greetings from a canadian potash trader, page-19

Here is the article referenced in previous post..

No Quick Fix for Price Spike


OMAHA (DTN) -- Fertilizer markets ain't what they used to be. For most of the past 30 years, demand was so stagnant, fertilizer seemed downright boring. Phosphate prices resembled the flat line on a deceased patient's heart monitor. Mines operated below 65 percent capacity.

Two dozen nitrogen fertilizer plants folded in the U.S. after natural gas prices -- the major cost of ammonia fertilizers -- flared briefly in the 1990s. After that debacle, surviving manufacturers decided that they could source cheaper natural gas overseas, and import nitrogen fertilizers instead.

Of course, that was then. Today, fertilizer companies can't mix the stuff fast enough.

Fencerow-to-fencerow crop production is stressing the once sleepy fertilizer supply chain. Global phosphate use alone could increase 13 percent, and potash 18 percent from 2006 to 2008, according to the International Fertilizer Industry Association. That is the equivalent of adding another United State to world demand in just three years, according to Mosaic, the giant fertilizer manufacturer.

If this clip continues, "there will be more than just spot fertilizer shortages," said Dan Froehlich, Mosaic's director for agronomy. "Some fertilizer companies are sold out through March, and it doesn't matter if you could pay $1,000 per ton, it's just not available."

INPUT INFLATION

Since the beginning of January, diammonium phosphate (DAP) prices have jumped to $760 per metric ton fob Tampa, up 200 percent from year-ago levels. While phosphate could be the most troublesome element, other fertilizer analysts reported that St. Louis potash prices jumped from about $200 per ton to $420 per ton in the same time period and urea from $300 to about $400. With this much instability in markets, "dealers are pulling their hair out," said Keith Swanson, who advises fertilizer dealers for CHS, the Minnesota-based cooperative.

"The risks dealers have -- everybody has -- have been enhanced," said Swanson. And how manufacturers, dealers and farmers choose to handle that risk could have profound effects on U.S. agriculture, including how many dealers survive the price turmoil, how willing America's farmers are to shoulder the bill and how fast supplies can expand.

Swanson sees three threats on the horizon now. First, higher price risks mean unacceptable exposure if dealers carry inventory season to season. A sudden drop in U.S. grain prices could leave dealers with inputs that growers can't afford to apply. Second, abnormally short supplies inside the U.S. and abroad mean products may not be delivered on a timely basis this spring. Areas more remote from terminals or river transport, such as the upper Midwest, remain the most vulnerable. Third, a bidding war in commodity markets is leaving dealers with huge uncertainty over the ultimate acreage shift between corn, wheat and soybeans. Last year saw more acreage substitutions than any year in U.S. history. So without firm orders from farmers, dealers are having difficulty gauging spring needs.

When markets moved only $10 or $15 a ton from season to season, there wasn't that much risk holding inventory. "Now, a wrong bet and a $150 or $200 swing can wipe out a dealer or another co-op," Froehlich said.

"Armageddon for the fertilizer industry is a scenario where a dealer buys $800 fertilizer and it drops to $400 two months later," said F.C. Stone fertilizer analyst Ryan Sherwood. So right now, dealers are shifting as much risk as possible to growers by requiring cash forward payment, he said.

Until recently, farmers saw little value in early orders, but spot anhydrous shortages last fall may have changed their minds. In January, CHS dealers received record orders for fall 2008 deliveries. Some buyers wanted to secure stocks for 2009 crops, but no manufacturer will go out that far, Swanson said.

"One of the things I tell dealers is that there is a lot of farmer disbelief [about fertilizer shortages and supply problems]. But it's one of those times that there really is a wolf in the den," Swanson said. He thinks growers need to operate more like manufacturers when they forward sell crops, and simultaneously lock in margins per acre by securing inputs such as fertilizer so they know they can produce at a profit. (See accompanying sidebar below, "Help for Hedging Inputs").

RELUCTANCE TO EXPAND CAPACITY

In the interim, don't expect any quick supply fixes from manufacturers. Mosaic expects phosphate prices to remain "fairly high for the next 18 to 24 months," said Froehlich. To reopen a now-idled phosphate mine in Florida would require an outlay of more than $1 billion, he said. No company is going to spring for that kind of cash to fix a short-term problem. Like a lot of farmers, fertilizer executives -- and their banks -- remember that over the last 100 years, grain prices suffered from boom and bust scenarios.

On Thursday, Terra Industries, the nitrogen fertilizer company based in Sioux City, Iowa, reported sales of UAN and AN up 20 percent last year, a major factor in the company's financial turnaround in 2007. The company expects sales to remain strong in the first half of 2008 despite steep price increases, thanks to record levels of customer prepayments.

Overseas nitrogen fertilizer production will gradually ease supply shortages, as Middle East oil producers add infrastructure. But so far, only Terra has announced plans to reopen one of the nation's 25 mothballed nitrogen fertilizer plants, with start-up at its Donaldsonville, La., ammonia plant to launch in the third quarter of 2008. Its facility had ceased operations in December 2004.

If many more of the closed facilities could have come back by now, they would have, "as fertilizer manufacturing margins have been extraordinary for nearly two years," Swanson said. "That they haven't can be attributed to a variety of reasons: very old and inefficient plants, views of management that current high manufacturing margins are relatively temporary and time and expense to reopen shuttered facility is not worth it for short-term benefit."

"There's just too much demand for crops and too much demand for a static commodity like fertilizer," Swanson said. For the coming season, global manufacturers are not going to overwhelm the market with supply, he told dealers. "If there's any potential for fertilizer prices to go lower in 2008, it would be because of a demand event -- i.e., a much bigger switch than expected of corn to soybeans."

SIDEBAR: HELP FOR HEDGING INPUT COSTS

Growers' inability to hedge inputs, outside of simple forward contracts a few months in advance, remains problematic. No futures contract exists for fertilizers at the moment, and conventional over-the-counter contracts require individuals to prove he or she has a minimum of $10 million in assets and a net worth of $1 million, according to F.C. Stone's Ryan Sherwood. Usually, that's too rich for farmers' balance sheets.

Hurley and Associates, a Charleston Mo., marketing consulting service, has recently launched a method of hedging diesel, natural gas and other energy products on a scale that might attract more farm operators, and it hopes to expand into a fertilizer program next.

Until now, one problem with the futures market is that oil contracts alone are sized at 42,000 gallon minimums, too big for 1,000-acre grain farms that might use only 5,000 gallons a season, Case said. That flaw also discouraged fertilizer futures participation in the past. By aggregating interested parties, Hurley and its broker F.C. Stone can effectively give smaller producers the same hedging capacity as middlemen or manufacturers.

"There's no minimum size to the contract, but each participant has to understand the strategy and be willing to bear the cost of the strategy," Case said. Using a long-hedge options strategy means a producer would only be out the cost of the option, and the intent is to take the contract all the way to expiration.

The risk manager can structure the deal by buying a call option or by buying a forward contract with a put option, but in either case these are maximum price contracts (see DTN's Market Matters blog on our online home page for more details).

Case emphasizes the new hedging products are still playing out, but a few farm customers have already given the product a try. In late 2007 the crude oil market was trending higher. If it broke $100 per barrel, analysts feared it would approach $150 next. "Since the market was already trading at historically high levels, we were looking for a break in price to scale in purchases," Case said. "Basis on diesel was very attractive at the time, so we fixed forward contracts and eliminated the risk of the market going to $150 per barrel, but we created the risk of not being able to participate in a price break. Incorporating a put option strategy allowed us to add value to our position if the market went down. Buying a call option was an acceptable alternative if you weren't able to do a fixed forward contract at the time."

While such over-the-counter products remain in their infancy, farmers' need to reduce input risks should make them a popular item. "They show a lot of promise," Case said.

Editor's Note: Get the latest fertilizer outlook by joining Dan Froehlich, Mosaic's U.S. agronomic marketing director, and Timothy Chrislip, director of product management for CHS crop nutrients, for a free DTN webinar at 2 p.m. CST on Feb. 19. Just register in advance to hear it live or rebroadcast at your convenience at http://www.dtn.com/…