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Difficulties within the financial sector became apparent in the middle of September as the U.S. government grappled with responses to a worsening credit situation. The financial meltdown, along with public perceptions of economic problems, has led to concerns that a deep, world-wide recession is occurring.
As a result, prices of many commodities have declined dramatically in the belief that demands for those commodities are being reduced. Among those commodities seeing declines are wholesale fertilizers. Lower wholesale fertilizer prices likely will lead to lower prices that farmers pay for fertilizers. Lower fertilizer prices then may lead to an increase in corn profitability relative to soybean profitability.
Declining Wholesale Prices
Since September, wholesale prices of fertilizers have declined dramatically. In September, fertecon reported that wholesale prices of anhydrous ammonia at the Gulf of Mexico were over $800/ton. In early January, anhydrous ammonia prices were below $200/ton. Similarly, diammonium phosphate (DAP) at the Gulf was over $1,000/ton in September and about $350/ton in early January.
In explaining these price declines, executives of The Mosaic Company, a publicly traded fertilizer company, indicated that a perfect storm of factors led to the price declines, including 1. the global financial crisis, 2. large distribution pipeline stocks in some regions of the country and 3. a late North American harvest season (source: The Mosaic Company, Security Exchange Commission 8-K filing "report of Unscheduled Material Events or Corporate Changes, Dec. 3, 2008).
The financial crisis limited fertilizer applications in South America, as credit for purchasing fertilizer was constrained because of non-functioning credit markets. In North America, fertilizer manufactures produced large amounts of fertilizer under expectations of high farmer use due to high commodity prices. However, farmer demands have been reduced because of lower commodity prices and higher fertilizer prices. Moreover, much of the Corn Belt experienced a late harvest, further limiting fertilizer applications. As a result, there are large amounts of unsold fertilizer in inventory.
These factors have led to significant reductions in demand. The chief executive officer of Agrium, another publicly traded fertilizer company, estimated that demand in the fall of 2008 was down by 20% for nitrogen (N), down by 50% for phosphate and down by 50% for potash. These demand reductions have led to price declines for both anhydrous ammonia and phosphates (source: CIBC World Markets, Equity Research Company Update, Agrium Inc., Dec. 2, 2008).
Outlook for Farmer-Paid Prices
As of yet, prices farmers pay for fertilizers have not decreased as much as declines in wholesale prices. In fact, retail fertilizer prices have not declined much at all in many areas of Illinois. Non-declining prices are attributed to large unsold fertilizer inventories held by many retailers. Retailers will lose money on these inventories if retail fertilizer prices follow wholesale fertilizer prices down. While retailers will suffer financial losses, there are incentives for farmers to delay purchasing fertilizers, waiting for fertilizer prices to decline.
Waiting to purchase fertilizer poses some risk to farmers. Supply of fertilizer could become limited as companies curtail production. There also are geopolitical events that may impact fertilizer prices. For example, Russia and the Ukraine recently have had a dispute over natural gas pricing, potentially leading to a cut off of natural gas supplies to Europe. If this unlikely event occurred, natural gas prices in the U.S. could escalate, leading to higher N fertilizer prices. Again the point is not that this or other events will occur, rather the point is that there remains risks for higher fertilizer prices.
Fertilizer Costs and Planting Decisions
Besides increasing farm profitability, lower fertilizer prices may influence planting decisions. In general, lower fertilizer prices increase corn profitability relative to soybean profitability, thereby providing farmers with incentives to plant more corn. This is particularly true of reductions in N fertilizer prices, as N is needed on corn and not on soybeans.
To illustrate, per-acre fertilizer costs are calculated for corn and soybeans given fertility programs representative of those in northern and central Illinois. Under these representative programs, corn receives 180 lbs./acre of anhydrous ammonia, 128 lbs. of diammonium phosphate (DAP) and 125 lbs. of potash. Soybeans receive 38 lbs./acre of DAP and 163 lbs. of potash.
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Costs are calculated using prices representative of fertilizer prices in the late summer and early fall prior to the drop in wholesale fertilizer prices. Fall prices are a $1,000/ton for anhydrous ammonia, $1,000/ton for DAP and $900/ton for potash. Given these prices, fertilizer costs are $210/acre for corn and $92/acre for soybeans.
In anticipation of retail price declines, fertilizer costs are calculated at lower prices that may be prevalent in spring. Prices of $600/ton for anhydrous ammonia, $800/ton for DAP and $600/ton for potash are used in calculating costs. Given these "spring prices," fertilizer costs are $143/acre for corn and $64/acre for soybeans.
Spring prices result in significantly lower per acre fertilizer costs. For corn, fertilizer costs using spring prices are $67 lower than for fall prices ($210 cost using fall prices, $143 cost using spring prices). For soybeans, fertilizer costs using spring prices are $28 lower than fall prices ($92 costs using fall prices, $64 costs using spring prices). The $67 reduction in corn fertilizer costs is $39 larger than the $28 reduction in soybean costs. These fertilizer cost reductions increase the profitability of corn relative to soybeans by $39/acre – a sizable increase that may cause corn to be more profitable than soybeans.
Of the $67 decline in corn fertilizer costs, ammonia price declines accounted for $36 of the decrease. Stated in percentage terms, the $36 ammonia cost decrease was 56% of the total corn cost decrease. Since N fertilization is not needed for soybeans, prices changes in N sources such as anhydrous ammonia will have larger impacts on relative profit changes between corn and soybeans as compared to prices for phosphates and potash.
Summary
Like most other commodities, wholesale fertilizer prices have declined since the middle of September 2008. As a result, retail fertilizer prices likely will be lower in the spring as compared to the fall. Lower fertilizer prices will increase the profitability of corn relative to soybeans. As farmers make planting decisions, up-to-date fertilizer prices should be used in calculating relative profitability.