Fertilizers: A different deja vu again

No matter the commodity, the worry in markets today is the same: Are we headed over the economic abyss ... again? Fertilizer markets saw “cliff-drop” declines back then, as prices fell by at least 2/3 in the months between the summer of 2008 and late-spring 2009. Volatility for sure.
 
It is interesting that in the recent run up, in spite of grain markets spiking last summer to close to the peak levels attained in the summer of 2008 (even higher in some cases), fertilizers remained 40-60 percent below 2008’s highs.

Why the difference?

The last time there was a 1-to-1 lock step correlation between grain markets and fertilizers, when grains moved higher, fertilizer prices followed. The principle reason was the supply chain stayed full as the expectation of ever-higher fertilizer prices led to more “stay full” buying.

This time around has been very different. Memories of the last experience, and the bad outcome it produced for many in the supply chain, mean that risk aversion is a big factor in fertilizer markets today.

In recent years, too, we’ve boosted fertilizer production capacity around the globe, which has helped mute price increases even though fertilizer demand has been very strong worldwide because of strong farm production economics.

While fertilizer markets didn’t experience the relative peaks seen in grain markets, they interestingly didn’t experience the “August swoon” witnessed in grain and other markets, either.

Fertilizer prices, which are up substantially year-over-year, remain at their recent highs generally, even today.

All this boils down to the fact that fertilizer markets are now trading more on their own supply/demand fundamentals; strong grain markets are fundamental for strong demand, but supply and risk aversion are now big “watch factors” day to day a lot more so than in the last cycle. And because of risk aversion, there is nothing like the “storage overhang” in the market today as there was then.

This is very important to the outlook. For the fall season there is good supply in place. But the fact that the market for fertilizers is not “bought ahead” generally means that even if we had a replay of the 2008 economic meltdown, fertilizer prices now would not fall nearly as much as they did then. And barring that kind of “disaster-scenario event,” demand and the need to rebuild inventories more, mean fertilizer prices look to be mostly stable near current levels into next spring.

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Joe Dillier is GROWMARK’s director of plant food. His e-mail address is jdillier@growmark.com.