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A Fertilizer Power Play

Editor's Note: Farm Futures is starting a new ongoing series taking a more in-depth look at key input prices for the 2008 crop year. While higher crop prices have been good news on the farm, there's a bad-news scenario building for fertilizer costs. Look for more coverage this winter.

Farmers lining up supplies of spring fertilizer this week are getting a rude awakening: Prices for anhydrous soared past $600 a ton at Midwest locations, with some quotes as high as $650 according to farmers. And dealers reportedly are warning that even these offers may not last long, with more increases possible December 1, if not sooner.

The price hikes come on the heels of a record fertilizer bill paid by farmers for 2007 crops. According to USDA, anhydrous averaged $531 in April, up from $521 in 2006 and $416 in 2005. Farmers who locked in supplies this time of year likely paid less, which makes current quotes all the more worrisome.

And anhydrous prices aren't the only product rising sharply. Potash prices also are scheduled to jump $30 a ton December 1, with more increases promised for January and February.

While quotes of anhydrous for spring delivery soar at the retail level, wholesale prices are far cheaper. Reuters quoted prices at the Gulf at $289 a ton this week, with FMB-Group reporting prices last late week at $292 to $297.

Those are spot prices, which rose recently on seasonal demand for fall-applied fertilizer. Prices out of the Black Sea, a major exporting hub, have actually been falling since September.

The large gap between wholesale and retail prices isn't the only disconnect in the industry. Prices for anhydrous used to track natural gas, the feedstock for nitrogen fertilizers. That led to the closing of some domestic plants when gas prices soared in 2001 and again in 2005, turning the U.S. to imports.

The connection between natural gas and anhydrous prices ended two years ago, when corn acreage in the U.S. began to ramp up, increasing demand for fertilizer. This year's record corn acreage sent nitrogen usage up 1 million nutrient tons, according to USDA.

Despite that record fertilizer bill, prices of natural gas have been relatively stable over the past year, with record supplies in storage as the heating season starts, according to the U.S. Energy Information Administration.

Each dollar on the price of natural gas adds around $34 to cost of the raw ingredients needed to make a ton of anhydrous. At the current price of $8, the gas in a ton of anhydrous would cost $272. However, natural gas prices paid by fertilizer companies are typically less, thanks to long-term production contracts from plants in the Caribbean. Those agreements lock in natural gas at $3 or less.

It's no wonder, then, that fertilizer companies are enjoying boom times, according to recently released financial results.

Third quarter profits for the Potash Corp. rose 67% in 2007, to $243.1 million; Mosaic income rose 180% to $305.5 million; and Agrium's bottom line got an injection of $51 million, compared to just $1 million for the third quarter of 2006. Agrium's profits would have been $20 million higher without natural gas hedging losses; for the first nine months of the year the company's profits rose 183%, to $269 million, helped by gains in the Canadian dollar.

Nitrogen prices aren't the only fertilizer giving producers sticker shock as they prepare cropping plans for 2008. Potash prices are also up sharply. The big Canadian companies raised prices $25 to $50 for January and February delivery last week, after suspending sales following news reports that a major Russian mine might halt production. While that mine is continuing to operate, other Russian suppliers raised their prices, spurring another round of increases.

Potash prices in the U.S. are already due to go up $30 a ton on December 1.

We want to know what you're hearing in the country and from supplies. Send along a comment to Mike Wilson at mwilson@farmprogress.com so we can cover this issue in depth.