Unlike the bursting commodity price bubble last fall, fertilizer prices may be able to retain a lion’s share of their luster based on supply and demand fundamentals.

At least that seems a logical conclusion after reviewing an analysis by USDA Economic Research Service analysts, Wen-yuan Huang, William McBride and Utpal Vasavada.

Among the points they make:

  • “During the 12 months ending in April 2008, nitrogen prices increased 32%, phosphate prices 93%, and potash prices 100%. This price surge in 2008 was due to strong domestic and global demand for fertilizers, low fertilizer inventories, and the inability of the U.S. fertilizer industry to adjust production levels.”
  • “…by late 2008, monthly average prices had fallen. Global fertilizer demand softened in response to the record-high fertilizer prices and declining crop prices. Some U.S. farmers postponed fertilizer application, tighter credit availability slowed fertilizer purchases, and fertilizer supplies from overseas increased, all contributing to the price decline.”
  • “Prices of phosphate rock, sulfur, and ammonia – raw input materials used to produce diammonium phosphate and other fertilizers – increased from January 2007 to early 2008. Moroccan phosphate rock contract prices tripled, international contract prices of sulfur increased more than 170%, and Tampa prices of ammonia doubled.”
  • “Rising energy prices also increased the cost of producing and delivering fertilizers. Prices of natural gas, which is used to produce ammonia, the main input in all nitrogen fertilizers, rose more than 550% over the past 10 years. Between June 2007 and June 2008, natural gas prices increased more than 65%.”
  • “Rapidly rising fuel costs also translated into higher transportation costs... Transportation is a significant component of total fertilizer costs, accounting for about 22% of the cost of ammonia shipped from Trinidad and Tobago to the U.S. Gulf Coast, and more than 50% of the cost of ammonia shipped from Russia to the U.S. Gulf Coast.”
  • “In addition, the cost of transporting fertilizers from the U.S. Gulf Coast to farmers throughout the Midwest rose dramatically. Specifically, over the three years ending in January 2008, U.S. rail rates to transport ammonia increased 63%, and an additional 44% fuel surcharge was added to U.S. rail transport costs in July 2008 because of high fuel prices.”
  • “Fertilizer prices continued increasing in early 2008 and were 26% higher in August than in April. But prices began to decline in October, particularly for nitrogen fertilizer. The decline in monthly average prices might be attributed to several factors: softening global fertilizer demand in reaction to the fertilizer price surge and declining crop prices; a shortened window for U.S. application of fertilizer in fall 2008, caused by wet weather that delayed spring plantings and fall crop harvests; an increase in fertilizer supplies from overseas (from July to October); tighter credit availability, making debt-financed fertilizer purchases more difficult; and congested distribution supply chains due to farmers postponing purchases.”
  • “The recent decline in fertilizer prices, however, may not be sustainable. While a deepening global economic slowdown would put downward pressure on fertilizer prices, fertilizer markets could also be affected by unforeseen weather events or by changes in global fertilizer trade. It is possible that the prices of U.S. fertilizers could again move higher during spring 2009.”
  • “Many of the causes of the recent spike in fertilizer prices could still put upward pressure on fertilizer prices in early to mid-2009.”
  • “While higher farm commodity prices in 2008 offset much of the negative effect of higher fertilizer prices on farm incomes, fertilizer prices in the U.S. don’t necessarily move in tandem with food and feed grain prices. Fertilizer prices approaching those experienced in late 2007, caused mainly by global demand and tight supply factors, might be sustainable even if U.S. and world commodity prices continue to soften.”
For the complete analysis, see www.ers.usda.gov.