Sunday, March 16, 2008

The All-Fertilizer Weekend...

My scintillating post on fertilizer prices prompted this additional information from Christine Gillespie, my secret inside source at Crop Production Services (Agrium).
One thing I am concerned about is the scare tactics some of our competition seem to be creating around fertilizer prices… While I agree with others that the trend for fertilizer prices for the next couple of years are strong, I think there are some possible factors that could provide short term relief for farmers. The first is a factor you mentioned – that US farmers have done a good job over the past few years managing soil fertility and there is the option of cutting back in the short term – or using things like VRT and micronutrients to make the most out of the fertilizer farmers do apply. But there are also other uncertainties in the short –term that could provide buying opportunities this summer:
· Potash – if the Russians and Canadians don’t come to agreement on contracts with India and China soon – they will have product they have to move – while they’ll likely try to limit downward pressure on production by possibly curtailing some production – I think more likely they’ll look at keeping product moving in the short-term rather than wasting valuable capacity
· Phosphate – the big one here is with the spread between international prices and Chinese domestic prices (in part thanks to price controls put on by the government) – will the 35% export tax be enough to stem the flow of phosphate exports – I don’t know for sure – but the potential is there (look what happened to nitrogen in the late 90s when the Chinese decided to export). I think in the medium term even with Chinese exports the pricing would again strengthen – but in the short term this could have a big impact.
· Nitrogen – huge market with hundreds of players – it only takes one of them to run out of space to store ammonia to prompt a selling spree – again I think this would be a short-term impact but could create some summer buying opportunities (as has been the case in most – if not call other years). (One misconception that seems to be out there is that with $100 oil – we should be scared that more price increases are coming – but today – the price of oil has virtually nothing to do with the price because of the supply/demand picture)…
I’m worried that our growers are getting talked into prepaying fall fertilizer at historically high prices and not being given the full picture. In addition, I’m not sure I believe the claims that this is the only way to ensure supply. In my experience, proper planning and good communication between growers and retailers does a lot more to ensure supply than giving prepay money to retailers who may or may not be in good financial shape (c.f. our discussion on that subject the other day). [My links added]
I know what you're thinking - CPS is just using me to advance their evil corporate propaganda. Well, let me remind you of two indisputable factors:
  1. Christine is a lovely young woman.
  2. My raw animal magnetism.
I think we all know who was using whom, huh?

[Update: It would appear that the fertilizer industry is not fixated on the US for clues as to where prices are headed. They are looking at the top two consumers: China and India - and they like what they see.
Incitec Pivot Ltd., Australia's biggest fertilizer maker, is looking at joint ventures with Chinese companies to meet demand from farmers in the world's most populous nation that has helped push prices to a record.

Incitec wants to take advantage of a ``super cycle'' in farm commodities and China's growing appetite for a protein diet, Incitec Chief Executive Officer Julian Segal said.

The company this week agreed to buy the 87 percent of Dyno Nobel Ltd., the world's second-largest explosives maker, it doesn't own for A$1.9 billion ($1.8 billion) to benefit from demand for fertilizers and explosives led by China and India.

``It is joint ventures we are looking at, it makes a lot of sense when you're going into China,'' Segal told the Australian Broadcasting Corp.'s Inside Business program today. ``The only way for the Chinese to actually be able to deliver and have the food as it is required by the population there is to increase yields, and the only way you can increase yields is to have the fertilizer there.''

Increased Chinese demand is ``of course is putting a lot of pressure on fertilizer supply worldwide and therefore fertilizer prices,'' Segal said. ``I believe that current prices are sustainable for a long period of time.''

Segal said the company would also look at opportunities in Latin America. [More]
So, is there a bottom line here? Well, for me, I'm looking at the value of the dollar and planting intentions, which I think (for no hard reasons) will show a surprising lack of corn acres, and planting progress, which I am betting will be slow (cold and wet, according to Mike). If these don't contribute to lower fertilizer usage and prices, the US has lost control of the market.

Maybe it's a good thing I can't forward contract any more 08 crop - at least corn.]

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