Major changes in retail fertilizer markets over the past three years include price volatility and price increases. But, in addition to the unprecedented price volatility, basic changes in the trade practices at the manufacturing, wholesaling and retail levels in the fertilizer value chain are also affecting farmers.
"As the retail fertilizer business shifts to a global industry, inventory pricing and availability of fertilizer is changing, making it important for farmers to maintain ongoing relationships with fertilizer dealers," says Roger Ginder, an Iowa State University Extension economist.
Fertilizer business shifting to global industry
Some people date the start of these changes to 2003 to 2005, when the two large farmer-owned manufacturing firms, Farmland Industries and CF Industries, exited the industry. But the transition of fertilizer manufacturing from a North American mid-continent industry to a more global industry had actually begun in the mid to late 1990s at the time nitrogen fertilizer manufacturing became a global industry, says Ginder.
Relatively low natural gas feedstock prices in the Former Soviet Union and the Middle East favor more offshore production of nitrogen product. But the need to ship the finished product over a much longer distance means that the lead time required between manufacture and delivery is much longer, he explains. It also means that international exchange rates become a factor in fertilizer pricing. The significant decline in the dollar's value earlier this year resulted in stronger grain prices, but it also increased the import price for many fertilizer products.
Inventory pricing changes also taking place
The exit of Farmland and CF coincided with a radical change in trade practices at the manufacturing and retail level, notes Ginder. The production of fertilizer by these farmer owned firms was more or less committed to the U.S. markets and to a great degree committed to the cooperative distribution system. These companies were willing to undertake the inventory risks and provide a great deal of stability in retail markets.
Inventory was manufactured more or less continuously and moved down the transportation channel to the wholesale and retail level in advance of the season. Much of the inventory moved into retail warehouses was unpriced and there was no commitment to price it before the local cooperative decided to price it. Requests to change fertilizer products even after they were priced were often honored. These policies provided farmers and local cooperatives with maximum flexibility and influenced the trade practices of other manufacturers and local retailers in the market.
Retailers now have to order fertilizer way ahead
The remaining manufacturers are no longer willing to absorb this inventory price risk, says Ginder. Retailers have been required to place orders and pay for product prior to manufacture. In essence manufacturers have pushed the inventory price risk down the chain to wholesalers and retailers. Because there is no effective way to hedge fertilizer products, there is no good mechanism for retailers to manage the inventory price risk they are forced to accept.
Some of the added inventory risk has been absorbed at the wholesale and retail levels. But doing that is very similar to holding an unhedged grain inventory; a large risk that few are willing or able to undertake. The magnitude of this risk has increased two-fold or in some cases three-fold as fertilizer prices have skyrocketed. Those who lend operating capital to retailers for inventory financing are no longer willing to do so under these circumstances.
Changes affecting farmers as they buy fertilizer
This creates a much changed retail marketplace for farmers who, up to now, have incurred some price risk as they purchase their fertilizer. Price could rise if they had not priced their tons or it could fall after they had committed to a price. Most farmers are accustomed to this kind of risk and routinely accept it.
But going forward farmers will face the added risk of product or supply availability, says Ginder. With retailers unable to afford financing large inventories of unpriced fertilizer there is no assurance that enough product will be available when demand is high. If farmers do not place an order and price the product well in advance, it may not be available when they need it.
An additional change in trade practices has evolved during the past 12 months at the wholesale level, he notes. Unlimited fertilizer supplies are no longer being offered to retailers from all manufacturers on a continuous basis. Defined quantities or 'blocks' of product are being offered on an intermittent basis to retailers. In many cases these quantities are less than the retailer would prefer to purchase or could sell promptly.
Keep communicating with your dealer
This means that the retailer may no longer be able to offer a price for fertilizer product to all customers on a daily basis, says Ginder. Sales can be made only to the extent product has been made available for the retailer to purchase. While that quantity may be adequate to promptly fill some customer orders, it may be inadequate to meet all customer demand at the time.
Whether or not this is a permanent change in trade practice is unknown at this time. For the near term, farmers need to be aware that filling their fertilizer needs the coming year may be different than the past. There is less opportunity for farmer price shopping when manufacturers require prepayment from the dealer and offer smaller quantities of product to dealers more frequently. Maintaining an ongoing relationship and more frequent communication with the dealer about supply becomes as important as searching the market for the lowest price.