In 2016, fertilizer prices were a bright spot for producers facing falling commodity prices. The question now is whether prices will hold, or even fall further in 2017.
In answering that question it is helpful to take a look at the big picture. After decades of relative stability, the prices of all fertilizer products spiked dramatically in 2008. Increasing global fertilizer use in Asia and U.S. biofuel demand caused global demand to outrun production. The resulting price spike led to investments in new production facilities across the globe.
During the last five years, global fertilizer consumption has been increasing at 1.5 percent to 2 percent per year, while production capacity has been increasing more than 3 percent.
U.S. fertilizer production, particularly nitrogen, has been in line with the global trend. Domestic market share of nitrogen fertilizer production fell below 50 percent in 1990, but has now grown to 70 percent due to plant expansion projects and new startups.
With a dozen expansion projects still in the development or construction stage, some 6 million tons of ammonia capacity could come online in the next three years, increasing domestic market share to a level not seen in 20 years.
PLENTY WILD CARDS
That supply picture underlies our farm level price trends. While the magnitude varies across product forms, fertilizer prices have been trending lower since mid-2013.
By the fall of 2016, most retail prices were at their lowest point since 2010. Retail prices for NH3, DAP, and phosphate all fell 20 percent during 2016, and were 25 percent to 40 percent off their peak levels.
As we hope for more of the same in 2017, it is good to remember how far we have come. While the supply situation is cause for moderate optimism, there are still plenty of wild cards.
The North American fertilizer industry has become very concentrated. Two firms control nearly 75 percent of the NH3 and UAN delivered to the central U.S. The phosphate and phosphate manufacturing industries are also concentrated. None of the major players are eager to idle capacity. However, supply discipline is much easier to achieve in a concentrated industry.
Several potash mines were idled during 2016, reminding us that fertilizer manufacturers will adjust supply. While the U.S. is now more self-sufficient in fertilizer production, changes in consumption or exports by major players such as China, India, or Russia can still generate a seasonal spike.
The current consensus is for flat to weakening fertilizer prices for 2017 with the typical possibilities for seasonal rallies. Many producers will be tempted to play a cat-and-mouse game with retailers, hoping for small breaks in prices.
Fertilizer dealers will be cautious about holding inventories, and are keeping a close eye on accounts receivable. This could present opportunities for well-capitalized farmers to pre-book at favorable prices or negotiate for higher than normal cash discounts.
Some farmers may be willing to take on more risk by delaying fertilizer purchases in hopes that prices will continue to decline. That strategy might yield some gains in 2017, but trying to outguess the market can also be costly.
In terms of other inputs, seed and chemical manufacturers won’t be pushing many price increases, but are unlikely to do much to decrease the producer’s burden. Before the advent of biotech traits, seed prices tended to follow commodity prices. Since then, seed prices have gone up virtually every year as companies attempt to recoup their multi-million dollar investments.
Despite low commodity prices, seed dealers are likely to try the hold the line on prices in 2017. Mergers in the crop protection industries have dealers worried about a reduction of rebates.
That may limit their interest in pushing prices lower. Both seed and crop protection wholesalers are actively trying to bypass retailers and sell direct to the larger producers. That could create pricing opportunities for larger scale operations, but producers will want to consider the downside of upsetting long-term relationships.
In tough times, retail relationships can become increasingly important.
(Dr. Phil Kenkel is Regents Professor at Oklahoma State University, Stillwater, and holds the Bill Fitzwater Cooperative Chair. Dr. Steven Klose is Professor and Extension Economist-Farm Management, Texas A&M University, College Station.)