Another feckless prediction...  

Fertilizer prices may have peaked. 

No, seriously. 

Aaron and I are revising our P & K apps in light of the outcome of our cash rent negotiations. My pattern has been to simply slow the buildup on fields that need it.

But whether the Fertilizer Oligopoly can repeat their slowdown to limit supplies is to be seen.

According to the International Fertilizer Industry Association (IFA), there are currently 250 fertilizer production capacity expansion projects under way globally and planned investments of approximately $88 billion through until 2015, including huge projects in China, the Middle East and Latin America.

...

Among the minerals, nitrogen production capacity is growing particularly quickly.

Capacity is seen 19% higher at 229.6 mmt by 2015, driven by expansion in China, India and Latin America, where authorities are seeking to increase self sufficiency and in Africa, where there are the most accessible deposits, according to the IFA.

Meanwhile, regarding urea, the Middle East and North Africa are set to become more important because of the energy cost advantages.

"New capacity is being built to take advantage of cheap gas in Qatar Saudi Arabia and Iran, among other spots," said Calum Findlay of UK fertilizer merchant Gleadell Agriculture.

Another area in which heavy investments are being made is potash and, as a result, large potash surpluses are expected from 2015 onward, according to the IFA. Canada will have the biggest surplus, providing a readily available source of potassium for U.S. farmers. By 2015, North America will produce 39% of the world's potash.

In the area of phosphates, rock mining capacity is expected to grow 26% between 2010 and 2015 with the largest growth areas in Africa, which has the most readily accessible reserves.

In the short term, phosphoric acid supply remains tight but that should ease in the next three to four years as 34 new plants are planned for completion between 2010 and 2015.

With food and feedstuff prices still near all-time highs, demand for fertilizers remains buoyant. But affordability will keep a lid on demand. That's because, at current levels, fertilizer prices are around 30% higher than what is considered a natural equilibrium point against agricultural commodity prices, according to CRU analysis. [More]

Another curious development is the glut of crude in the Midwest and the unusual reaction.

The decision to reverse the flow of a key oil pipeline should alleviate a supply bottleneck that has trapped crude in the Central U.S. for the better part of this year.

It will also raise the price of oil in the U.S., and could restore some of the lost legitimacy of the main U.S. crude benchmark.
Benchmark crude on the New York Mercantile Exchange jumped above $102 a barrel after Wednesday's announcement that Enbridge Inc. (ENB) and Enterprise Products Partners LP (EPD) would reverse the direction of the Seaway pipeline to transport crude from the oil hub of Cushing, Okla., to refiners on the Gulf Coast.
The reversal should help drain the brimming tanks of oil in the Midwest, where elevated inventories and a shortage of outgoing pipelines have depressed the price of crude on the Nymex, also called West Texas Intermediate, compared with Europe's Brent benchmark for much of this year.
...
Pending regulatory approval, the 500-mile pipeline could ship an initial 150,000 barrels of oil a day from Cushing to the Houston-area refining market by the second quarter of next year, Enbridge and Enterprise said.
After pump station additions and modifications, the capacity could rise to 400,000 barrels a day by early 2013, the two companies said.
That flow should help reduce oil inventories in the Midwest, which have been elevated for much of the year. Over the past 12 months, commercial crude held in storage in the Midwest has risen 4% to 91.2 million barrels last week, according to Department of Energy data.
"It enables the increasing amount of oil production to get to the refining centers on the Gulf coast in an economical way," said Andy Lipow, president of the Houston oil-industry consultancy Lipow Oil Associates.
Seaway isn't the only pipeline in the works that will transport crude out of the Midwest. TransCanada Corp.'s (TRP) expansion of its Keystone pipeline, which carries Canadian crude into Cushing, will offer an outlet to the Gulf Coast as well. [More]

I am embarrassed to say I thought they were one-way pipelines.

The cash rent smoking gun?...

One familiar gripe from tenants who are asked to switch to cash rent from shares or have to compete with strong cash rent bidders is that cash renters mine the soil.  This actually one way I try to argue for longer term contracts, since there would an obvious incentive to take care of fertility if you are reasonably assured you will be there in 10 years or so.

As Illinois is one of the leading cash rent states, a recent study may add some strength to that argument.

The most consistent P declines since 2005 occurred across the Corn Belt and Central Great Plains. The median P level for the 12 major Corn Belt states plus Ontario declined from 28 ppm in 2005 to 22 in 2010. This decline has major agronomic significance since a high percentage of samples from this region now test below critical levels (Figure 3). Considering that soil P levels are highly buffered, such large declines for a population of over 3 million samples over a 5-year period are surprising. The high sample volume and limited diversity in cropping systems of the Corn Belt offers opportunities for additional evaluation of aggregate data to gain insights into the cause of these declines. [More (pdf)]

 Consider these maps:

Of course, there are several other reasons why P1 tests are dropping, but as the article points out, this is about the best data we can come up with. And the study was done by the fertilizer industry, so the point of view must be taken into consideration.  Even with those sampling flaws and disclaimers, I think there is some cause to be concerned.

The report also details the drops in K as well as micronutrients, but it was the phosphorus that stuck out in my mind. Checking our own tests, I can't see it, but soil tests can wander all over a wide range.

Still maybe our tests aren't dropping because we haven't enjoyed the killer yield increases that all the other farmers seem to be getting. Seriously, since it takes considerable time to correct soil deficiencies, I think owners and farmers both should be paying closer attention to what is happening with fertility.

On the whole, not good news...

For potash prices.  The "conservative" government in Canada steps back from free-trade rhetoric to old-fashioned protectionism.  I suspect this same tendency abides in our right-wing.  Free trade is a good deal for industries in another guy's district/state.

This is the second time the Conservative government rejected a significant foreign takeover. In 2008, the Conservatives cited national security concerns when it rejected a proposal by Minnesota-based Alliant Techsystems to acquire MacDonald Dettwiler and Associates (MDA), the maker of the Canadarm.

At a media conference with his cabinet, Mr. Wall said the decision demonstrated that Canada could still be a free-market, open-trading economy while saying no to certain foreign investments that involve so-called “strategic resources.”

“We are open to foreign investment, open to takeovers, but there may be strategic considerations that we will take into account,” Mr. Wall said. “I think we have struck the right balance. And maybe Canada has entered a new phase in terms in terms of how we look at these deals.”  [More]

The effect on potash prices would have been felt via the loose cartel that sorta controls world potash trade, CANPOTEX. It was expected BHP would run this business like engineers rather than supply-control economists.

BHP Billiton’s planned $40bn (€31bn) takeover of Canada’s Potash Corp of Saskatchewan (PotashCorp) will likely put an end to the Canpotex export group, thus changing the way potash is marketed and priced on global markets, Canadian analysts said on Thursday.
Canpotex has marketed and distributed potash from Canada's Saskatchewan province to overseas buyers since 1972. Its potash sales are 8m-9m tonnes/year, according to Canpotex.
Jacob Bout, an analyst with CIBC bank, said that if BHP Billiton were successful, it would likely want to go it alone, rather than sell through Canpotex.With the loss of its largest member, Canpotex, which also includes Agrium and Mosaic, would come to an end, he said.
Mario Maselli, market strategist for Chicago-based futures trading firm Lind-Waldock told Canadian business television that BHP was keen on making its own mark in potash, after an earlier attempt to merge with mining firm Rio Tinto failed. 
The analysts' comments came after BHP chief executive Marius Kloppers said earlier that his company’s strategy was to run its assets throughout the cycle, in good times and bad times, and that it preferred to market itself to its customers. [More]

The worst part of this broken deal is the emboldening effect it will likely have on other governments, especially those who pay even less lip service to free trade. If good guys like Canada can invoke national interest, so can we could become a common refrain.


BHP may not be done. As yet, they have not responded.  This could even be a simple ploy to bump up the bid or get a different deal on taxes. I'll keep and eye on this, but sadly, with corn prices rising, the thinking at CANPOTEX is to squeeze the market, I'll wager.

Think you're worried about potash?...

The Chinese are really worried.

But, as with oil, potash deposits are not evenly spread. A handful of nations – led by Canada, Russia, Belarus and Israel – command the bulk of the reserves. Eight companies control more than 80 per cent of global supply. Two marketing groups – Canpotex for North American producers and BPC for the Russian and Belarusian groups – dominate the global trade.
The concentration of supplies is driving concern about a tight and politically charged market. “If BHP buys PotashCorp, is it the end of Chinese agriculture?” runs a breathless headline on the website of the China Business Journal. The accompanying article argues that Chinese control of the industry would boost the country’s agriculture and “great causes” – but, if the miner bought the Canadian producer, it would gain control of the potash market and its pricing system.
Other countries are watching the battle closely, from India, the second-largest importer of the mineral; to Brazil, a key exporter of agricultural commodities that relies on overseas fertiliser supplies. But it is in China, where grain markets are managed closely to ensure farmers keep producing in sufficient quantities to feed the growing population, that concern seems greatest. Few countries take grain self-sufficiency quite so seriously – indeed, it was one of the promises on which the Communist party came to power in 1949.
Maintaining that promise depends in part on potash, the only fertiliser in which China is seriously deficient. The country, which feeds 20 per cent of the world’s population using just 7 per cent of global arable land, has huge fertiliser needs.
China, while it produces a small amount of potash, has to import about half of its needs, a dependency that “may become a major threat to China’s fast-developing national economy and long-term strategic needs”, according to the Chinese Academy of Social Sciences, a think-tank that advises the government. Little surprise, then, that its primary importer of the mineral, Sinochem, says it is paying “close attention” to the PotashCorp battle, suggesting the group could launch a counterbid.
In contrast to the drive to make energy and metals acquisitions in Africa, Asia and elsewhere, the country’s agricultural sector has historically stayed out of the global limelight. But as China struggles to meet its food sufficiency targets, and as fertiliser markets tighten, that is changing. The government has quietly encouraged state-owned agricultural companies to go abroad. Cofco, the grain trader, and Sinochem, the chemicals group, have been hunting for overseas agricultural deals, though with mixed success. [More]

If the BHP takeover attempt is hard to forecast as far as implications for potash production and pricing, think about a Sinochem acquisition.  Even more perverse will be the situation that a major revenue source for a Canadian province will be a huge foreign-owned company.

Is it me, or does that make for weird global politics?

BHP and me...

Does the stunning all-cash offer for Potash Corp. by mining giant mean anything to Midwest farmers?  I'm positive it does, but exactly what?

BHP Billiton’s unsolicited US$39-billion takeover offer for Potash Corp. of Saskatchewan supports the underlying strength within the fertilizer sector. It also provides support for key mine site resources as major miners seek to diversify further into the fertilizer sector, according to Clarus Securities analyst Steven Gold.

He believes this bodes well for the entire fertilizer group, primarily Potash One Inc., since its Legacy Project is in the same region as many of Potash Corp.’s assets.

He also thinks specialty fertilizers will benefit from this news as consolidation within the conventional fertilizers continues.

“Increased focus will be on specialty fertilizers that in many cases offer farmers higher yields,” Mr. Gold said in a note to clients. [More]

Reading between the lines, it looks to me like mining companies see farmers as one of the brighter sources for attractive margins.  Just like Monsanto indicated to Wall Street just a few months ago, our input suppliers intend to get their share of the prosperity on the farm, and one way is to dominate market share. Bottom line: higher fertilizer prices unless more competition shows up.

Of all the nutrients, potash has the greatest potential for growth — a potential 298% increase to match that recommended rate of 66 pounds per acre.

One interesting piece of news from China in February was the government initiative to boost crop yields by sending out 100,000 agronomists to educate 160 million farmers about modern farming techniques. The goal is to boost fertilizer use and demonstrate the benefits by way of soil samples. China is the biggest fertilizer market in the world, but crucially, it lacks much in the way of potash. China must import most of its growing needs.

That’s because potash is a rock and quality mines are scarce. It costs a lot of money and time to bring one online. A brand-new (or greenfield) 2 million-tonne potash mine will cost you a minimum of $2.2 billion — not including what it would cost for infrastructure such as rail, power, etc. It would also take seven years.

So the bigger-picture reasons for owning potash still make sense. More importantly, for our purposes, is the value of the stocks.

The April 20 edition of Foreign Policy included a story titled “Peak Phosphorous,” with the subhead: “It’s an essential, if underappreciated component of our daily lives, and a key link in the global food chain. And it’s running out.”

The story begins:

“From Kansas to China’s Sichuan province, farmers treat their fields with phosphorus-rich fertilizer to increase the yield of their crops… Our dwindling supply of phosphorus, a primary component underlying the growth of global agricultural production, threatens to disrupt food security across the planet during the coming century. This is the gravest natural resource shortage you’ve never heard of.”

You think OPEC is a force with 75% of the world’s oil reserves? Well, just five countries control 90% of the world’s phosphate reserves: Morocco, China, South Africa, Jordan and the United States.

The U.S. has only 12 phosphate mines. When food supply issues get hairy, countries essentially stop exporting phosphate. China did this in 2008. (China has the second largest reserves of phosphate, after Morocco.) I don’t see a phosphate shortage as imminent, but it’s a potential flash point that would surely light a fire under a couple of the stocks in the Capital & Crisis portfolio.

These stocks are potential monsters. They could double their output by 2015 and 2020. About 75% of new supply coming online till 2020 is from these two titans. This provides a powerful way to increase earnings even if potash prices go nowhere. If prices do climb, then earnings will jump sharply.

The value in these stocks, though, really comes from their huge net asset values (NAVs), as seen by looking at replacement values. In other words, let’s answer the question what would it cost us to build these assets from scratch?

If it is cheaper to buy the stocks than to build the assets, we have a promising situation. Think about that as if you were potash producer. If it cost you $1 billion to build a 1-million-tonne facility or $500 million to buy a ready-made potash mine in the stock market, what would you do?

All things being equal, you buy the stocks. In today’s market, the stocks are cheaper than building new mines. A number of global mining giants get the attractive investment profile I’ve laid out for you. Vale and BHP have already made small purchases. Vale bought Bunge’s phosphate mines and took a majority stake in Fosfertil, a Brazilian fertilizer company. In 2009, Vale also bought potashBHP already owns reserves for a possible mine in Saskatchewan. All of these would be greenfield projects. reserves in Argentina and Saskatchewan.

So given all the risks, expense and time… why not just buy the two big players in the Capital & Crisis portfolio if they are cheaper? (Not only are they cheaper, but the assets are of a much-higher quality).

I have my own conservative estimates of their NAVs based on replacement value. However, I could be way conservative. Morgan Stanley’s estimates are much higher, to give one other estimate. They include an estimate for infrastructure. They also use average costs based on existing publicly disclosed greenfield projects.

The high cost of new assets also provides price support for fertilizer prices. To lay out all of that cash for a new potash mine and get just a 10% return on your investment, you’d need potash prices of $500 per ton to make it work. Currently, prices are around $350 per ton. Brownfield expansions — or additions to existing mines — are cheaper. Some can work at prices as low as $250 per ton. These brownfield expansions are what the Capital & Crisis investments are doing. But they’ve got the best assets. [More - although I was a little generous excerpting]

Meanwhile at the same time, the USDA is fussing about consolidation within our borders.  This discussion may be needed but will it really matter much if our adjacent links on the value chain (suppliers and buyers) are all global-sized. Tinkering with our ag market structure here won't touch multinational concentration, it seems to me.

It's not just my yields...

That have been disappointing. Agriculture is struggling to grow in India.

India has been providing farmers with heavily subsidized fertilizer for more than three decades. The overuse of one type—urea—is so degrading the soil that yields on some crops are falling and import levels are rising. So are food prices, which jumped 19% last year. The country now produces less rice per hectare than its far poorer neighbors: Pakistan, Sri Lanka and Bangladesh.
Agriculture's decline is emerging as one of the hottest political issues in the world's biggest democracy.

On Thursday, Prime Minister Manmohan Singh's cabinet announced that India would adopt a new subsidy program in April, hoping to replenish the soil by giving farmers incentives to use a better mix of nutrients. But in a major compromise, the government left in place the old subsidy on urea—meaning farmers will still have a big incentive to use too much of it. [More with great comments]

It was whopping purchases of potash that ignited the run on that commodity back in 2008. And I suspect their shifting much of that business to Russia will further hassle Canadian potash suppliers.

Belarusian Potash Co., the world’s biggest exporter of the fertilizer, expects to sign contracts with India, the largest importer, in a “matter of weeks” as global demand strengthens.

The new contracts will most likely run through at least December and deliveries may start as soon as April, BPC sales chief Oleg Petrov said in an interview. BPC, which represents Belarusian and Russian producers, expects talks to start in the next two weeks, he said.

International Potash Co., the biggest supplier to India, said earlier this month the Asian nation may start running out of the fertilizer as early as March. Prices fell as low as $350 a metric ton last year from as much as $1,000 in 2008 as a slump in grain prices spurred farmers to curb purchases. India agreed to buy potash from marketer Canpotex last week at $370, signaling improving demand. [More]

I'm starting to doubt the potash cartel can survive in its present form as India and China are now large enough to deal seriously, and Russian competition and capacity can take advantage of much lower freight costs.

Somebody's bullish on corn prices...

Despite dismal fundamentals, obviously input suppliers think there is a future in corn farming.

CF Industries Holdings Inc. increased its offer to acquire rival Terra Industries Inc. to about $4.58 billion as it seeks to increase output of nitrogen fertilizer.
The bid of $36.75 in cash and 0.1034 of a CF share for each share of Terra includes the $7.50 a share dividend Terra declared in September, Deerfield, Illinois-based CF said today in a statement. CF’s previous offer was $32 in cash and 0.1034 of a CF share and also included the dividend.
CF has sought to acquire Terra for more than 10 months while fending off a hostile bid from Agrium Inc. At stake in the three-way battle is whether Agrium or CF will become the world’s second-largest publicly traded maker of nitrogen-based fertilizers after Yara International ASA of Norway. Terra has rejected CF’s previous offers. [More]

I wouldn't count Agrium out just yet, either.

Furthermore, index funds are still buying corn, too.

No product, no byproduct...

Ag lime could be in short supply soon since so much limestone quarry capacity is idle.  Ag lime is essentially the fines from crushing to get rock for roads or concrete.  Guess how many foundations we've been pouring lately.

Second quarter earnings for aggregates declined as the impact of sharply lower shipments more than offset the earnings benefit from improved prices, lower unit costs for diesel fuel and cost control measures.  Aggregates shipments declined 31 percent from the prior year due to weak demand and wet weather.  The decrease in aggregates volumes reduced second quarter EBITDA by approximately $112million versus the prior year.  The increase in the average selling price for aggregates reflects wide variations across Vulcan-served markets.  Many major markets realized price improvement from the prior year well above the 3percent average, while certain markets in the far West and Florida reported year-over-year declines in average selling price.
By rationalizing production, reducing operating hours, streamlining the workforce and effectively managing spending, the Company offset some of the cost impact related to lower volumes.  Aggregates cash fixed costs were reduced17percent from the prior year’s second quarter.  The unit cost for diesel fuel decreased 54percent from the prior year’s second quarter, increasing earnings $0.12per diluted share.  [More from one of the largest aggregate producers]

You might want to check your supplier.

Which one is different?...

Pop quiz - which of these price curves is not like the others?

 

This chart is from the brilliant presentation* by John Malinowski, Simplot Agribusiness on July 15 in Canada. (When we weren't enjoying the single-payer health system, we really got some great information!)  

It compares fertilizer prices against a "basket" of commodity prices.   The "100" line is the ratio of commodity prices at that time to N-P-K prices.  Basically, it suggests N and P are relative bargains right now, but K....

My take-away (and you have to use that term several times in the biz now) was the potash boys are fooling themselves if they think they can defy economic gravity or force their customer/horses to drink.

What I heard from John was Canadian potash producers are betting the mine on India.  Meanwhile, the stuff is piling up unsold.

Yesterday, Potash Corporation (POT) announced that North American inventories of potash were on the rise again and were currently 115% higher than the five year average. Despite production cuts from Potash (POT), Mosaic (MOS) and Agrium (AGU), supplies have been on the rise since the second half of 2008.
With the announcement, Goldman Sachs (GS) adjusted their price targets for the three major North American potash producers. Mosaic saw its price target increase from $45 per share up to $50 per share. Agrium saw its price target increase from $54 per share up to $56 per share. And Potash Corporation saw its price target reduced from $105 per share down to $96 per share. Goldman maintains its Neutral rating on all three companies. [More]

With natural gas prices floundering and massive phosphate production capacity about to come online, potash producers have picked an odd time to try to swim against the tide. 

From my vantage point, buying over-priced potash makes no sense, as we really don't know (IMHO) whether we are using the reserves in our soil as well as we could be.  I stopped applying K last year, and if my soil tests decline as slowly as massive applications made them rise, I can wait the potash industry out, I think.

* E-mail me for the whole PowerPoint presentation.

Maybe a dotted line...

Is it logical to connect these two dots?

• Last fall less N was applied across the Corn Belt due to the outrageous price, poor conditions and crop planning uncertainty.
• The Gulf Dead Zone is smaller than expected.

The infamous Gulf of Mexico dead zone looks smaller than predicted this year, but scientists say the reprieve is just temporary, and barely even a reprieve. Some worry that more pollution could cause the Gulf’s ecosystem to collapse.
“We’re in a condition in the Gulf of Mexico that indicates we might be near some sort of tipping point, but you don’t really know it until it happens,” said Nancy Rabelais, director of the Louisiana Universities Marine Consortium.

The federal National Oceanic and Atmospheric Administration released the dead zone data Tuesday. Caused by farm fertilizer runoff that feeds algae that in turn feeds oxygen-gobbling bacteria, the dead zone has covered an area the size of New Jersey for the last several years. This year, unexpected weather patterns — rather than a drop in pollution — have cut its surface area by half. [More]

Of course, whether farmers see a connection is not nearly as important as whether regulators do.

Another alarm sounding...

This time for phosphorus supplies.  Is it me or do these warnings seem to have become a regular section of the news?

As complex as the chemistry of life may be, the conditions for the vigorous growth of plants often boil down to three numbers, say, 19-12-5. Those are the percentages of nitrogen, phosphorus and potassium, prominently displayed on every package of fertilizer. In the 20th century the three nutrients enabled agriculture to increase its productivity and the world’s population to grow more than sixfold. But what is their source? We obtain nitrogen from the air, but we must mine phosphorus and potassium. The world has enough potassium to last several centuries. But phosphorus is a different story. Readily available global supplies may start running out by the end of this century. By then our population may have reached a peak that some say is beyond what the planet can sustainably feed.

Moreover, trouble may surface much sooner. As last year’s oil price swings have shown, markets can tighten long before a given resource is anywhere near its end. And reserves of phosphorus are even less evenly distributed than oil’s, raising additional supply concerns. The U.S. is the world’s second-largest producer of phosphorus (after China), at 19 percent of the total, but 65 percent of that amount comes from a single source: pit mines near Tampa, Fla., which may not last more than a few decades. Meanwhile nearly 40 percent of global reserves are controlled by a single country, Morocco, sometimes referred to as the “Saudi Arabia of phosphorus.” Although Morocco is a stable, friendly nation, the imbalance makes phosphorus a geostrategic ticking time bomb. [More]

Believe it or not, I actually visited one the largest phosphate complexes in the world in Morocco in 1988 as part of the IL Ag Leadership Program (a life-changing experience, I might add).  It was a brand new facility then and needed an astronomical price to break even - something like $250/T at the time.

(Pause for sardonic laughter)

I've also seen the Florida mines which have been curtailing production due to drops in demand and foreign competition. Like the mundane potash business, suddenly the idea of shortages in the face of biofuel driven demand has added glamor to these extraction industries.

But how valid are the cries about depletion?  Credible arguments can be made for "peak phosphorus" and whether it has already occurred.

Morocco's importance to the global economy is due to its control of at least 2/3 of the world's reserves of rock phosphate. The USGS has stated that there are no substitutes (.pdf) for rock phosphate in agriculture. With biofuel demand increasing steadily, and world food shortages hitting the headlines, rock phosphate is arguably as important to the world situation as oil supply. Importantly, Patrick Dery has performed a Hubbert Lineraization on world phosphorus production and estimates that we have already passed peak phosphorus (see graph below). While the importance of rock phosphate has been discussed here before, its impact on the situation between Morocco and Algeria has not. Additionally, fertilizer supplies are a critical component of many biofuel projects, creating an interrelationship between phosphate and energy supplies. Like Algeria, Morocco faces an internal Islamist insurgency (though currently less troublesome than in Algeria) and has significant demographic challenges with a population growth rate of 1.6% (graph) and sharp ethnic divides (map).

[More]

This would pique my interest had I not read too many peak-oil arguments in the last few years. They all sound plausible, but they sure as heck don't help predict oil price action or even production figures.

What these forecasts do, I think, is prime market participants toward an attitude of expectation for wild price swings.  Perhaps they even become self-fulfilling prophecies as players over-react to every price swing.

Regardless, if global economies do climb out of the recession in the next few months, and consumption resumes (albeit in significantly different patterns), I'm planning on coping with wearisome MAP and DAP prices.  It may be a heap-it-on strategy when prices seem less ridiculous, or serious investigation into how little my crops need, or both.  But forecasting crop input costs will never be simple again, I fear.

Friends don't let friends...

Buy $900 DAP.  I'm trying to find a marginally acceptable way out of the fertilizer pricing mess we seem to have found ourselves in. I like my dealer and I respect the right of the fertilizer industry to make business plans for their own ends. But it has become glaringly obvious what the industry wants to force customers to do: underwrite their unfortunate business decisions.

As the boys at Purdue delicately put it:

Fertilizer markets are adjusting now to a dramatically different economic situation after prices reached 
unprecedented levels last year.  With prices in flux, the wholesale prices paid by agricultural retailers vary 
dramatically, depending greatly on the fertilizer source and when they were purchased.  Correspondingly, 
retail fertilizer prices can be much different from dealer to dealer this year. As in any year crop producers 
should check pricing with more than one dealer, but also especially this year get a good feel for the assurance 
of supply when you will need fertilizer this spring.  Also, carefully weigh the value and possible future benefits 
of maintaining a good working relationship with your agricultural supplier.  [More]

"Somebody, by God, is going to buy this overpriced inventory of mine", they seem to be demanding. Dire warning of yield drops and inability to get product in time are transparent scare tactics.  And they know a few good-hearted souls will honor our previous contracts and miscalculate that our share lease at least splits the pain with some hapless landlord.

But what never seems to cross the minds in the boardroom is farmers know there is a sale coming this summer. The presumption we are slaves to habit and will pony up because we always have may be partially right, but it will not include this producer.  They seem to forget I have my own bad decisions to rectify. I'm not in the mood to solve their problem.

I value my relationship with my retailer, and I suspect he is the sacrificial pawn in his company's effort to make regional and local dealers be the fall-guys for corporate misjudgments. And I will honor my 2008 contracts and prepays for NH3 with a pretend smile on my face.

But someone else can overpay for P & K this spring.  I think I can apply twice as much this fall for the same money.  In fact, I wonder if I can prepay it right now.

I have seen the earning guidance given by fertilizer manufacturers desperate to look profitable in front of extremely skeptical stock analysts.  (Do they think we can't find this stuff on the Internet?) And we all have read/heard the stories of same-county competitors $500+ apart because only one was choking on overpriced inventory.

This is not the year to go into any market place with "demands".  Not for producers.  Not for fertilizer sellers.  Conflict with customers is soooo 2008.

It's a new world for fertilizer, too...

Despite strong skepticism by fertilizer execs, farmers aren't buying their arrogant pricing or their products either.  Taking ammonia for one example: [from The Market - an excellent source for fertilizer information.] 

Storage tanks at Tampa are brimming and ships have nowhere to unload, while the pipeline
to the midwest has not be drawn down. The Mississippi river barge market is at a complete
standstill.

The weakness in demand has forced the shutdown of two plants operated by Agrium and
Mosaic, but a third plant operated by Terra Industries in Donaldsonville is defying market
predictions by staying open.

Agrium's 280,000 tonne/year Redwater 1 unit in Canada's Alberta province is considered a
swing plant. Agrium will not bring the plant back up until there is a market rebound. A
second Agrium unit at Redwater has a capacity of 680,000 tonnes/year and is still in
operation.

Mosaic's Faustina plant in Louisiana has been down for two weeks. The plant has a capacity
of 510,000 tonnes/year of ammonia. 

A steep fall in industrial demand for ammonia is contributing to negative sentiment.
Ammonia is used as an intermediate in the production of nylons, acrylonitrile for fibres and
plastics, isocyanates for polyurethanes, hydrazine and explosives. This means ammonia is
partly exposed to the steep decline in the US housing and construction, automobile, pulp
and paper industries, via a range of chemicals including caprolactam, nylon, melamine, and
acrylonitrile-butadiene-styrene. One bright spot is the mining sector demand for explosives,
which is said to be holding up reasonably well among coal producers in particular, as a peak
production season begins.
 Even more stunning is the outlook for phosphate products.

The phosphates market remains in search of a price floor. All major exporters have
significantly curtailed production in the face of virtually non-existent demand globally. 

These comments tie to a website for the fertilizer retailing industry, and it appears all is not well among the ranks.  Here's one dealer comment:

Q: “…what is the mood of the Ag-retailer going into deeper and perhaps uncharted water?”

A: “As for the mood of the Ag retailer…it is degrading as we get keel-hauled by our customers for cost increases promulgated by our suppliers who are clearly capitalizing on the situation. We all hear about how the global market situation is entirely responsible for this, much as we hear how the global situation is responsible for the price of gasoline and diesel. Our suppliers apparently think we are too naive to look at their quarterly earnings reports. Yes, we realize we are in a global market situation and yes, we realize that our suppliers are capitalizing on the situation while we are getting our butts chewed off by the people who have to actually pay for this stuff. As I told one supplier the other day…it is my fervent hope that the folks managing their company are still in place when the seeds they are now sowing have ripened for harvest. They are systematically destroying demand that has taken years to build all in the name of short term gain. I have never seen such unbridled gluttony (and ignorance) in XX years.” [More]

Does the seed industry honestly think they can shrug off deflationary pressures in their corner of ag? Probably, given the fanatical mindset of absolute certainty in their business plans, but color me doubtful.  Seed price too will come under even more intense pressure, and just as I'm trying to figure out how to grow corn for $3, they will be struggling to learn to sell seed for $150.  That's my guess.

Watching soy prices fade rapidly, one has to wonder if the repeatedly-forecast "bidding for acres" has become a Dutch auction.

They shoot speakers, don't they?...

Today I had the particular pleasure of speaking to the ND Commodity meeting in Bismarck.  Lord knows, I barely got here.  But the discussion and surprising news were well worth it.

Except for one thing.  Our four-year old grandson has become an agent of a biological warfare laboratory: preschool.  He has suffered and shared several viruses and maladies over the past few months, and so when I began to speak this morning I knew my throat was doomed.

I was right. 

Still things from other speakers that made me take notice.

• The US used less electrical power in the last year than the year before - for the first time in history.  Don't tell me there is no demand curve.
• Fertilizer prices have broken hard here at least.  MAP ~ $600; NH3 ~$600; urea down even more (proportionally)  - I can't remember the number.  No words on K.  Don't tell me there is no demand curve.
  
• The Bakken oil field will change ND forever, and it's just now beginning to be seen.

 Finally, this nugget: fat people now outnumber the starving.  Yay?

Man, I'm going to bed.  I speak at the IA FB meeting on Thursday.

I hope.

I am Phipps: Destroyer of Demand...

Gosh - that sounds more dangerous than most descriptions I've heard.  And trust me, I am going to destroy a little demand for inputs, and I suspect I'm not alone.  I don't believe in organized boycotts, but many of us will arrive at the same conclusions based on similar data. Not only that, be we may have some powerful help.

Consider this comment from below:

Please tell me how a lender, (I am a lender and a farmer) is going to justify an annual operating loan or line of credit to plant 2009 crops? (even if we have the money to lend, remember FSA raised the loan limits by 50% with no increase in funding, so the current funding could be exhausted on only 66% of current borrowers!!) We need a positive cash flow and at current crop prices and input costs are going to make that difficult. I was told yesterday that soybeans will be $54 for 50# bag next year. (Do I have enough Monsanto stock??!!!) $70 seed cost, $50 chemicals, $150 fertilizer, $125 machinery, and $225 for land needs national average of 155 bpa at $4.00 to break even. I remember talk about Brazil farmers not being able to plant crops beacuse financing was not available several years ago when inflation was rampant. Maybe the canary is indeed coughing!! My fence post or seat of the tractor economics would say we need to lower interest to get liquidity into these markets and get some kind of floor under everything right now, and since we can not produce our selves out of this 'crisis', we need to get out of the way as we need to inflate ourselves out of this.

Thus is the same story my spreadsheet is telling me, and buying seed and fertilizer differently is one of highest paybacks I see to help me creep back toward a black bottom line.

Several reasons for this action.  First, I am soil sampling everything, and for the most part my P & K are in very good shape.  But more importantly, it took several years of massive applications to raise those levels to where they are. I suspect one year of underapplying won't even be seen in subsequent tests.  Ken Ferrie has convinced me we are not even close to utilizing our latent soil nutrients.  And my European buddies have produced enormous yields with rationed fertilizer for years.

In short, we may be about to change the rules for fertilizer application - and I don't think this vast experiment is what fertilizer producers really intended to happen.  Stratospheric prices will reward nutrient use efficiency big-time.

Second, although the input industry argument of costly seed and fertilizer will generate higher yields, they don't offer any money back guarantees for those increases, I notice.  The odds of them getting my hundreds of dollars per acre are 100% (my checks don't bounce).  However, the odds of me getting the promised returns are not as high, and have frequently been disappointing.

Third, the premium for non-GMO corn has jumped again, and with corn now below $4, it represents a significant boost - unlike when were selling for $6+.  Conventional seed is almost $180 cheaper than the hot numbers.  These are the same hybrids I loved just a few years ago, and I can handle the first-year rootworm pretty well to date.

To be fair, seed corn prices in my area have broken from the hardline "red-faced" ultimatum we heard just a few weeks ago.  I've been hearing "whatever it takes" and "we'll work with you" instead of "take it or leave it".  Recent seed company profit announcements add a little secret revenge in saying no as well.  Call me a flawed human being, I guess.

But the comment above is the real clincher. There is no bank so sound it can underwrite business plans that bet on the come in any industry. Auditors will be all over loan apps for the next three decades or so.  If I can't show a healthy margin with numbers obtainable right now, I won't get scarce credit. 

My sources in the fertilizer industry indicate they are convinced the days of "5/90" will be back soon: $5 corn and 90 million acres.  Also the emerging economies will snap back ferociously to gobble up anything at any price. But their dealers are getting nervous about piles of P & K in their warehouses that are not being spread, even if booked.

Input suppliers are going to have to learn the same lessons the housing industry is bleeding from: prices go down, too.  When they do break, the momentum downward will be fierce too, as buyers will want to recover what they saw as gouging just a few months ago.  Farmers read the same profit guidance from company execs as stock analysts, and we know from whose farms those profits were extracted.

Add in irate pre-payers, and a real cash flow problem (will you pre-pay with prices dropping?) and they have made normal market action about as painful as it can be for themselves. And simply because they thought market forces would stop applying to them.

Bad news, folks.  We producers thought the same thing up until August.

Obviously they are not talking about the price...

Scientists have almost accidentally discovered a type of ammonium nitrate that will not explode.  The Department of Homeland Security should be ecstatic.

Industrial manufacturer Honeywell said Tuesday it has developed a new nitrogen-based fertilizer that is difficult to ignite — a discovery that could reduce criminals' ability to make explosives used in major terrorist attacks like the Oklahoma City bombing.

Honeywell International Inc. said its patented fertilizer combines ammonium sulfate with ammonium nitrate, providing the nitrogen and sulfur needed for plant nutrition but making it largely useless as a fuel for explosives. The company said that when mixed with substances such as fuel oil — a volatile combination often used to make bombs — the new fertilizer did not detonate.

"The unique composition of this new fertilizer makes it extremely difficult to turn it into a weapon," said Qamar Bhatia, vice president and general manager of Honeywell Resins & Chemicals, in a statement. "Ammonium nitrate has long been an excellent fertilizer, but this technology makes it safer." [More]

Of course, this is not great news for the mining industry necessarily.  Diesel fuel and ammonium nitrate (ANFO) has been the staple explosive for quarries and mines for decades.  It is cheap, reliable and relatively easy to use.  What I suspect is a dual stream will emerge for the two major uses, and regular ol' ammonium nitrate will be tracked like yellowcake, while agriculture may get easier access to this type of fertilizer.

Easier - but not cheaper, of course.

The last hot commodity...

May be potash.  There is a significant chance of a looming potash shortage as potash mine workers take advantage of labor shortages (thanks to the energy boom) to demand their slice of the much-publicized potash profit pie.

Managers at Potash Corp. of Saskatchewan restarted operations at the fertilizer giant's Allan mine on Monday, the largest of three potash mines where workers have been on strike since Aug. 7, a spokesman said Tuesday.

The company has not determined how much potash it will be able to produce from two shifts at the mine, which normally runs on four shifts, spokesman Bill Johnson said.

The Allan mine produced 1.744 million tonnes of potash in 2007, or 19 per cent of the company's total output.

It is still too soon to gauge whether the strike by about 500 mine workers will affect Potash Corp.'s ability to meet its sales commitments, Johnson said. [More]

As I posted earlier this summer, until potash production capacity rises demand will be pushing prices until usage is curtailed.  This seems to be happening in the minds of stock analysts as fertilizer stocks have dropped back sharply from recent stratospheric highs.

In early August, close to 500 United Steelworkers union members walked off the job at three Potash Corp. mines after contract negotiations broke down. The workers had been without a contract since April. As of Monday, there weren't any talks scheduled between the union and the company. Potash Corp. has plans to increase capacity at their mines by 76% by 2012, and is still expecting to go forward

As of now, Potash has managed to start up one of the mines, at least in a limited fashion. While the strike has affected deliveries of the mineral to Potash Corp.'s industrial customers, farming season demand has yet to hit - look for headlines to scream of a potash shortage, and spot prices to rise, if the strike continues on into October. (That all could be good news for Mosaic, of course, which is the key competitor in terms of potash production.) [More] with those expansion plans. Of course, increasing capacity without actual miners to turn that into capacity utilization ...

The rumor in my corner of the Corn Belt is probable rationing of around 80% on at the dealer level. Of course those are the same hysterical voices who last year said seed corn could hit $300/bag.

Wait a minute, here...

Real farm problems...

We don't know what they are.  Our colleagues in India do, and it could be dragging this vibrant emerging country down.

Global circumstances—soaring oil prices and the subprime crisis that dried up the flow of foreign funds—are certainly to blame. But so is New Delhi. Much of the crisis India faces today could have been avoided by skillful planning. India imports 75% of its oil to meet demand, which have grown exponentially as its economy expands. The government also subsidizes 60% of the price of such fuels as diesel. In 2007, when inflation was a low 3%, economists such as Standard & Poor's Subir Gokarn urged New Delhi to start cutting subsidies. Instead, the populist ruling Congress government spent $25 billion on waiving loans made to farmers and hiking bureaucrats' salaries.

Now those expenditures, plus an additional $25 billion on upcoming fertilizer subsidies, is adding $100 billion a year—or 10% of India's gross domestic product, or equivalent to the country's entire collection of income taxes—to the national bill. This at a time when India needs urgently to spend $500 billion on new infrastructure and more on upgrading education and health-care facilities. The government's official debt, which dropped below 6% of gross domestic product last year, will now be closer to 10% this year. "Starting last year, the government missed key opportunities" to fix the economy, says Gokarn. In fact, he adds, "there has been no significant reform done at all in the past four years"—the time the Congress coalition has been in power.

Even the most bullish on India are hard-pressed to recall any significant economic reforms made in the recent past. A plan to build 30 Special Economic Zones is virtually suspended because New Delhi has not sorted out how to acquire the necessary land, a major issue in both urban and rural India, without a major social and political upheaval. Agriculture, distorted by fertilizer subsidies and technologically laggard, is woefully unproductive. Simple and nonpolitical reforms, like strengthening the legal system and adding more judges to the courtrooms, have been ignored.

A June 16 report by Goldman Sachs' (GS) Jim O'Neill and Tushar Poddar, Ten Things for India to Achieve Its 2050 Potential, is a grim reminder that India has fallen to the bottom of the four BRIC nations (Brazil, Russia, India, and China) in its growth scores, due largely to government inertia. The report states that India's rice yields are a third those of China and half of Vietnam's. While 60% of the country's labor force is employed in agriculture, farming contributes less than 1% to overall growth. The report urges India to improve governance, raise educational achievement, and control inflation. It also advises reining in profligate expenditures, liberalizing its financial markets, increasing agricultural productivity, and improving infrastructure, the environment, and energy use. "The will to implement all these needs leadership," points out Poddar. [More]

India is, of course, one reason fertilizer prices have detonated. But it is also, unlike China, the one country where liberal democracy means farmers have enormous political clout.  Like farmers tend to do, they seem to be intent on choosing actions that exacerbate their problems, rather than fix the underlying causes.

Farmers were handed over loan-waiver certificates, along with a letter signed by Prime Minister, which stated: " Agriculture is the lifeline of our economy... I assure that government will stand by you and other farmers while you continue to engage in agriculture."

Under the debt waiver scheme, government has waived all outstanding farm loans of small and marginal farmers having up to two hectares of land that were overdue on December 31, 2007.

Meanwhile, other farmers will get up to 25 per cent of the due amount under one-time settlement scheme by paying the rest of amount. [More]

I think India will labor to escape the agrarian trap, while Chinese farmers migrate rapidly to the city for other work.  In fact, a pronounced two-part economy seems to be developing there with knowledge workers (consulting, medicine, information technology, etc.) making rapid gains in income and living standards, but the vast majority stagnating.

For Moët and other luxury purveyors, India is a land of enormous promise. Sure, two-thirds of India's 1.1 billion population lives in the hinterland with little access or means to such luxury, but there are almost 100,000 dollar-millionaires in the country. American Express (AXP) predicts that India's millionaire brigade will balloon by 12.8% a year for the next three years. Its nouveau riche could spend $30 billion on high-end goods by 2015, according to consulting firm A.T. Kearney. They now spend about $4 billion, while the Chinese spend more than $5 billion. A survey by by A.C. Nielsen early this year shows that India is the third most brand-conscious place in the world after Greece and Hong Kong.  [More]

Given the current food crisis, how India approaches their agricultural problems will have enormous impact around the globe. But their bloated and unimaginative government does not give much reason to hope.

The acronym needs work...

Is fertilizer controlled by a cartel every bit as fiendish as OPEC? Well, obviously - according to some observers. Although I have a hard time equating Canadians with Arab sheiks, the concentration in this industry certainly makes the concept of an "OFERTEC" possible, if not likely.

Those who oppose industrial agriculture think this is yet another reason to question our agricultural system. And frankly, looking at fertilizer costs for 2009, I think a few more farmers will be listening to this kind of populist advocacy.

I can think of few things more taken for granted in modern post-industrial society than fertilizer. Few people know people know what fertilizes the fields that produce the food they eat -- fewer, I'd bet, than know the source of their drinking water or electricity. To modern consumers, all of these things appear as if by magic.

But with food prices hovering at elevated levels and hunger protests simmering in the global south, stuff like fertilizer is suddenly front-page news. The Wall Street Journal uncorked a doozy the other day. Did you know that dominant fertilizer giants like Mosaic and Potash Corp. of Saskatchewan -- the ones I'm always writing about -- are organized into OPEC-style cartels and legally allowed to collude on price? I didn't. [More]

As more of us contemplate the amount of money we are going to scatter on our acres, even high prices (which we fear could disappear overnight) seem barely enough reward to climb that risk mountain. For farmers in the developing world, the anger is intense, as they have just arrived at the blast-off point for ag production only to see apparent price-gouging.

With the prospect of earning record prices for corn, wheat and soybeans, farmers globally are trying to increase output. To do that, they need more fertilizer.

But high prices and record profits have exposed serious tensions. Indian leaders this week accused suppliers of acting in tandem to drive prices abnormally high. Rising fertilizer prices, they allege, will imperil global food security.

It is a devastating charge. Fertilizer, after all, is a commodity like no other. Without it, there wouldn't be enough food to feed 40% of the world's people.

"You can wait for steel, you can wait for aluminum, you can wait for power," says Dr. U. S. Awasthi, managing director of Indian Farmers Fertilizer Co-operative, who alleged "cartelization" by suppliers this week. "But can you wait not to have your meal?" [More]

It looks to me like about 3-4 tense years before supply begins to catch up to demand. More investment is puring into fertilizer production and the profits are certainly high enough to induce supply boosts.

Cartels are eventually self-defeating, but the "eventual" part can seem like forever if you're stuck on the other end. And the politics of the day likely ensures official scrutiny.

But c'mon - being scammed by a Canadian? Aren't there any good guys left?