Over the next few weeks, Canadian farmers will be making some key decisions about which crops to plant and how to grow them in 2009. Part of this decision-making process will involve fertilizer. In a typical year, that process is fairly straightforward. This year will be a little different.
Here in the early spring of 2009, the fertilizer supply/demand picture is very different than in a typical year. Today, market dynamics are exceptionally volatile. While a healthy supply of fertilizer sits at retail points, relatively few farmers have made purchase decisions. Many fertilizer manufacturers, which normally are running flat out at this time of year, have responded to this demand reduction by cutting production significantly. Meanwhile, we are weeks away from a time of year when much more fertilizer will be needed than is now being produced.
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Fundamentals appear strong
How did we get here, what happens next and how should farmers approach their fertilizer decision-making over the coming weeks? We would like to offer some thoughts on the current fertilizer market, and suggest what is likely to happen this spring.
In sketching a portrait of the current market, we like to drill down to some base fundamental factors. We see them as follows:
On a global basis, stock-to-use ratios for grain are at historic lows. Despite generally good crops worldwide, the population has consumed more grain in recent years than we have grown, and demand for food is rising. Population is increasing, while the number of acres of arable land is decreasing. These facts point to strong fundamentals for growth in global agriculture.
Many Canadian crop producers, meanwhile, have come into 2009 in relatively good shape financially. We therefore would expect that farmers will fertilize their crops to a level at least consistent with recent years. This view is supported by the fact that grain prices have been generally positive since hitting their December lows.
Where is the fertilizer that Canadian farmers will use in 2009? A large supply now sits at retail points and storage facilities across the country. For the most part, this fertilizer was purchased by retailers during the summer of 2008.
At that time, retailers were coming off a spring fertilizer season in which grain prices and fertilizer prices were both highly volatile, and generally well above the average of recent years. To ensure future availability of fertilizer for their customers, these retailers bought, paid for and stored a large volume of product last summer.
By the fall of 2008, as we know, prices for many crops had declined from the levels of the previous winter and spring. Fertilizer prices came down as well in the fourth quarter of 2008, but the fact remained that the fertilizer being stored by retailers was purchased at the higher prices prevailing last summer.
Stalemate at retail
Since then, we have seen something of a stalemate among farmers and retailers. Farmers are reviewing their economics and are only prepared to buy fertilizer if they see an economic gain. Retailers are holding a supply of higher-priced inventory,
“ We Are Weeks Away From A Time Of Year When Much More Fertilizer Will Be Needed Than Is Now Being Produced.”
and have nowhere to put the new product until their current supply moves out.
Therein lies the dilemma.
This is a complex situation involving farmers, retailers and manufacturers of fertilizer. There is supply in place, but relatively little current demand.
Over the next 90 days, we believe this situation will reverse itself, and this presents the problem.
The next 90 days
Having stayed on the sidelines through this volatile period, farmers will likely decide they need their fertilizer for spring needs now. Retail inventories will empty quickly, and then retailers and farmers will look to manufacturers to provide additional supply.
That won’t be easy. Since farmers largely stopped buying fertilizer this fall, many manufacturers had no choice but to cut production. This has occurred globally. On a worldwide basis, 10 to 20 per cent of urea production capacity has been shut down or curtailed since the fall. About 40 per cent of ammonia production, 30 to 40 per cent of phosphate production and 30 per cent of potash production have been shut down or curtailed.
The first wave of 2009 fertilizer demand will be satisfied by inventory in storage and product currently being manufactured. The challenge will come if a second wave of fertilizer demand occurs, and there is less available than needed.
We believe, therefore, there may be a significant problem looming between mid-March and the end of April. We at Agrium will work diligently to manufacture product and transport it where it’s needed this spring.
To some extent, we are in uncharted territory here and no one knows precisely what the demand for fertilizer will be. We do know this: the sooner we can resolve the 2008 inventory issue, the faster new product can replace it and the better farmers’ 2009 production needs will be met.
It is for individual producers to assess what is most important to them at this stage, and whether supply assurance is of greater value at this moment than price assurance.
Many Canadian farmers have developed close working relationships with their retailers. To help ensure they have the fertilizer they need, when they need it this spring, producers might be well served by sitting down with their retailer, soon, to discuss how those needs can be met. CG
