The “Perfect Storm”
We have seen prices of fertilizer rise dramatically over the last year, but why? There are several factors that go into why prices have increased, culminating in where we are today. In hindsight, 2021 was actually the beginning of this “perfect storm” for price increases.
1. Urea
Natural Disasters
As you may or may not know, urea is the largest determining factor for the cost of a bag of fertilizer. Starting last year, the cost of urea started to rise due to multiple natural disasters like Hurricane Ida in August of 2021—which was the second most damaging hurricane on record at $75B. Shipments of urea were interrupted and most of the ammonia plants in the Gulf Coast area were shut down for a significant period of time. The supply chain has yet to fully recover from this shutdown.
Regional Conflict
Top urea exporters are Russia, Qatar, Egypt and China. With the major conflict going on over Ukraine and Russia, there is instability in the market. Whenever there is instability, prices increase due to the uncertainty of how and when things will end.
Energy Demand & Production
Natural gas composes of roughly 75-90% of the operating cost to produce urea. With the energy crisis in Europe and Asia, natural gas has risen over 340% in 2021. Demand for fuel has been artificially inflated as economies have tried to recover from the pandemic. When these prices skyrocketed in the Spring of 2021, multiple overseas urea manufacturing plants shutdown due to becoming fiscally unviable. These shutdowns created a supply shortage, which in turn, started to lead us into near record level pricing.
Agriculture is Priority
The last area the has led us to record urea prices is “Mother Ag.” The Turf and Ornamental market is at the mercy of the agricultural market; specifically corn and wheat. Corn is a high nitrogen feeder and requires high levels of nitrogen as opposed to soybeans. Crop value of corn in 2022 is projected at $193 per acre and soybeans at $63 per acre. Even with higher urea prices, there is no financial incentive to switch crops. Some could argue that if more farmers plant soybeans this year, in theory, that would leave more urea for our market which may drive the price down a tick or two. The unfortunate scenario however, is the phosphorus and potassium have also risen sharply.
2. Phosphorus & Phosphate
Yara is the leading supplier of MAP/DAP products which is the preferred nutrient for phosphorus delivery. Yara has shut down roughly 50% of their capacity at multiple European phosphate plants due to the high natural gas prices.
China, the world’s top phosphate producer, and coincidentally where the pandemic first broke, impacted supply disproportionately. Mandatory lockdown throughout China stopped all phosphate production facilities and they have yet to get back up to pre-pandemic levels. Then, due to lower-than-normal production, they completely halted all phosphate exports to ensure ample domestic agriculture supply for food production.
3. Potash
In spring 2021, when urea initially started to increase in price, there was significant, unanticipated potash demand from farmers for MOP, because it was the most affordable nutrient input. Mosaic, the world’s leading supplier of MOP, abruptly closed their two primary mine shafts in its best ore deposit site in Esterhazy, Canada due to an accelerated brine inflow which caused the mine to become unsafe to operate. Mosaic is reopening a new mine in Saskatchewan, Canada, but it will take several years to completely re-open the operation to full capacity.
4. Solvents & Additives
Many fertilizer components require solvents and additives to manufacture—many of which are in very short supply due to supply chain issues. For example, urea-formaldehyde (UF) resin is used in the production of almost all slow-release nitrogen sources used for turf and ornamental. 70-80% of all UF resin is used for bonding plywood, MDF, particle board. The forest-product industry over bought which put us in somewhat of a shortage, again driving up the cost for are market.
5. Combination Fertilizer Products
Combination fertilizer products get the “double whammy” effect because in addition to nutrient cost increases, the availability of tech is significantly lower and the price has increased accordingly. Prodiamine is in short supply this year due to being manufactured overseas. This has caused a dramatic price increase. The cost of prodiamine went up by 60% from Q4 of 2021 to Q1 of 2022. Virtually all industry pesticide chemicals have also been impacted. Generic dithiopyr (Dimension) is no longer available, which was the odorless/colorless option for pre-emerge combo products.
6. Transportation/Shipping
All transportation expenses have exploded over the past few years. Products have multiple shipping touch points, adding to the increase in costs. For example, ocean liners import our raw materials, then barge ships move those raw materials up rivers. From there, these products are loaded onto rail cars to a local region/area. Then, trucks still have to deliver these raw materials to be process or if already a finished product they are delivered to a retailer/distributor. And finally, trucks deliver finished goods to you, the end user. With transportation costs and fuel prices at all time high, freight is now a significant factor in fertilizer prices, more so than it has ever been. Unlike the nutrient issues we’re currently facing, freight prices are much less likely to return to “normal” levels anytime soon. Two main driving factors outside of rising fuel costs are driver shortage and a shift in the supply and demand model.
The driver shortage is mostly caused by the fact there are far less drivers today than there was five years ago. The trucking industry is short an estimated 80,000 drivers; pre-pandemic it was already 60,000 drivers short. The pandemic caused a large number of drivers to abruptly retire and there was a lack of new drivers in the pipeline to replace them. The age requirement of 21 limits the pool of people who can enter the profession. Any remaining drivers were heavily recruited by companies where the average wage increased 75% over pre-pandemic rates.
7. Increased Consumer Demand
Finally, the shift in supply and demand model in the pandemic has sparked increased consumer demand for everything. Online shopping became the safest, most used channel. Supply and demand model shifted heavily to the consumer world. Hauling consumer products is considered easier than turf and ornamental given the high weight demands and heavy fuel consumption to move the freight.
The overall number of drivers willing to haul raw materials and finished goods in our industry has significant been reduced—and with a higher cost and increased limitations. “Extra driver services” have either risen dramatically in cost or been completely removed (multiple stops, driver assist, flat beds, etc.).
KEY TAKEAWAYS:
- Be transparent with your customers. Everything has risen in price in the last year.
- Now is the time to take a price increase to your customers. You must remain profitable in a time where margins are shrinking and costs are rising.
- Order your fertilizer and insect round now. It’s better to get into the pipeline now than be locked out later.
- Trucks will be our biggest bottleneck and will add significant costs if you cannot stagger deliveries or plan out your delivery dates. This might be the time to look for extra storage to ensure you have product when you need it.
- Using high enhanced efficiency fertilizers are more important than ever. Jackpot fertilizers contain over 50% Slow/Controlled release fertilizer which is not only good for the environment, it will keep your turf greener for up to 12 weeks and you may be able to reduce 1 or 2 rounds which will save labor and fuel costs in the long run.
- Be patient…the market will correct itself. It always does.
About Bob Hartman
Bob Hartman is an industry veteran with more than 15 years of experience in the green industry; specifically, turf. Bob brings a solid background in both the organic and synthetic methods of feeding turf and plants. His diverse background and experience on the manufacturing makes him an excellent resource to help you grow your business.