April 27, 2009

Pain in the Fertilizer Supply Chain

Bad news on global agricultural output:
The Globe and Mail (Canada): Farmers across Canada, the United States and elsewhere are ... holding off on fertilizer purchases in the hope prices will fall. Their collective action has sent fertilizer sales into an unprecedented nosedive and pummelled the bottom lines of agriculture giants like Potash Corp. of Saskatchewan Inc., [POT-T]Viterra Inc., Bunge Ltd. and Terra Industries Inc.


Fertilizer dealers have been hit even harder and a few small stores in Canada have gone out of business.

"It's not good," said Bob McNaughton, who runs Sylvite Agri-Services Inc. in Putnam, Ont., which has six locations. He knows several stores that are facing financial trouble. "They're gone, or will be."

Many stores bought potash last year at close to $1,000 a tonne, he said. The price has fallen to around $800, which many still believe is too high. Even if a retailer can make a sale, Mr. McNaughton said the owners have to eat the loss.

"Everybody was expecting a mind-blowing, record fall season and it was a bust," said David MacKay, executive director of the Winnipeg-based Canadian Association of Agri-Retailers, which represents about 1,000 fertilizer dealers.
It seems that retailers will rather let their stockpiles lay still than sell at a heavy loss. I have a radical suggestion: If the producers want to see potash move in the market, they should accept that the super high prices of last fall were a mistake. They should make temporary offers of retrospective rebates to retailers, payable against retail sales, to encourage reductions in stockpiles.
Potash chief executive officer Bill Doyle said farmers are playing a "dangerous game" that will have consequences.

"This level of reduction has never been seen before," he told analysts on a conference call. "No one can state precisely what the impact will be on the world's food supply, immediately or over the longer term. But we know with scientific certainty that nutrient underapplication damages both crop yields and quality."

Mr. Doyle said farmers in Brazil and Argentina are already witnessing the fallout. They used far less fertilizer on their crops and are now seeing production yields fall by as much as 20 per cent.

He said fertilizer sales to North American farmers have dropped as much as 86 per cent but farmers still plan to plant the same amount of corn, canola and other crops as last year. If farmers around the world follow the same path, global food supplies will be affected. "After two record world crops in 2007 and 2008, the year 2009 could be a completely different story," he said.

No, it’s the potash producers who are playing a dangerous game by trying to leverage their oligopolistic market status to extract excessive profits at the expense of the whole population of the earth. Farmers don't have the money.

These kinds of “pile-ups” in the supply chain are an unfortunate side effect of unregulated speculation on essential commodities.

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