Ahead of the curve

by Peg Zenk

Feb 02, 2018

As recently as 20 years ago, the fertilizer business operated on predictable production and buying calendars, with little concern about shortages or carryover from one season to the next. But in the past decade, international and political changes, industry consolidations, environmental concerns, and increasing market pressures have transformed the crop nutrients industry — like many other supply-chain markets — into a complex, global business with tighter margins and higher levels of supply and price risk.

We actually have 400,000 fewer tons available for the Corn Belt than we did before all the new plant construction.
Todd Dysle
CHS nitrogen manager

Recently, new fertilizer production facilities builtin the United States and elsewhere in the world have begun to change trading patterns and shipping paths. Anticipating those changes and the effects they will have on the supply chain has become essential work for the CHS Agronomy team as it works to supply grower nutrient needs reliably and cost-effectively.

Push Is On
One major change over the last few years is that fertilizer markets have begun transitioning from what economists call “demand pull”to “supply push” dynamics. “In a demand pull market, demand exceeds supply and the market reacts by pulling prices higher,” explains Jason Marthaler, director of risk management and supply, CHS Agronomy. "But in a supply push market, product is readily available and/or exceeds demand, so the market reacts with lower prices.”

A prime example, he notes, is the increase in U.S. nitrogen production seen in 2017, when several new fertilizer plants and other facility expansions came online. “For granular urea alone, there will be an addition of nearly 4.5 million tons in domestic production. That represents approximately one-third of the 11 million tons used annually in the United States.”

Current global energy costs favor U.S. fertilizer production, as well, with U.S. natural gas prices being some of the lowest in the world over the past decade.“In a supply push market, it’s all about being the least-cost producer,” adds Marthaler.

Needed: More Trucks
“Having more regional production is significantly changing trade flow between the Rocky Mountains and the Mississippi River,” says Marthaler. “There will be less dependence on barge and rail to move production to the middle of the country, and greater need for trucks to haul product from new production facilities throughout the region."

As trucks become the most cost-effective mode of transportation near new production points, unit train facilities will start to feel competition, he adds. “But a big benefit of unit train facilities will continue to be origination flexibility. That will continue to have value to the supply chain, especially to areas farther from new production.”

With the need for fewer tons of imported nitrogen, fewer barge tons will move through some river terminals, he notes, changing how those assets add value to the cooperative supply chain.

The consequences of these changes will vary, market by market. CHS Agronomy product managers offer perspective on recent developments shaping key fertilizer market segments and how those developments may affect nutrient supply
and price.

Urea Production Up
The U.S. urea market has been the focus of considerable attention the past few years, with several new plants coming online in 2017. By the end of 2018, all new production should be at or near capacity, adding approximately 4.5 million tons to total U.S. production, says Adam Hoffmann, CHS urea product manager.

In the last two years, increased U.S. urea production has resulted in 3.2 million fewer tons being imported by the U.S. from producers in China, North Africa and the Middle East. Some of those misplaced tons are finding homes in India, Australia and Latin America. 

In 2016, U.S. granular urea consumption was about 11 million tons, with 3 million tons produced domestically and 8 million being imported from Canada, the Middle East, Trinidad, China, the Baltic region and North Africa, he says. “With new production plants all running, those numbers will be nearly inverted, with U.S. granular urea production expected to reach around 7 million tons and imports dropping to 4 million tons.”

Each of those new plants will be producing product every month and looking for buyers, he says. “Some of those tons could be exported if domestic buyers aren’t willing to buy early. After all, fertilizer producers are in business to maximize profits by running their plants.

Between 2015 and 2021, U.S. urea production will increase significantly in the central part of the country. As a result, imported urea volume entering the U.S. at the Gulf Coast, the main point of entry for imports, will drop by more than half. 

“A big benefit of CHS investment in CF Nitrogen is that, through the partnership, we’ve gained access to production economies and can tap into a reliable urea supply,” he adds.

“The takeaway for cooperatives and growers is that, with more consistent domestic production, they will have more opportunities to buy throughout the year, rather than just in the winter and spring, with prices that could incentivize storage,” says Hoffmann.

UAN Tightness
In early 2017, UAN demand was strong enough to drain tanks. UAN manufacturers took summer-fill orders and worked the rest of 2017 to fill them, but several unplanned maintenance outages delayed production and shipments, explains Todd Dysle, CHS nitrogen manager.

“Some plants could switch products and produced urea last year instead of UAN,” he says, “and UAN imports remained light. All those factors have contributed to overall market tightness as the 2018 season approaches.”

The U.S. is now the major driver of the UAN market. OCI’s new plant at Wever, Iowa, has the capacity to add 1.5 million tons of UAN to Midwest supplies, which could have a significant impact on UAN movement around the country, Dysle says. “For much of the Midwest, trucking product from that plant will make more sense than dealing with barges coming up the river from New Orleans. It could also displace some East Coast import tons in the eastern Corn Belt.”

UAN imports, which reached 3.5 million tons several years ago, have declined to just 1.5 million tons. That number could drop even further because few foreign producers will be able to compete with U.S. plants due to the current low natural gas prices here, he adds. “UAN producers in Romania and Russia, which have supplied some U.S. imports, just can’t compete with new manufacturers here. Some of them have already slowed UAN production and are making other nitrogen products they can sell in Europe.”

Exports from the U.S. are likely to remain close to import levels, says Dysle. “Even with new UAN production capacity, the U.S. market is expected to remain balanced, and we don’t expect to see excess UAN or any significant price drop.”

UAN prices have been trending lower, he adds. “In 2017, the market started out $20 to $25 lower per ton than it did the year before.

“The main source of market volatility comes from unplanned maintenance, which was the case last year,” he says. “The other contributor is plants switching away from UAN to sell ammonia or make urea.”

Overall domestic demand for UAN is projected to remain flat in 2018 at 12.8 to 13 million tons. “As it has in the past, UAN demand is likely to mirror corn acres,” adds Dysle.

U.S. Ammonia Competitive
As with the other nitrogen markets, ammonia production is energy-driven and U.S. manufacturers are currently highly competitive. That has allowed the U.S. ammonia market to have more influence on international markets in the past few years, says Dysle.

“But recent domestic plant upgrades and expansions to produce more urea and UAN have caused U.S. manufacturers to consume more ammonia to make those nitrogen products than is being produced here,” he says. “We actually have 400,000 fewer tons available for the Corn Belt than we did before all the new plant construction.”

U.S. demand for ammonia at the farm level remains fairly flat, from 3.8 million tons in a bad-weather year to up to 4.2 million tons with good fall and spring weather. “Overall ammonia volumes haven’t changed much in the last 10 years, but we do see less use of rail for transport and more truck tons,” Dysle adds.

Global Changes for Phosphate
Changes in the phosphate market are occurring on a global scale. For North American phosphate manufacturers, meeting tighter environmental standards continues to increase production costs, making it more challenging to compete with the world’s top producers in Saudi Arabia, Russia, Morocco and China.

Looking ahead, the other major factor impacting North American phosphate manufacturers is limited remaining mine life, says Jim Carlson, CHS manager of phosphates, potash and sulfates. “For Florida phosphate mines, life could be as short as 25 years, compared with Morocco, where they have enough phosphate rock to last 100-plus years.”

Input costs for phosphate production have also increased, namely ammonia, sulfur and phosphoric acid costs, he notes. “That puts more pressure on high-cost manufacturers like those in China, where plants have been closing. Those factors, coupled with environmental concerns, really put pressure on production economics.”

Recent closure of Mosaic’s Plant City, Fla., phosphate plant eliminated the country’s source of 10-50-0 fertilizer and took about 1.5 million tons of DAP, MAP and 10-50-0 out of the world market and, more important, out of the domestic market, Carlson notes.

Still, overall global demand is on a slow incline, he says, with the most notable increases coming from Brazil. “World production is set to increase as the Moroccans and Saudis continue to add low-cost production.”

Growers could be feeling a little sticker shock this winter, as phosphate prices increased due to higher production costs and robust global demand, but Carlson encourages buyers to keep the long view in mind. “Current phosphate pricing is significantly lower than it was four years ago.

“When input budgets get tight, phosphate is often the first crop nutrient to be cut, but it’s critical to maximizing yield,” says Carlson. “You can’t make money without producing bushels.”

Less Potash Volatility
Global potash market expansion has continued to outpace demand growth. Both Russian and Canadian manufacturers are opening new mines, so long-term supply is not a concern.

The recent Agrium-PCS merger further limits the number of players in this market, which could reduce price volatility, says Carlson. “With so few manufacturers, they will probably get pretty good at managing production to balance the market.”

Canada supplies most potash used by U.S. farmers and Russia/Ukraine supplies most of the rest.

“Potash values continue to be relatively low when compared to other fertlizers on a cost-per-acre basis, and that’s likely to continue over the next few years,” adds Carlson.

The locations of new U.S. nitrogen plants have increased the need for truck transportation. To meet the demand, CHS Agronomy has created a fertilizer trucking program that collaborates with other CHS businesses, ranging from grain marketing to processing.

“When we haul fertilizer into the country, we can maximize opportunities to backhaul grain, oilseed meals and distillers dried grains,” says Bryan Larson, trading and logistics specialist, CHS Agronomy. “More than 40 percent of fertilizer shipments now include return trips.”

That improved efficiency helps maintain supply and control costs.

The program was developed in late 2016 to deliver urea and UAN from Port Neal, Iowa, in connection with CHS investment in CF Nitrogen. Transporting the CHS share of production from that plant equates to at least 1,500 truckloads per month, says Larson. “We’ve been expanding our trucking capacity to handle deliveries of phosphate we source through rail and barge terminals.”

“This transportation development has required us to change our pricing model to reflect delivered cost,” notes Jim Carlson, product manager for phosphates, potash and sulfates. “But being able to coordinate truck deliveries on a broader scale also gives us more flexibility in how we source product. In the end, it helps CHS to be more competitive in serving our owners.”

Partnering on Nitrogen Supply
To help secure reliable nitrogen supply, CHS entered into an agreement in 2015 to invest in CF Industries Nitrogen, LLC. The investment gave CHS a minority equity interest that includes access to up to 1.1 million tons of granular urea and 580,000 tons of UAN annually from various CF Industries plants, including a new facility in Port Neal, Iowa. CHS began taking regular delivery of urea and UAN in 2016.

“This investment has been beneficial for CHS and its owners, enabling the company to add direct value for our fertilizer customers, while providing sustained access to dependable, patronage-eligible fertilizer products,” says Gary Halvorson, senior vice president, CHS Agronomy.

New Fertilizer Facility Opens Just in Time
Last season’s wet spring conditions pushed planting, then replanting, into July in parts of Wisconsin. When field conditions finally accommodated equipment, growers and retailers had to move fast.

Fortunately for those working with ProVision Partners, construction on the cooperative’s new agronomy center at Auburndale, Wis., had wrapped up in May.

Inauguration of the new computerized fertilizer facility, with blending and bagging capabilities and 12,000 tons of dry storage, couldn’t have come at a better time, says Rob Larson, general manager. “Having the new plant and increased capacity helped tremendously in getting products to customers quickly. We were able to do more with less.”

That’s quite an accomplishment considering the growing labor shortage in central and north Wisconsin has put pressure on the cooperative’s ability to staff up with seasonal employees, he adds.

A new rail system with 25-car loadout capabilities, now under construction next to the fertilizer plant, and new state-of-the-art feed mill should be completed this summer, says Larson. “The new system will give us flexibility to bring in more cars of fertilizer, feed and other commodities, while helping us save on freight costs.”

Access to a main rail line and four-lane state highway made the Auburndale site an attractive expansion option, he explains. “Over half our fertilizer arrives by rail, with most of the rest trucked up in backhauls from the CHS Winona terminal.”

Expanding capacity and updating technology were essential steps to securing the cooperative’s future in agronomy, says Larson. “The 2015 merger of Harmony Co-op and Central Wisconsin Cooperative to form ProVision Partners allowed us to eliminate territory overlap and inefficiencies, while providing the financial resources and investment required for greater success as we serve our owners in the years to come.”

Rob Larson, left, general manager, ProVision Partners, consulted with Gary Tomter of CHS Aligned Solutions on strategic planning steps, including upgrading the cooperative’s agronomy facilities.

Check out the full C Magazine with this article and more.

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