Normally the rising cost of natural gas, its effect on nitrogen fertilizer production and fertilizer costs makes the headlines right before the spring planting season. 2004 is anything but normal now that the warning bells are already sounding for 2005.
Three main factors- high raw material prices, transportation costs and international competition are responsible for the sticker shock growers may face come spring. While fertilizer manufacturers, distributors and retailers can't control the factors leading to this demand spike, good planning and communication with growers can help to keep fertilizer costs under control.
Natural gas is essential to the production of anhydrous ammonia, the starting point for most commercial nitrogen fertilizers. Natural gas has recently reached $6/MMBtu and the futures market has natural gas prices remaining on the $5-$6 range for the next several years. At this price, natural gas represents nearly 90 percent of the manufacturing cost for a ton of ammonia.
Similarly, phosphate based fertilizers rely upon sulfuric acid for the mining and refining process. Higher sulfur prices in the past year or so have impacted phosphate fertilizer manufacturing.
“Since mid-2000, when the natural gas crisis began to manifest itself, 15 nitrogen production facilities representing more than 22 percent of U.S. capacity have permanently closed,” said Harriet Wegmeyer, director of communications for The Fertilizer Institute. “During this same period, many other nitrogen fertilizer production facilities were idled due to the volatility of U.S. natural gas prices, an occurrence which has, in turn, jeopardized farm profitability.” Because of increased costs and regulations, manufacturers and growers increasingly rely on imports, since companies are able to produce fertilizer raw materials outside the U.S. more economically.
California is a fertilizer deficient state and all raw materials must be transported across state lines or into maritime ports to reach the retailers and growers. In California, the fertilizer industry has traditionally relied upon rail service to transport product to growers and retailers. In 2003 and 2004, an unforeseen increase in retirements and dramatic increase in demand brought the rail yards to a screeching halt.
In an April 2004 open letter to customers, Union Pacific executive vice president-marketing and sales, John J. Koraleski stated, “while we are usually pleased with increases in demand, our inability to quickly meet these new levels has become obvious and is very frustrating. The combination of a shortage of train crews and the dramatic increase in demand for service created huge stress on our system. This strain manifested itself by increasing the time it takes to recover from external problems such as winter storms and major derailments.”
The letter went on to detail plans to improve rail service through aggressive hiring plans, increased equipment purchasing and the establishment of additional, temporary facilities to ease some of the rail congestion, but the actual results of these efforts will not be truly tested until the winter season.
The record high fuel prices in the U.S. are starting to be passed along down the manufacturing chain, driving up the cost of many goods that need to transported major distances, including fertilizer. As more fertilizer is brought in from outside the U.S., there is also increased competition with other commodities and a decrease in the total number of ocean freight vessels available for transportation.
China, the world's second largest economy is experiencing rapid economic growth. This growth has fuelled an increase in demand for commodities from grain to steel and has triggered a corresponding increase in ocean freight needed to transport them.
Nitrogen producers outside of the U.S. and EU enjoy substantially lower natural gas prices. The financial advantage is so great that even with paying ocean freight costs, these foreign countries can still compete with the U.S. nitrogen producers located near the U.S. Gulf. Growth in developing nations is putting a major squeeze on fertilizer supply.
Nutrient deficient soils in areas with rapidly developing economies means that countries like India and Brazil will require a larger share of the world's fertilizer production. Phosphate inventories are significantly below five-year averages and anticipated import demand growth from Asia and Latin America will trend U.S. prices higher due to increased competition. This demand will have effects on fertilizer prices not just here in California, but globally.
“In light of these factors beyond the control of the retailer, including higher raw material prices, transportation costs and global fertilizer supply and demand, farmers should expect prices to remain high for the foreseeable future,” said Beckley. “A good relationship and communication between the farmer and retailer can maximize the benefits of fertilizer products.”
Ongoing and open dialogue between fertilizer retailers and farmers should include crop plans, fertilizer application schedules and methods. By carefully assessing crop and soil nutrient needs, application methods and timing, many farmers may be able to increase their fertilizer efficiency while minimizing input costs. The latest information on the efficient use of fertilizer is available from the Fertilizer Research and Education Program (FREP), http://www.cdfa.ca.gov/is/frep/. Additional information on fertilizers in California is available from The Western Fertilizer Handbook, produced by WPHA and published by Prentice Hall, http://vig.prenhall.com/catalog/academic/product/0,4096,0813432103,00.html