Buyers once dominated the fertilizer market like the Yankees once had a virtual monopoly on World Series pennants. OK, maybe farm inputs can't compare to sports, but in fertilizer manufacturing, that meant decades of stable supplies and stable prices determined by cost of production. Then panic buying struck in 2007-08 and the old bulk commodities game has never been the same, a new study by Rabobank International's analyst team.
When $6 corn first triggered panic buying in 2007, the industry moved towards full-capacity production and spawned shortages of raw materials and phosphate rock. Wholesale prices soared--just in time to leave dealers holding platinum-priced inventory when grain prices abruptly collapsed in the summer of 2008. You remember the painful renegotiations.
But something different happened in 2010-11 when a second commodity boomlet occurred, Rabobank says: Urea, DAP and potash moved up but never marched in lockstep with increases in corn prices like they had three years earlier. In this new scenario, both buyers and sellers are alternating control of the market, Rabobank says. It also appears the sellers are getting smarter.
"The fertilizer chain has become much more conscious of price volatility and is avoiding scenarios of panic buying at extreme prices and building up excessive inventory," Rabobank says. But the problem is their pipeline is relatively empty, which may lead to issues if growers expect just-in-time deliveries.
Retail prices for anhydrous averaged over $1,000/ton in November 2008, after corn has peaked at $7.65. But in the summer of 2011 when corn prices were within a whisker of $8, anhydrous prices reached only $819/ton, according to DTN's weekly surveys of more than 300 retailers. Was this discipline at work?
In 2011, fertilizer manufacturers inventory cycles operated at around 45 days, compared to an average of 6 days suppy in 25 to 2009. "When wholesale traders keep fertilizer inventories low, they push the fertilizer price risk and inventory decisions through to the farming end of the supply chain," Rabobank says.
As DTN's Russ Quinn reported in last week's series on Fertilizer Shoppers (see last week's Best of DTN newsletter if you missed it) farmers' fertilizer buying behavior has also changed. Some producers are installing both liquid and dry fertilizer storage on-farm and monitoring best prices throughout the season; some are buying storage in fertilizer condos and sharing discounts from bulk buys; and others even bolt across the Canadian border when they see favorably priced products and have backhauls to spare.
I've also seen other responses--like a 7,000-acre farmer who now throws all of his business to his local fertilizer dealer rather than hunting for the lowest bidder every year. Besides what he hopes is fair pricing, his dealer will be paying the salary of an agronomist on his farm this year and will share on-farm research with both parties. It's a novel way to build customer loyalty.
One DTN customer from Ontario (he asked to remain anonymous) told me at last week's AAPEX meeting that he also scouts fertilizer prices in New York state. Because his local suppliers must stock up on inventory before the St. Lawrence Seaway freezes, they haven't been able to offer as competitive prices as he sees stateside. Here in the U.S., 10-34-0 and urea have both inched off their highs in the last few months, but "our dealers are going through a 2008 all over again" loaded up with depreciating inventory, he says.
It sounds like the tug of war between fertilizer buyers and sellers isn't over yet, with potential for big swings in prices throughout a crop season. But the responses on both sides mean history isn't likely to repeat itself.
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