Fertilizer Manufacturers Face an Uphill Battle

We continue to see further evidence of weak fertilizer demand, particularly for phosphates and potash products. Potash inventories for North American producers were recorded at 56% above their 5-year average in March. DAP inventory levels (diammonium phosphate)are also running nearly 30% above their 5-year average. These are indeed formidable surplus levels to work through in any market.

Increasing phosphate and potash inventories should come as no surprise to those following the standoff between farmers and nutrient dealers dating back to last fall. These latest inventory readings suggest that high-priced product is still not moving through dealer pipelines as retail price cuts have failed to match the proportional drop in grain prices. The supply increases are even more disturbing when we consider that producers have already substantially cut operating rates in recent months in anticipation of weak demand.

Weather delays to planting progress now have the potential to reduce marginal demand even further. The longer that we see cold and wet conditions persist in the northern regions of the grain belt, the greater the probability that growers will switch corn acres to soybeans or spring wheat. While corn acreage is expected to be flat year-over-year, spring wheat acreage intentions are down 6% from 2008 plantings.
Most growers’ crop insurance policies have locked in a soybeans:corn ratio near 2.2, which historically has favored planting more beans. Since the USDA’s Prospective Plantings report on March 31st, the SX:CZ ratio has actually increased by 11%. The market is telling us that corn is failing to “bid” for more acres this spring – a bearish sign indeed for marginal fertilizer demand.

Implications: as we have noted in previous studies, corn acres typically consume roughly 5.6 times more fertilizer than soybeans (measured by pounds/acre, combined nitrogen + phosphate + potash). Wheat in turn consumes roughly 2.2 times as much fertilizer as soybeans. Therefore a shift to more soybeans at corn’s and spring wheat’s expense will further erode marginal consumption this season.

We will have a clearer picture of actual acres planted by June. Until then, the trade will closely monitor the weather conditions to anticipate where planted acres will cross the finish line.