Diesel fuel and nitrogen fertilizer prices rose sharply this spring as farmers prepared to begin producing 2003 crops. It should not have come as any surprise. Impending war in the Middle East; political unrest in Venezuela; a projected big Midwest corn crop and the inevitable East Coast snowstorm made spikes in energy prices to be expected.
However, almost as quickly as prices rose, they seemingly retreated when prices for natural gas, the feedstock for nitrogen fertilizers, fell from a high of almost $20 per million cubic feet to less than $6 in a matter of days. However, prices for nitrogen fertilizers did not drop and are up dramatically over this time last year. Experts are predicting tight supplies before summer.
Bulk diesel prices to farmers climbed to $1.25 per gallons on the West Coast in early spring, but started falling shortly thereafter and could drop like a cultivator when a hydraulic line breaks if the war with Iraq is over quickly. One fuel wholesaler in California's San Joaquin Valley said a quick Gulf War II could send that same diesel down to 80 cents within a month after it peaked at more than $1.
It has become an energy price yo-yo, and farmers and fertilizer suppliers reaching under their gimme cap bills scratching their heads, wondering which way the fuel and fertilizer prices will go over the next few months.
Farmers have been down this road before only about three years ago. Some guessed right then. However, others like those who bought $1 per gallon diesel futures during the last energy crisis only to see the price fall to 70 cents, guessed wrong.
This energy crisis has everyone guessing as never before.
“I am telling my customers to buy 500 gallons at a time rather than truckloads,” said Tim Ward of Tom Ward, Inc. a fuel jobber in Firebaugh, Calif.
“There is no fuel shortage on the West Coast. It all a fictitious price increase by the major oil companies. Inventories are at good levels on the West Coast. There is no reason for these price increases. It's price gouging by the major oil companies,” Ward said.
Nevertheless, fears that prices will increase or shortages develop remain. “A good buddy of mine bought two truck and trailer loads of diesel the other day for $1.20 per gallon,” said Ward, who is adamant about his 80-cents per gallon prediction.
“If it falls to 80 cents, multiply 40 cents by 7,600 gallons twice and that is how much my friend will have needlessly spent if prices do fall as I predict they will,” said Ward.
“A truckload that once costs about $6,500 is now $10,000,” said Kings County, Calif., farmer Craig Pedersen, one of those who bought now rather than risk a bigger price run-up later.
“When you see prices for diesel like we have this spring, you start playing a mix and match game and start looking at different at decisions you have to make,” said Pedersen, who irrigated his winter wheat with canal water this spring rather than turn on diesel pumps as part of his mix and match dilemma.
Pedersen admits it is risky using canal water early. Allocations may be cut from what is already a below-need delivery projection. However, he chose to cut cost by irrigating with canal water rather than fire up diesel pumps for well water.
He will have more choices to make if fertilizer prices continue to increase or become in short supply. “We do a lot of double cropping corn after wheat. Concerns about fertilizer cost will weigh on that corn planting decision as well,” he said.
Fertilizer prices are not likely to drop like Ward predicts diesel will.
Right now nitrogen fertilizer prices are 65 percent higher nationwide than they were a year ago, according Jay Yost, Independent Agribusiness Professionals (IAP) assistant general manager for fertilizer.
IAP's membership of independent retailers are mostly California companies, but it has members in Georgia, Colorado, Oregon, Arizona, Washington, Idaho, Maine, Texas and Wisconsin.
Eighty-five percent of the cost of producing ammonia fertilizers is natural gas and when prices become too high, as they did in late February, U.S. fertilizer plants in the Midwest, Mississippi and the Louisiana Gulf Cost simply shut down because it becomes uneconomical to produce nitrogen fertilizers. Even though prices dropped just as quickly as they rose, only a few plants had restarted by mid-March.
Stopping and starting those plants only disrupts the wholesale supply of fertilizers. What happened in March may not impact farmers for two to three months, but experts are sure the impact will come.
Yost said the last spike in natural gas prices occurred in 2000-2001, in winter. This current upward movement of natural gas prices and the sharp peak about a month ago happened in the spring as farmers were getting ready to take to the field.
“The potential for shortages is there this year,” said Yost. “It is difficult to have supply and demand balance with the issues in the Arabian Gulf, U.S. plant closures because of high natural gas costs and the anti-dumping duty being imposed on solutions coming in from the former Soviet Union.”
Tim McGahey, fertilizer manager for Helena Chemical Co.'s Western business unit, expects a shortage of urea and UN32. “We are looking at allocations from major producers,” said McGahey.
“There is plenty of product in the U.S. right now, but that will run out by mid-May,” said McGahey. California must import all its nitrogen fertilizer from either other states or overseas. The domestic supply was expected to be short even before natural gas prices spiked.
“California depends on a certain amount of rail ammonia and UN32 from the Midwest. Today that is non-existent because of a big corn crop expected in the Midwest.” McGahey said that that will not change when nitrogen plants re-fire in the Midwest. “You can bet suppliers there will take care of their home business first.”
When domestic suppliers shut down or run short of inventory, wholesales go offshore for nitrogen fertilizer, but that is even a more tenuous prospect than uncertainty over domestic supplies.
Among problems in the Middle East and the reduction in supplies from the former Soviet Union, a Venezuelan urea supplier that produces 3,500 tons per day is off-line because of unrest there.
The Arabian Gulf is a major source of nitrogen fertilizer, but sending a cargo vessel to port there now is economically and physically risky.
World bulk markets were already high before the threat of war loomed so close, said McGahey. “Buying a vessel of UN32 at today's top market to build inventory and bringing it into a deep water port with no cushion for price deterioration is risky,” said McGahey.
What to do?
Compounding that economic dilemma is the increasing cost of bunker oil for a fertilizer ship and the added insurance cost of sailing into a war zone.
So, what's a grower to do?
“We recommend that all farmers meet with their fertilizer retailers or distributors regarding their needs for spring planting,” said California Plant Health Association president Steve Beckley. “Given the current climate, it may also be a good time to review your nutrient management plans.”
“Farmers may need to shift to alternative products,” suggested McGahey.
As a retailer, McGahey said Helena will focus on taking care of its existing customers. “I am sure we'll hear from people this year looking for product who would not return phone calls before.”
“Our retailers are telling growers that if it is agronomically practical, get (fertilizer) products on and down earlier this year than in previous years,” said Yost. “Waiting until the last minute for fertilizer may not be the best thing to do this year.”
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