Surging nitrogen production moderates fertilizer price outlook
By MATEUSZ PERKOWSKI
Increasing global nitrogen production is expected to stifle price surges for the fertilizer, potentially reversing an upward cost trend that has undermined farmer profits in recent years.
Experts say major spikes in prices -- as seen in spring 2012 and autumn 2011 -- will be less likely as world markets become saturated with nitrogen from new manufacturing facilities.
"We're not expecting anything like that again," said Glen Buckley, chief economist at the NPK Fertilizer Advisory Service.
Strong crop values can still spur demand and prompt upturns in nitrogen prices in the future, he said.
However, any such uptick would attract more fertilizer to flow into the U.S., effectively capping the price increase, Buckley said.
"The markets are clearly oversupplied," he said.
The average yearly wholesale price per short ton of urea along the Gulf of Mexico, a major trading region, will likely drop in 2013 after rising from $426 in 2011 to $478 in 2012, said Clive Yearsley, chairman of the Profercy fertilizer market analysis firm.
"We've reached some sort of peak in 2011-2012," Yearsley said.
After topping $700 per short ton in April, wholesale urea prices at the Gulf of Mexico have more recently been fluctuating slightly above $400 per short ton, he said.
If prices fall below $400 per short ton, that would encourage more buying and eventually push prices up, Yearsley said. "It's not a price we'd see for very long."
Nitrogen prices have reached a tipping point and are generally headed for a reversal, but they're not likely to plummet drastically, he said.
Natural gas, the major raw material in urea production, is currently inexpensive in the U.S. but not in other manufacturing regions, Yearsley said.
If urea prices drop enough, production becomes unprofitable and factories shut down, thereby limiting global supplies and establishing a floor for the market.
"It's not going to get super cheap because the production costs in a lot of the world are not cheap," he said.
Prices for other nitrogen fertilizers -- urea ammonium nitrate, a liquid solution, and anhydrous ammonia, a gas -- roughly track granular urea, Buckley said. Farmers switch fertilizers if one type gets too expensive.
Growers may want to lock in their urea prices for spring 2013 if they see retail prices fall, but may want to wait for UAN and ammonia to drop more, he said.
Generally, retailers and farmers have been content to hold off on purchases, especially in light of substantially higher imports of urea into the U.S. expected in the second half of 2012, Yearsley said.
"There's no perception of a shortage, so people are prepared to wait," he said.
One caveat is the possibility of tighter economic sanctions on Iran, which would prevent its shipments of urea from reaching India, Yearsley said. India would then need to buy fertilizer elsewhere, lifting prices.
Bottlenecks in transportation can also restrict supplies in areas within the U.S. come spring, said Loran Thom, Northwest crop nutrients regional manager for the CHS farm cooperative.
"The dealers haven't seen the growers come in with the traditional prepay business," he said. "We will saturate logistics very rapidly with later decisions."
Thom also said he expects nitrogen prices to fall over the long term, but he doesn't expect the global oversupply to have a significant impact until 2016.
Fertilizer manufacturing requires specialized machinery, so limited availability can slow the rate of new facilities coming online, he said. "It will take a while to get them up and running."