News
World fertilizer demand squeezes US supply, increases prices

March 18, 2008

West Lafayette, IN -Worldwide potash demand is growing faster than the industry can produce it, and some U.S. farmers may have difficulty obtaining it when they need it this spring, says Alan Miller, a Purdue University Extension farm business management specialist. Supplies will also likely be tight for certain forms of nitrogen (N) in some areas of the country this spring, as well, he adds.

"The whole fertilizer industry is working at full capacity to meet demand right now, but with the rapid increase in global growth, this may take awhile to sort out," says Miller. "In the short run, there is concern about the industry’s ability to ship all the products needed to all the places they’re needed, particularly in areas where railroads have less interest in moving anhydrous ammonia."

Yet, product availability will likely be less of a concern to most Midwestern farmers this spring than price, says Sebastian Braum, West Coast agronomist, Yara North America. "I think we will have enough fertilizer product available where it’s needed, but it’s not going to be cheap," says Braum. "Potash prices will be very high this spring, but that’s what it will take to get it into the U.S. It will have to be profitable enough to suppliers to bring it here, because the rest of the world is competing heavily for it."

Production capacity has been unable to keep up with the rapidly growing demand, agrees Braum. "So, potash prices continue to trend up and no one knows where they will stop," he says. "In comparison, N prices are fairly flat right now, but as spring planting starts in the Midwest, both urea-ammonium nitrate (UAN) and anhydrous ammonia prices will likely go higher."

Contrary to recent media reports, the increase in demand for all fertilizer types is more about increased global wealth and the lower dollar than an increased demand for ethanol, says Braum. "The expansion of ethanol is causing maybe only 5-10% of the problems in current fertilizer capacity," he says. "The rest is due to the increase in world demand. It’s up everywhere, but especially in China, India and Brazil."

Fertilizer prices are currently at all-time highs for all fertilizer materials, largely due to increased global wealth and demand, confirms Kathy Mathers, v.p. public affairs, The Fertilizer Institute. "World fertilizer demand from 2001 to 2006, has grown 14%, which represents the size of a whole new U.S. fertilizer market," she says. "China, India and Brazil are the areas where fertilizer demand is increasing the most. As those economies develop, their citizens are able to purchase more than rice –- they’re able to purchase more meats, fruits and vegetables, which is increasing the demand for fertilizers to grow those foods."

The increased demand is causing an increase in prices, adds Mathers. "Compared to January 2000, fertilizer prices in January 2008 were about 130% higher, according to the USDA," she says. "In addition, since 1999-2000, the U.S. has lost about half of its N production capacity, which is largely due to high and volatile prices for natural gas, the main cost component in N fertilizer production."

Now, instead of N coming from U.S. sources, U.S. retailers and suppliers are mostly buying N from foreign sources, where natural gas has been cheaper, she says. However, a falling U.S. dollar is now increasing the price to import foreign fertilizer products. "When the dollar falls and companies sell product into the U.S.," says Mathers, "those importers have to raise their prices just to keep even on their investment."

With the falling U.S. dollar and the rising natural gas prices in some foreign-sourcing countries, importing fertilizer from other countries is becoming more expensive, agrees Miller. At some point soon, it may become more profitable to produce N fertilizer in the U.S. again, he adds.

In the last six months of 2007, N imports into the U.S. increased 34% compared to the imports during the last six months of 2006, notes Miller. "The sheer logistics of handling that amount of product could pose some problems, especially now with higher prices for oil," he points out. "On the other hand, the big increase in imports into the U.S. last fall also suggests N supplies are in better shape going into the spring of 2008 than the spring of 2007."

Farmers who are still trying to decide whether to plant more corn or soybeans this spring should make sure they’ll have enough fertilizer on hand to meet their potential needs, advises Miller. "Right now, because corn prices are up relative to beans over the last few days, it looks like there’s been a shift where the profit margin for the average producer in Indiana is a little better for rotation corn than it is for rotation beans, but that could change in an instant," says Miller. "The profit margin still favors rotation beans over ftlinecontinuous corn. Single-crop wheat actually looks more profitable than continuous corn here at this point, given our estimates. There will probably be big price swings back and forth between corn, soybeans and wheat not only until these crops are in the ground, but also throughout the growing season and even after they’re harvested."

To help compare potential profit margins between crops in Indiana, Miller advises downloading the 2008 Purdue Crop Cost and Return Guide by clicking here: www.agecon.purdue.edu/extension.