneapolis-based The Mosaic Co. "It's typically from a number of different things."

First on the list of multiple factors is increased demand. While India and China are often cited as the two growing economies increasing demand across the agricultural sector, Rahm says increases in soil nutrient use are also seen in Brazil, Argentina, Malaysia, Indonesia, Vietnam, Thailand and Pakistan. "It seems like in every corner of the globe, farmer economics—in spite of the increase in many crop input prices—are still very, very good," Rahm says. "Producers are expanding planted acres and using crop practices to boost yields. It all boils down to the doubling of the pace of growth for crop nutrients worldwide."

That increase in demand is added to an increase in input costs for fertilizer manufacturers. "If you follow natural gas markets, they climbed up to $10 to $11," Rahm says. Parts of the world where natural gas had been historically cheaper—such as the Commonwealth of Independent States (formerly the Soviet Union), which is a large supplier of nitrogen in the world market—have seen prices approach market value. In the case of phosphate, the sulfur used in the manufacture of diammonium phosphate has leapt from less than $100 per metric ton in India in early 2007 to $700 per metric ton in April 2008.

Lastly, the fertilizer industry is emerging from a decade of difficult times, Rahm says. "Fertilizer prices are high now, and fertilizer companies are making money now, but during the first part of this decade, that certainly was not the case," he says. As a result, the United States lost production capacity with nearly 24 anhydrous ammonia plants closing during the downturn. Today, U.S. anhydrous capacity is 40 percent less than it was at its peak in the late 1990s. However, total world nitrogen supplies have been helped by increases in urea production in the Middle East and China. Similarly, phosphate producers consolidated and closed plants during the past decade, resulting in today's U.S. rock phosphate production being 30 percent less than in the mid-1990s. The loss in capacity has made it difficult for suppliers to respond to the demand surge and higher prices.

The world's supply of potash, the third plant nutrient, comes from just 12 countries, led by Canada, Russia and Belarus. "When the demand surge hit, after a long period of stable demand, it tightened things up quickly," Rahm says. "To complicate things, there was a mine in Russia that flooded in late 2006 that exacerbated the situation." Much of the increased demand for potash is coming from China, India, Brazil and Southeast Asia, he adds.

The combined impact on farm fertilizer costs is significant. Rahm's economic analysis shows that if a Midwestern farmer was paying spot prices this spring, he would be paying $155 per acre for nitrogen, phosphate and potash. "That's roughly a $100-per-acre increase in fertilizer cost from five to six years ago," he says. "On the other hand, when the price of corn goes from $2 to $6 [per bushel], the farmer economics still look very good to us."

Such high fertilizer prices are expected to stimulate further innovations in crop management and nutrient efficiency, which have steadily been improving. In the early 1970s, USDA data shows three pounds of nitrogen, phosphate and potash was applied for each bushel of corn harvested. Today, 1.5 pounds is used for each bushel of corn harvested. While much of that has come from corn genetics improving crop yields, another portion has come from improved application practices. Some of the newest—precision agriculture technologies and time-release fertilizers, for example—are likely to become more attractive and cost-effective for American corn growers.
 

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