By LINDA McGURK
Indiana Correspondent

WEST LAFAYETTE, Ind. — Unusually high prices prompted many farmers to skimp on fertilizer last year, but benefiting from both lower and more stable prices they’re making up for it this spring.
From April 2009 to April 2010, prices for anhydrous ammonia dropped by $250 per ton, potassium dropped $350 per ton and phosphate fell $50 per ton for the North Central region, according to the USDA’s National Agricultural Statistics Service.

“Fertilizer prices have come down substantially in the last year,” Purdue University agricultural Economist Alan Miller said in a press release. “This has had a substantial impact on crop input margins since fertilizers comprise a large portion of those costs.”

Fertilizer prices started rising in late 2006 and early 2007 as a result of increased ethanol production, booming economic growth, and strong worldwide demand for crops and energy. The summer of 2008, just before the financial crisis broke out, fertilizer prices reached historic highs, but during the economic downturn they started falling dramatically along with the price of oil. Many retailers – and some farmers – got stuck with stockpiles of fertilizer purchased in anticipation of ever-rising prices.

“Some were hoping to lock in the price, thinking it would go higher,” said Bruce Erickson, director of cropping systems management at Purdue. “That proved to be a catastrophic strategy for some farmers.”

Prior to the global financial crisis of 2008, there were reports of potash selling for over $900 per ton, anhydrous ammonia for over $1,000 per ton, and diammonium phosphate for over $1,100 per ton, according to an input cost projection and analysis for the 2010 crop that Erickson helped calculate.

As a result, overall fertilizer use in North America declined by 15-20 percent from 2008 to 2009, with potassium fertilizer decreasing about 30 percent. Fertilizer prices bottomed out last fall and have increased relatively little since then.

“As the price of nitrogen drops relative to the price of corn, the economically optimal amount of nitrogen fertilizer increases. As a result, farmers that may have cut back on fertilizer rates in recent years due to previously higher prices may be feeling a bit more comfortable with their normal program,” Erickson said.

“What we’re seeing is prices returning to old time. They were extremely volatile right before the financial crisis a couple of years ago, and now we’re getting back to a more normal situation.”

Kevin Underwood, a corn and soybean grower near West Lafayette, Ind., said he reduced his fertilizer use last year when prices were high, and took advantage of the current lower prices by purchasing all his fertilizer around the first of the year, before prices started creeping up again. This growing season, his fields are getting a little extra boost to compensate for last year’s cuts. “But we haven’t changed anything dramatically, because we’ve also seen crop prices drop. We’re still trying to adjust everything to meet that,” he said.
Fertilizer prices are closely tied to the price of oil and natural gas, which is used as a feedstock for producing anhydrous ammonia fertilizer. That means lower natural gas prices, along with weaker worldwide demand, have helped bring down the cost of fertilizers. “I expect fertilizer prices to go down over the next few months, because oil right now is trading in the upper 60s and lower 70s, and that has a big impact on fertilizer prices,” said Dave Wyeth, a crop producer in North Salem, Ind.

Wyeth cut back his own fertilizer use last year due to the inflated prices for the 2009 crop, and has increased applications on both corn and soybeans this year. “I use a variable rate so depending on soil tests in the past I’ve adjusted (the application) field by field and by the soil type within the field,” he said.

Because fertilizers, unlike like grains, energy and stocks, are not traded publicly on an exchange, the risk of volatile fertilizer prices is hard to manage for both farmers and agricultural suppliers, according to Erickson. The fertilizer industry is dominated by a small number of companies, some of which are not based in the U.S., which means information and day-to-day prices can be hard to find.

“There has been some discussion about starting fertilizer contracts,” Erickson said, “but some of these companies that are not based in the U.S. may not have great incentives to participate in an exchange. If fertilizers were traded on an exchange, farmers could hedge against future price changes.”