Possible fertilizer shortage a growing problem for corn farmers

greenspun.com : LUSENET : Grassroots Information Coordination Center (GICC) : One Thread

Mike Blahnik Star Tribune Monday, January 8, 2001

Rising prices and a possible shortage of fertilizer, brought on by the soaring cost of natural gas, could have widespread implications for Minnesota corn growers.

About half of the nation's fertilizer production capacity has been shut down in recent months as the price of natural gas -- which accounts for more than 80 percent of the cost of producing nitrogen-based fertilizer -- has quadrupled from year-ago levels.

Because of the uncertain supply situation, most fertilizer wholesalers and retailers are unwilling to allow farmers to lock in prices for springtime deliveries. This could cause many farmers to delay planting decisions and consider alternatives, such as switching from corn to soybeans or other crops that don't require fertilizer.

"We are headed into a situation ... with rapidly rising and very volatile nitrogen prices, and a big question mark over whether there will be adequate supplies of nitrogen to put the corn crop in this spring," said Al Giese, co-president of Agriliance, which supplies about half the seed and fertilizer used on Minnesota farms.

Minnesota is the nation's fourth-largest corn producer -- farmers grew $1.3 billion worth of corn in 1998. The state's farmers used more than 600,000 tons of nitrogen as fertilizer last year; price increases this year could translate into additional costs of up to $100 million.

"It certainly is a volatile situation, unlike anything the nitrogen industry has seen anytime in the past," Giese said. "It's really throwing the whole agriculture planning process into chaos."

"There's going to be an increasing amount of emotion developing with this thing, because farmers are going to become very frustrated that they can't plan and lock in their input costs," Giese said of the situation.

Farmers typically like to make their planting decisions by mid-February, but the uncertain situation will force those decisions to be delayed in most cases. Farmers can remain flexible into April because there are adequate supplies of both corn and soybean seed available. But the 3½-month countdown to planting time will become even more anxious for an industry already buffeted by increased foreign competition and crop prices that often are below the cost of production.

"A guy wants to have a good handle on the costs going into it, before you put that kernel of corn into the ground," said Loren Tusa, who is president of the Minnesota Corn Growers Association and farms 900 acres near Jackson in southern Minnesota. "At the kind of margins that we're operating farming, a few bucks an acre is a lot of money."

Current prices of nitrogen fertilizer vary widely but are roughly 50 percent higher than a year ago. Where prices will land after those supplies run out and spring arrives is anyone's guess, but Tusa said most corn farmers are holding off on early fertilizer purchases and don't necessarily believe talk they've heard about a potential shortage.

"As farmers you're always skeptical, because this is the time of the year someone is yelling about a shortage either in seed corn, or chemicals, or fertilizer, and every year when it comes down to it, it's available. It's just setting somebody up for a big price hike," Tusa said.

Supply situation

The fertilizer industry has been one of the hardest hit by natural gas prices. The nation's increased reliance on gas for generating electricity combined with the hot summer to create a shortage that began pushing gas prices up in May. The colder-than-normal winter has exacerbated the imbalance; Friday's closing price of $9.28 per million British thermal units was more than quadruple the year-ago price of $2.17.

Natural gas is the basic material in the production of anhydrous ammonia, the most common fertilizer used by Minnesota farmers, and the price surge has made fertilizer production cost-prohibitive.

"Right now the price of fertilizer and the price of gas means that if you produce it, you lose money," said Ron Phillips of the Fertilizer Institute, a Washington, D.C.-based trade group.

At current natural gas prices, it costs about $330 to produce a ton of ammonia, Phillips said. Spot prices for ammonia have risen to about $250 per ton from $160 a year ago, but they're still well below the cost of production.

"When that equation changes, they'll start producing more," Phillips said.

At the end of last month, about 38 percent of the country's ammonia production capacity had been idled. Two more plants were idled last week, and closings are expected to continue in the coming weeks.

Many of the nation's 40-some fertilizer producers have hedged their natural gas costs, but at least two have shut down because they can make more money reselling the gas than by making fertilizer. Others hedging contracts will run out soon.

Foreign fertilizer producers have much lower natural gas costs and still can operate profitably, but it will take a full growing season before imports can make an impact in the Midwest.

"There are some basic logistical infrastructure limits to how quickly the import market can respond to what's going on -- particularly for products that are hard to move, like anhydrous ammonia," Phillips said.

More soybeans?

Fertilizer producers are poised to restart production quickly if the price of natural gas drops. But the longer that prices remain high, the less chance there is to avoid price and supply problems.

"We're going to start seeing buyer resistance as farmers start seeing what the price of nitrogen is, and we'll start seeing acre-switching from corn to soybeans as farmers look at the increasing cost of nitrogen," Agriliance's Giese said. "It's too early to say we're starting to see it, but most ag economists are starting to say that they see that as a fairly significant potential now, that we'll have corn acres switch to alternate crops."

Seed suppliers have heard the speculation as well.

"I think there's been some discussion [between farmers and their bankers] that they may need to look at adjusting their acres into soybeans because it is a less-expensive crop to put in," said Ron Nyquist, retail sales manager at Top Farm Hybrids in Cokato, Minn.

Orders for soybean seeds are running strong, dealers say. Gold Country Seeds in Hutchinson already has exceeded last year's soybean sales, general manager Dennis Sjogren said. "I'm guessing that's pretty typical with a lot of seed companies," he said.

Sjogren and Nyquist said corn seed orders were running slightly ahead of last year's pace.

Vernon Eidman, a University of Minnesota agricultural economist who specializes in production economics, said that based on the current situation, he expects that some farmers will switch to other crops but that most simply will reduce nitrogen applications.

"That will cut back on yields," Eidman said, "but if [normal] rainfall doesn't occur, they won't need as much nitrogen either" because the crops can't fully utilize nitrogen without adequate moisture.

Eidman said a similar situation occurred during the 1970s energy crisis, which also drove up the price of fertilizer. Farmers then reduced the amount of fertilizer they applied and accepted lower yields.

Another factor that might prevent farmers from switching to soybeans is the relatively low price for that crop.

"It's a matter of the price of corn vs. soybeans. The soybean production seems to be quite high worldwide, so prices domestically have not been as strong," Eidman said.

Over the past month, soybean prices have fallen about 2 percent -- partially on talk of farmers switching to beans, according to a Reuters News Service report -- while corn prices have risen about 3 percent.

Other factors involved include farmers' alternating their growing of corn and soybeans each year.

"I don't want to tamper with that rotation any more than I have to," said Tusa, who typically uses half of his acreage for corn and the other half for beans, then switches the next year. "If I start getting out of that rotation, it does have an impact on crop diseases."

He stressed that it is still too early for farmers to be making decisions that will take them out of their rotation.

"Some of these decisions don't have to be made until the planter is rolling," Tusa said.

Waiting for prices

How much farmers actually will pay is a guess.

"Pricing is a problem right now because the rules keep changing, and there's going to be a great reluctance by retailers to do any pricing right now because of the upside risk they run," said Gary Colliver, vice president of Agronomy Services at Agriliance, an agronomy marketing joint venture between Midwest cooperatives Land O' Lakes, Cenex Harvest States and Farmland Industries.

A rule of thumb is that farmers gain a bushel of corn yield for each pound of nitrogen they use. Last year, Minnesota corn farmers had an average yield of 150 bushels per acre. So, given last year's average retail price of about $250 per ton of anhydrous ammonia, the fertilizer used to produce a bushel of corn cost about 15 cents.

Using an estimate of $400 per ton, the fertilizer cost would rise to 24 cents per bushel. While 9 cents extra per bushel might not seem like a lot of money, consider that 9 cents is nearly 5 percent of the current market price of corn. For an average size farm of 1,000 acres, an additional cost of 9 cents a bushel translates to $13,500 in additional costs.

For Tusa, the whole situation points to the need for the country to develop an energy policy, one that includes the role of farmers.

"It's too bad we can't get into the gasoline-type market, with corn-based products and bio-based products like ethanol [derived from corn] and bio-diesel fuels [from soybeans]," he said.

Mike Blahnik can be contacted at mblahnik@startribune.com

http://www.startribune.com/viewers/qview/cgi/qview.cgi?story=83286722&template=business_a_cache

-- Martin Thompson (mthom1927@aol.com), January 08, 2001

Answers

Farmers Face Possible Fertilizer Shortage

Des Moines (AP) - Farmers may face a shortage of fertilizer because of the high cost of natural gas,used to produce ammonia to enrich the soil.

Natural gas prices have continued to rise and are taking the cost of production of many nitrogen fertilizers with them. Some companies that produce ammonia and nitrogen fertilizers, such as Terra Industries in Sioux City, have slowed production because of the high gas prices.

Terra Industries cut two-thirds of its ammonia production capacity in North America at the beginning of January, said Mark Rosenbury, senior vice president.

The company's total ammonia capacity is nearly 3 million tons, and the fertilizer company has stopped producing nearly 2 million tons by shutting down five of its seven plants in Oklahoma, Texas, Arkansas and Iowa.

"Our base product is ammonia. And we were down," Rosenbury said. "While we had some forward pricing that will give us some gain, it's difficult to say how much it will cost to idle these facilities."

Natural gas prices are off the charts, said Ron Phillips of the Fertilizer Institute in Washington D.C.

"So what has happened is that our cost of production at these kinds of gas prices exceed what we're able to sell the product for in the marketplace," he said.

In January last year, prices averaged $2 per million MMBtu, or million British Thermal Units, which is the standard measurement of thermal energy in the United States. The institute reports that since then prices have leaped to about $10 per million MMBtu, Phillips said.

Consequently, fertilizer producers are opting to save money by slowing production, Phillips said. That means production of fertilizer has been cut in half.

Production cuts are putting agriculture officials on edge with planting season a few months away.

State officials haven't looked into the problem yet but are aware of it, said Brent Halling, deputy secretary of the Iowa Department of Agriculture.

"The other issue that has been brought in by some suppliers that have been filling some orders for producers for next spring, now they are not sure that they're going to be able to stay true to that commitment if they can't get the product next spring," Halling said.

Halling said it's a double whammy for farmers who face outrageously high input costs and suppliers, who aren't certain whether enough of the product is going to be available for planting in the spring.

"It's going to be a major decision-maker as far as planting intentions and those kinds of things for producers," Halling said. "If in fact the supply is not there or the cost is extremely or prohibitively high, we could see a change in planting intentions and corn acres as a result of it."

http://www.omaha.com/index.atp? u_div=3&u_hdg=2&u_sid=55484&u_print=print

-- Martin Thompson (mthom1927@aol.com), January 10, 2001.


Moderation questions? read the FAQ