Fertilizer business is a mess
Most Corn Belt retailers have high priced fertilizer in storage because they filled storage last summer and farmers held off applying their normal amount of fertilizer in the fall.
Now, there is no easy way out for these unlucky ag retailers when the current prices for fertilizers are one-half or lower, and farmers want the low-priced product. There are few secrets in agriculture as farmers know the depths to which wholesale fertilizer prices have slid.
The American Farm Bureau Federation recently told its members that "fertilizer dealers will have to 'cost average their prices down' by averaging their current high priced inventories with lower-priced future inventories."
I don't see how retailers could be blamed for causing their own problems in this situation, although I'm sure most farmers have no sympathy for their retailer who is on the wrong side of the fertilizer market.
Since the summer, the price of all forms of fertilizer has dropped drastically. Farmers not applying fertilizer last fall weren't more intelligent than the retailers in forecasting the future. It was a case of circumstances to a large degree from my way of thinking-grain prices started dropping fast, ag lending was in flux because of the national banking scene and wet weather plus late harvest limited field work to a degree.
At the Agricultural Retailers Association annual meeting, one retailer during a panel discussion suggested some retailers might have to take a loss of up to $400 per ton if competitors bring in cheaper fertilizer and force the issue or if competitors set loss-leader averaged pricing to gain customers. The price difference for DAP, urea and ammonia fertililizers purchased last summer compared to current pricing could be more than $500 per ton.
It appears fertilizer companies/manufacturers are being hard hit, too-after being perhaps the most profitable agricultural business sector of the past two years. Publicly traded fertilizer giants saw their stock prices fall 75 percent.
Although I would like to blame the fertilizer companies for pushing retailers to fill those fertilizer sheds and anhydrous ammonia tanks when fertilizer was priced at record levels, I do not actually think their economists expected such a downturn in the world economy or in U.S. ag economics.
It was just a couple months ago that I was suggesting the boom in agriculture must have long legs because all the macro companies involved in agriculture were investing heavily in research and development and hiring large numbers of employees. I hadn't found one company that was predicting any degree of recession that would have nearly the current projected impact on agriculture.
Overall, from what I can see, global agriculture still has a rosey tinge to it compared to many businesses, even with or because of major drops in grain prices. Depending on one's position in the buying, selling or feeding of grain, emotions can be sad to happy.
Several economists have noted that the price of corn and oil during the past 18 months have been on exactly the same tracks following each other up and down for the first time ever. It will be interesting to see what rebound we have in fertilizer and fuel prices if grain prices begin to climb again, or vice versa.
The world outlook is for income growth to slow, which will limit demand for food products in developed countries. Developing countries with growing populations will still require food; therefore, the demand could be driven more by these countries and humanitarian efforts to feed the world. Even if we don't produce as much ethanol, the world's population has to be fed.
Fertilizer business is a mess