Fertilizer markets have been extremely volatile recently, more so than any other commodity market. The wholesale price of urea, the most volatile, dropped 25 percent from November to December, then doubled from the December level by late March.
The wholesale price of DAP fell from August to December by more than 30 percent, and since then has jumped 15-20 percent.
What drove much of this volatility was fear: Dealers and wholesalers were worried to death last fall that we were possibly looking at a repeat of the price implosion of 2008/09, especially with the Greek/Europe question.
Buyers stepped back from the market and prices fell. Then, because more supply ultimately was needed, prices rose rapidly.
The volatility in fertilizer is attributable to the nature of the market -- seasonal usage on the demand side vs. continuous production on the supply side.
And a very large factor is that fertilizer demand is very inelastic -- it takes a very large change in price to affect the quantity of demand.
It is evident that the dramatic improvement in crop economics in recent times has made the demand for fertilizers that much more inelastic and is driving more price craziness.
Volatility looks to be a market staple in the new year, too.
A big “outlook factor” is new production capacity coming on stream. Cheap natural gas (not only in the U.S.) is a propellant in nitrogen; in phosphate and potash, manufactures are bringing on new production to capture margins that are much larger than a few years back.
This has the potential to send prices lower.
Another factor is China, which is a big exporter of nitrogen and phosphate and is expected to have substantial new supply in 2012/13.
But with changing currency and energy prices in China, how much old production capacity gets shut down is a big question.
Foreign policy developments are another consideration, as Iran, Saudi Arabia, and other Persian Gulf states are big nitrogen producers and are getting bigger. Any Gulf disruption would have a serious, immediate impact on nitrogen markets.
Then there is the question of where grain markets go this summer.
Simple, huh?
The strategy to deal with this volatility surely has to be to back-to-back sell grain and buy fertilizer at the same time to as much extent as possible. While not always possible, selling grain/buying fertilizer should be a “plan A” strategy given the dramatic volatility present today.
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Joe Dillier is GROWMARK’s director of plant food. His e-mail address is
jdillier@growmark.com.