The Changing Crop Nutrient Service and Supply Environment

Co-op logistics exec likens trend in handling fertilizer to move in handling grain in larger shuttle car operations; handling more product faster.

By Tracy Sayler

Fertilizer industry trends are not only affecting product price, but how product is delivered, affecting everyone in the supply chain, including farmers, according to Dan Mack, vice president of Transportation for CHS Cooperatives.

About 70-90% of the cost of anhydrous ammonia production is natural gas. Increase in U.S. natural gas demand (and price) began in the early 80s, driven by electrical generation as well as industrial and residential uses.  The cost of natural gas has risen dramatically since 2000, a function of higher energy prices and demand/supply imbalance, according to Mack, a speaker at the recent Prairie Grains Conference.

The trend in higher priced natural gas has prompted business consolidation amongst U.S. nitrogen producers, as well as a decline in domestically produced NH3 and urea.

Since 1999 – when natural gas prices began rising – 22 nitrogen fertilizer plants have closed. Of those 22 plants, 17 have closed permanently, accounting for a 20% drop in total U.S. nitrogen fertilizer production capacity, according to The Fertilizer Institute, Washington, D.C.

Meanwhile, operating rates for the U.S. ammonia industry have also declined significantly from historical levels. The permanent and temporary closures in combination with the drop in operating rates have resulted in a 35% decline in U.S. ammonia production, from 17.85 million tons of material in FY1998/99 to 11.70 million tons in FY2003/04, according to TFI.

Both natural gas (and thus nitrogen fertilizer products) can be produced more cheaply offshore, resulting in a greater dependence on imported natural gas and crop nutrients in recent years, a trend that is expected to continue.

The U.S. went from being the world’s largest exporter of nitrogen fertilizer in the 1980s to becoming the largest importer in the 1990s, according to USDA.  The U.S. fertilizer industry now relies on imports for nearly 45% of nitrogen supplies, from import sources that include Trinidad and Tobago, Kuwait, Canada, and Russia. 

Mack says the shift toward nitrogen imports has changed transportation patterns, lengthening the supply chain.  Previously, domestic or Canadian production moved by barge, rail or truck to the point of consumption. Now, more product is being moved by ocean vessel from foreign suppliers, discharged into port, reloaded to barge or rail, then shipped to distribution centers and retailers.

The change means domestic inputs suppliers have needed to focus more attention (and investment) on upgrading distribution facilities to handle more bulk product at a faster rate. A number of suppliers are expanding storage warehouses from, say, 10,000 to 15,000 tons to double that or more, with revamped fertilizer warehouse storage facilities often connected with grain elevator facilities on rail lines. Mack says the trend in handling fertilizer is similar to the move in handling grain in larger shuttle car operations; handling more product faster.

“The bottom line is that it means more planning and forward pricing by everyone, including producers,” says Mack. In the changing crop nutrient service and supply environment, he advises producers to:

• Develop long-term, strategic partnerships.
• Seek a supplier that can provide both technical and market expertise.
• Understand what is required as a producer to adjust to the lengthened supply chain.
• Diversify crop nutrient purchases throughout the year.

Commodity Program Support: Different Strokes for Different Folks

Commodity	Percent of Support in...			Support/Crop Value
	Direct Pmt.	C.Cyclical Pmt.	MLG/LDP
Corn	39	29	33	20
Cotton	36	53	11	36
Peanuts	27	56	18	34
Rice	54	23	24	51
Soybeans	29	14	57	13
Wheat	66	25	9	24

There are a number of factors that will play into a new farm bill, including the ongoing WTO negotiations (will current and future programs get the ‘green box’ or be allowable?) and the federal budget deficit (substantial – but you already know that).  Here are two more factors which will make coming to a consensus all the more challenging, according to Terry Francl, senior economist, American Farm Bureau. 

The table shows how the significance of the various facets of farm program support varies by crop.  While direct payments matter greatly to wheat, the support from counter cyclical payments means more to cotton and peanut growers, and marketing loan gains and LDPs are important to soybean growers.

Despite the daunting federal budget deficit, there is a certain amount of the ag budget that is mandatory spending, broken down in the graphic. Over half of mandatory spending is on food programs (i.e. food stamps, WIC).  About a quarter of mandatory spending is farm income support.  Seven percent of mandatory spending is conservation, and 6% is crop insurance. Given the mandatory side of the ag budget, any cuts would need to come from discretionary spending, says Francl.  His best guess is for a new farm bill to be finished sometime in 2008.  That assumes the current bill isn’t extended, however, or that a new bill isn’t delayed because of the WTO.