"'Really, it's nitrogen and phosphate that I'm concerned about,' Metz said."
------------------------------------------------------ Growers Marry 2012 Grain And Fertilizer Sales June 20, 2011
HADDONFIELD, N.J. (DTN) - Farmer Bob Metz has implemented a new marketing strategy since 2008 that sounds like this: If you fall in love with $6 futures prices for corn, don't forget what it will cost you to grow the crop.
Like a hangover, high commodity prices one year inflate cost of production the next. By the time grain markets collapsed in the fall of 2008, retail anhydrous prices had more than doubled in price and were slow to budge, and cash rents soared. So Metz believes it's your profit margin -- not selling price -- that you need to protect when you forward price in today's rarified markets.
"Decent margins are still available for 2012 -- if you lock in your inputs," the West Brown Valley, S.D., operator said June 15, even though 2012 futures had retreated from their highs. Metz had sold portions of his 2012 corn crop by early May and eyed more as December 2012 futures topped $6 in the last few weeks. But to build his comfort zone, he consulted his seed dealer for assurances that prices would remain stable, locked in most of his cash rent under three-year contracts and purchased all of the glyphosate he'll need for the next two years. By mid-May, he was shopping for opportunities to lock up 2012 fertilizer.
"Really, it's nitrogen and phosphate that I'm concerned about," Metz said.
TIPPING POINT ON NITROGEN Input hawks like Metz may have reason for concern, fertilizer watchers tell DTN. After languishing for months, retail prices for both urea and UAN 28 jumped 7% in the last month, according to DTN's most current survey of several hundred fertilizer retailers nationwide. All eight major fertilizers have registered double-digit increases in price compared with a year earlier. The starter fertilizer 10-34-0 led the way at 112% higher compared with the second week of June 2010. Anhydrous climbed 57%; UAN 32, 55%; UAN 28, 50%; MAP, 37%; DAP, 35%; urea, 29% and potash, 22%.
Corn prices had gained a whopping 126% in the same time frame, but analysts forecast that retail fertilizer prices would soon start to catch up.
"In the last month, Gulf wholesale prices for N, P and K have escalated dramatically and have yet to be priced into upstream retail markets in the Midwest," warned Glen Buckley, chief economist with NPK Fertilizer Advisory Service based in St. Louis. "Farm-level prices have not changed anywhere near as much yet."
Right now, the fertilizer industry anticipates the need for U.S. corn growers to plant 93 million to 94 million acres next spring and record or near-record demand for all fertilizers globally for 2012 crops, Buckley said. "Fertilizer is going to get bid up, along with everything else," he cautioned.
Weather and/or politics could still play havoc with forecasts: Because of this year's late planting, the window for fall fertilizer applications will be short, and that could also tax the industry's distribution system, Buckley added. What's more, China's fickle export policies on fertilizer are compounding trade anxieties.
Urea remains one of the industry's biggest concerns because the U.S. imports 70% of its supplies. Since April, wholesale urea prices have surged more than $100 per ton while average retail prices nudged up only $33, to about $521 a ton. Changes in China's export taxes mean manufacturers can't afford to sell overseas in their normal July-October season, Buckley said. The Chinese government could reverse its stance, but a shift could come too late to help U.S. growers who apply fertilizers in the fall.
That not only has huge implications for global urea supplies but also for competing N fertilizers such as UAN. "We could be setting ourselves up for another perfect storm," said Frank Rydl, an agronomy sales and marketing manager for Key Cooperative in Nevada, Iowa. He sees big fertilizer price jumps "just one weather event away in the grain market, or one funky production report in fertilizer capacity."
Like record-low corn stocks, Rydl said retailers' nitrogen fertilizer inventories are "running on empty" at the moment. The corn crop was eventually mudded in, but growers throughout much of the Corn Belt must reapply nitrogen lost to the cold, wet planting weather. Many retailers have waited to restock, since the normal seasonal price drop hasn't materialized, and manufacturers seem to be building expensive corn into their price equations.
"Typically, June, July and August would be retailers' fill period. We'd like to see the normal sag in prices so we can restock for fall, but we're not seeing it," Rydl said. Key Co-op tracks the price of fertilizer relative to corn with an online tool it calls AgroMetrix. That's part of its effort to get members to focus on profit margins for next year's crop rather than gross sales prices. Today, the calculator shows a grower who applied 150 pounds of N per acre could deliver corn in October 2012 at $5.40/bu. and lock in an anhydrous price that would cost the equivalent of 12 bu. of corn per acre to fertilize that crop.
In October 2008, at the height of the mismatch between fertilizer and grain prices, that corn-to-anhydrous ratio peaked at 20 to 25 bu. of corn, but it hasn't slipped below 10 at any time in the past five years that the co-op has kept records.
"You could wait for more robust 2012 crop grain prices closer to harvest, but it's more than likely higher input costs will capture more of your profit," Rydl added. Mike Stegmann, president of St. Louis-based fertilizer distributor Lange-Stegmann, noted that his 63,000-ton urea warehouse is pretty close to empty this time of year, a sign that there's little surplus in the system. "Commodity market volatility is so unpredictable, I can't say if urea will be higher come fall or not. But I'd sure be working on a plan. If there was ever a time to protect your margins, it's now," Stegmann said.
Retreating corn prices this past week should be triggering some grower actions, said DTN Senior Analyst Darin Newsom. "The corn market is nearing the establishment of an important top formation, one that hasn't been seen since the summer of 2009," Newsom said. "This means it might be a good idea to have some long-term grain sales in place at some point in the near future." Fertilizer might be the next step.
