Successful farming in western Canada

Damn government interference

2010-02-23T08:16:00.001-08:00

But this time its in India. This story from the Wall Street Journal talks about how the green revolution in India is stalled because of government subsidies that favour nitrogen application. As some of you may remember, when we started using fertilizer in western Canada we started with high phosphate analyses. When high nitrogen fertilizers appeared it seemed like they were magic but eventually the high applications of nitrogen appear to lose their effectiveness. Fertilizer application ultimately has to be balanced to nutrient removal by the crop but the Indian government doesn’t appear to have learned that lesson.

If the general thrust of that WSJ story is accurate and the Indian government begins to tender for increased quantities of phosphate and potash relative to its nitrogen purchases then look for continued strength in the potash market and firmer pricing in the phosphate markets.

Its worth noting that the domestic US phosphate market is currently so low that it is likely some exports will occur. In other words, expect higher phosphate pricing going into the spring and summer.

Peak phosphate – something else to worry about

2010-02-13T07:39:00.001-08:00

Last winter we were parked in Florida for a couple of months. One day I happened to notice that the gravel in the RV park was made up of tiny shells and that reminded me that Florida is one of the world’s greatest repositories of rock phosphate. Mining in “phosphate alley” or “bone valley” in central Florida dates back to the late 1800’s and it is still one of the largest sources of phosphate in the world. Rock phosphate that accumulated in the bones and shells of ancient animals is the necessary precursor for all phosphate fertilizers.

Rock phosphate isn’t available to plants, despite what some “natural” phosphate snake-oil salesmen may tell you. Once it has been processed into various phosphate fertilizer forms it becomes more available but it is a difficult nutrient for many people to understand.

Phosphorus is a highly reactive metal that is never found by itself in nature. Rock phosphate can be smelted to produce phosphorus or it can be beneficiated to produce phosphoric acid. Phosphoric acid can be subsequently reduced with anhydrous ammonia to produce ammoniated phosphates such as MAP, DAP or ammonium polyphosphate solutions.

The phosphate ion (P2O5) is a cation – a positively charge ion. Soil has what is known as cation exchange capacity which is simply the ability to retain cations. At a microscopic level soil has many negatively charged surfaces. The negatively charged soil attracts the positively charged cation and holds it. Some soils hold cations better than others but that isn’t the point today – the point is that soil hangs onto cations. Plants are able to take up free phosphate ions but those ions first need to be pried loose from the soil exchange sites and that isn’t easy because the positive-negative attraction is relatively strong. When you flood the soil with a large amount of phosphate ions in close proximity (a fertilizer band in the seedrow for example) you temporarily disrupt that soil to phosphate balance thereby freeing some phosphate ions for crop uptake. Over time though the soil tries to get things back in balance by tying up the free phosphate ions.

The fertilizer phosphate has to come from somewhere. In North America that somewhere is from open pit mines in either Oregon or more likely Florida. Open pit mines anywhere tend to attract negative attention and the US is no exception. Florida has done a good job of reclamation on their old mining properties but new sites are increasing difficult to develop.

The International Fertilizer Association (IFA) is starting to deal with the concept of peak phosphate. Readers may be familiar with Peak Oil which is the theoretical point where we can no longer find any additional oil reserves. Some of us who are longer in the tooth can remember that we were supposed to run out of oil a long time ago. So far higher prices for a barrel of oil have stimulated exploration which has revealed new reserves but it seems logical that any resource must have some finite limits, whatever those may be.

Phosphate is no different in terms of the absolute quantity available. Increasing prices tend to stimulate discovery of new reserves but it seems logical to assume that at some point we will have found everything there is to find, whatever that amount may be.

The difference between phosphate and oil is that phosphate cycles in a useful time frame. Once we extract the energy from a barrel of oil it is for all practical purposes gone. We don’t get to reuse that energy. Phosphate however is different because once added to the soil it enters a renewable cycle. There are some removals from the cycle – human bones for instance – but most of the phosphate stays within the system once it is added. Animal & human waste is high in phosphates as are animal carcasses. I suppose our human carcasses are a good phosphate source but I think we are a long way from using them as fertilizer.

Green bullshit

2010-02-11T07:29:00.001-08:00

If it looks like shit and it smells like shit then ……………

There’s no shortage of charlatans in the agriculture supply chain and now there’s a whole new batch sporting environmental garb. This afternoon I received this gem in my inbox:

“…………… this winter has been especially hard on plants, citrus
trees, and other types of produce. Whiteflies attacked local ficus trees, killing some and leaving several others leafless.

Frank (names changed to protect the guilty) applied Wonderdirt X-tra to a select population of affected trees . After only 20 days he’s seen visible improvement! We’re all very interested to see what his end results are after continued treatment with Wonderdirt X-tra.”

Who cares? We’re talking about 20 trees that might have recovered or died without treatment. The only useful information that this “experiment” will provide is to tell us if Wonderdirt kills citrus trees.

Based on a subsequent email it turns out that Wonderdirt also enhances the growth of marijuana plants. Only legitimate medical use marijuana plants of course:

“Here are some excerpts from the first report by a legal, California grower: I have a set of plants currently in their second week of flowering that have been receiving foliar application of your product. I started them on this program as soon as they became well rooted clones. I must tell you.....I am absolutely amazed!” I guess we’re supposed to believe it’s really good stuff if a pothead from California endorses it.

Here’s another one. The premise for this scam is that we’re going to save agriculture by making more or less anything into charcoal. Then – here’s the kicker – you farmers are going to pay to have this half-burned crap applied to your land. It probably wouldn’t actually do any harm but don’t hold your breath waiting for a payback either.

When we were in business we always used to laugh at the pseudo-research that accompanied any new soil amendment. Invariably if no yield benefit could be demonstrated then you could be certain that whatever the product was, it promoted better “root mass”. You have to say it like a mid-westerner to get the real effect – it’s kind of a cross between “root” and “rut”. What it means is “we can’t scientifically prove that anything is happening here but ---- damn the roots look good don’t they?”

There’s lots of good agricultural science gets done every year. Look at the yield improvements in peas or canola over the last 20 years for proof. There’s also lots of snake oil gets promoted and unfortunately some of it gets sold. Retail marketers have long since jumped on the green bandwagon and you can expect ag marketers to follow suit. Eventually it won’t all be bullshit but I’m willing to bet a lot of it will be.

The wired farmer

2010-02-03T10:09:00.001-08:00

Give yourself a pat on the back. If you are reading this you are part of a fairly elite group. Not because of the pearls of wisdom that I scatter here, although I wouldn’t mind if that was the reason. No, you are elite because up to half of your peer group hasn’t embraced the internet yet.

I find that hard to believe but that’s what a recent study commissioned by the National Association of Farm Broadcasting says.

These are US numbers so they aren’t necessary exactly accurate for Canada but they probably aren’t too much different. The number that leaps out at me is that roughly 1/3 of farmers with gross sales greater than $500,000 don’t personally access the internet. Several years ago now I sat on the board of directors of the Canadian Association of Ag Retailers. One of our board members runs a very large Canadian fertilizer company – we’re talking fertilizer manufacturer here, not a retailer – let’s call him George. We had a big debate about the use of email to send information out to board members. George stunned us all when he said that he didn’t see what the big deal was about using email versus using the fax machine. “When an email comes in my girl has to print it off. When a fax comes in it’s already printed. So the fax is actually faster and easier to use.”

I’m relieved to see that farmers haven’t figured out why to use Twitter either. I tried to figure it out and concluded that it was a colossal time waster with no visible benefit. Apparently I’m not alone in that conclusion.

Nitrogen head scratcher

2010-01-29T14:49:00.001-08:00

Those of you who have been paying attention will recall that all you need to make nitrogen fertilizer is a supply of natural gas, some fresh air and a lot of capital. When you get your plant up and running it will kick out anhydrous ammonia and likely urea because there are some natural synergies to the urea production process. If you want to go one step further you will add an ammonium nitrate line and then you will bring the urea and nitrate together to make UAN or liquid nitrogen.

That’s a gross over simplification of the process but the point is that UAN (28-0-0) is the final stage of nitrogen production. Its arguably more convenient to use and it has the most processing cost per unit of N which explains why historically it is also the highest cost product per unit of N.

But not right now. Since about this time last year the prices of urea and UAN have been inverted in NOLA.

The boy who cried wolf

2010-01-27T06:12:00.001-08:00

One of these years it will really be true. Year after year fertilizer manufacturers sing the same tune and the retail chain carries the chorus – if you don’t buy it now we may not have it in the spring. And year after year the pipeline fills up over the winter, spring comes and goes and nobody goes short. And this year will likely be no different.

Nitrogen pricing is still weak in the gulf and buyers are gunshy after the volatility of the past few years. Its an axiom of the commodity markets that nobody ever buys a weak market (just like nobody ever sells the highs). That of course is why there are highs and lows – by definition there are no buyers at the bottoms and no sellers at the top. The logistics however depend on buyers having inventory going into the spring and right now they don’t.

On another matter, Agrium is continuing their retail invasion in western Canada. Currently the CPS flag flies over locations formerly owned by Parkland Agri Service (9 locations with head office in Didsbury), Ross Agri (10 former Esso locations around Camrose), ServAgro (3 southern Alberta Esso locations), RTL Agri Services (3 Esso stores in southern Alberta), Heartland Agro (former Esso multi-outlet business based in Moose Jaw) and Cheyne Agri Services (another Esso dealership in SE Sask.).

In the case of the Esso dealerships Agrium already owned the real estate or at least the equipment located on the real estate as a carry over from their Sherritt/Veridian/Esso heritage. Parkland was an Agrium joint venture so there has been a long term Agrium involvement there.

There’s a couple of issues around this new competitor in western Canada retail. The biggest question for farmers should be “how competitive will this competitor really be?” There’s a good chance the reason the Esso dealerships failed can be traced directly to Agrium’s pricing policies during the 2008 run-up and 2009’s dramatic drop in nitrogen prices. I’m sure the legal-beagles on Agrium’s 4th floor made sure everything was done legally but I doubt it was done morally.

Right now about 21% of Agrium’s international sales comes directly from their retail organization but 29% of their profit comes out of the retail business. So its not hard to figure out why they want to increase their retail outlets.

Post Christmas bargain shopping

2009-12-28T14:02:00.001-08:00

Those of you that have been in the malls lately may have noticed that there aren’t as many bargains as there used to be. Retailers seem to have figured out that people will shop after Christmas and have adjusted their pricing accordingly. Despite the orange tags screaming “marked down 60%”, the bargains are farther apart.

Similarly if you are shopping for nitrogen or phosphate you may have to look a little farther afield but the bargains are out there nevertheless.

According to AgProfessional’s University of Nebraska correspondent, US retail pricing for urea is running around $450/ton. When you translate that into Canadian bucks and metric tonnes you can likely do better north of the border. It has been a while since that has been true. That means that Agrium is more appreciative of its loyal western Canadian base. Actually it doesn’t mean anything of the sort – they’ll take as much as they can get wherever they can get it but right now western Canada looks pretty damn good.

The sleeper is likely anhydrous ammonia. You don’t have much flexibility, you can’t store it and you’re at the mercy of your dealer but you still might find a bargain. The Americans had a late corn harvest and didn’t get much ammonia in the ground which means that inventories are high. That doesn’t necessarily translate into better pricing in western Canada but it means your suppliers might be receptive to some pressure. Right now US retails for ammonia and urea are similar – that’s a big discount for ammonia, if you can find someone who wants to play the game.

Good luck with your yearend bargain hunt.

Haber-Bosch – most people have never heard of it but it drives life on earth

2009-12-26T17:29:00.001-08:00

Back in October I mentioned the Haber-Bosch process that is the foundation for nitrogen fertilizer manufacture worldwide. I’ve been meaning to come back to it but never got around to it until a recent online discussion got me thinking about it again.

Most people have no clue what the Haber-Bosch process is or that it even exists for that matter. They certainly don’t begin to understand how fundamental it is to our life. We routinely hear people blathering on about how wonderful it would be if only we could live a totally natural life, by which they mean some utopia where nature coughed up enough to keep us alive without us having to put anything back in. Most 8 year olds with a piggy bank understand the concept that you can’t keep taking out without ever putting back in. So why is it so difficult for adults to understand the same concept when it applies to land?

I just happen to have some US production figures handy for another project I’m working on so I’ll use them but the principle would apply equally to Canadian production. The US produced roughly 12 billion bushels of corn in 2008. That equates to about 4.8 million tons of actual nitrogen removed from the ground. Just by way of reference, 4.8 million tons of actual N is equal to roughly 1/4 of the total annual US nitrogen fertilizer use.

You could do similar calculations for all the cereal crops. Vegetable crops are also high nitrogen users. Soybeans are legumes so they can fix their own nitrogen but canola isn’t so it is a net miner of nitrogen. Someday when I have nothing better to do I’m going to do a nutrient budget for western Canada just to see how far out of balance we are.

Legumes return nitrogen to the soil but not as much as you might think. There is still a significant nitrogen removal in the legume seed. The only nitrogen that gets added to the system is whatever is left in the stubble or root system. Anyone who has tried to grow a cereal on pea stubble with no added nitrogen will know how inadequate the nitrogen returned to the soil really is.

Haber-Bosch is so essential because, without it, our yields would drop off rapidly. And the greenies can talk until they are blue in the face – the reality is that the whole system would be in a nitrogen deficit because of the nitrogen that is removed in the crops. In fact the world is in a deficit because we are mining organic matter on a global scale.

In the early 1800’s Thomas Robert Malthus argued that any ecosystem has a natural limit on its ultimate growth. He extended his argument to the world and argued that world population would ultimately be limited by mass starvation. No doubt his dismal prediction would have been accurate if Haber-Bosch had never been invented. Without the ability to artificially fix atmospheric nitrogen we would likely have long since outgrown our capacity to feed ourselves. One of the surest ways to identify an undereducated greenie is when they trot out the human starvation argument.

There’s a really good graph about halfway down the page here. Scroll down to the world population graph to see the invention of Haber-Bosch on a population timeline. The graph doesn’t prove that Haber-Bosch enabled population growth but the relationship is pretty obvious on the chart.

………. and now for something completely different

2009-11-14T08:31:00.000-08:00

In our culture there are some subjects that are deeply taboo. Different people find it hard to talk about different things but for most of us death is the ultimate taboo. Nobody wants to talk about it because that would involve admitting that death will eventually come to all of us. So our topic for the day is that awful subject, our own inevitable mortality.

When my mother died, a year ago now, I went to the safe and dug out an envelope that had been lying there for close to ten years. That’s how long ago mom & dad wrote down their final wishes and sent them to my sister and me. At the time I didn’t want to think about it, let alone talk about it, so I put the envelope in the safe and more or less forgot about it. Occasionally I would have to move it when I went to the safe for something else but it mostly just waited there until last November. Which is all it needed to do and fortunately I remembered where it was.

When I opened the envelope I found that it contained a simple little booklet that mother and father had each filled out. Inside that booklet was all the information that I needed to deal with the mechanics of their deaths. I don’t think they ever gave me a greater gift. Those of you who have dealt with this already will know what I am talking about but for those of you that haven’t, there are some bits of information that you will need and some decisions that you will have to make once your parents die. You won’t have all the information you need and some of it will be downright hard to find.

Think about your own death for a minute - do your kids know where their grandparents were born? If they don’t they are going to have to figure that out at a time in their lives when they have better things to be doing. More importantly do they know how you want your final celebration of life or memorial service to be handled?

Ideally we should sit down with our kids, have the conversation, make sure they take notes and then get on with living. I can’t do that and I haven’t done it. Of course I don’t plan to die anytime soon so it doesn’t matter but I’ve got friends who are already dead and doubtless you do too. That’s the problem. I don’t know when the “right” time will come, if it ever will.

Mom & dad were persuaded to write down their final wishes by a class they attended at their church. The material was so useful that I made a special point of seeking out the preacher at the funeral and telling him how helpful it had been. He got a sheepish look on his face and said “I guess I should do mine too.” He absolutely should because he has some serious health issues but that’s his problem.

We can all find a reason to delay doing this but if you want to do something yourself then I’ll make it easy for you. I have plagiarized the booklet that the aforementioned preacher put together and made it available online. All you need to do is download the file, open it in the Acrobat reader and print your own copy. It’s formatted so that it can be stapled into a small booklet. If you don’t do anything other than fill it out and mail it to your kids you will have done a wonderful thing. If you actually sit down with them and talk about the material you will have gone far beyond what 99% of parents ever do for their kids.

To download the "My Final Wishes" booklet click here and either save it to your hard drive or open it. Once you have it open you can print it and fill it out.

PSSSST …. Wanna buy some snake oil?

2009-11-10T05:03:00.001-08:00

Over the years I have seen some memorable scams run against farmers. Often there is a germ of science buried in a blizzard of bullshit but sometimes you just have to shake your head.

For instance, this summer I was doing some crop inspections in southern Saskatchewan . In the course of a visit with what I thought were two very high end farmers, the father pointed across the road and started telling me about the neighbour’s new seeding system. I vaguely remember hearing about this “technology” but didn’t pay much attention to it at the time because it was so clearly crap. In a nutshell what it claims to do is capture the exhaust gasses from the tractor and inject them into the ground. Once in the ground the gasses presumably have miraculous properties to enhance nutrient availability.

As I was listening to the description of what the neighbour had done (and how many tens of thousands of dollars he had spent) I was trying hard to contain myself for fear I was talking to a true believer. Fairly quickly though I realized that the guy I was talking to was equally astonished that anyone could be gullible enough to fall for such a ridiculous sales pitch.

But ridiculous sales pitches combined with optimism and often a little desperation let the snake oil salesmen continue to succeed. “Black gold” (rock phosphate) is another one that comes around when times are tough. The claim is that you are buying “natural” phosphate. What they fail to mention is that on the calcareous soils of western Canada you would be at least as far ahead if you spread road gravel on your fields. In fairness to the Black Gold salesmen it is likely that they are too stupid to understand the chemistry involved. Several years ago now one of my distant cousins informed me in all seriousness that adding bleach to your wild oat spray would dramatically improve its performance. At those moments I’m torn between shouting “How could you be so freaking stupid as to believe that crap?” or trying to explain why what they are telling me is simply impossible.

It’s hard to understand why this stuff continues to make the rounds but in fairness, some of the so-called agronomy dispensed by ag retailers isn’t a lot better. Selling a farmer a concoction of (overpriced) micronutrients when he isn’t maximizing his returns from the macronutrients should be a criminal offense. Similarly, selling potash south of the Yellowhead highway is unlikely to improve anybody’s bottom line except of course the salesman’s. There may be some science behind the products that claim to release phosphate in the soil but there certainly isn’t any economics in them, yet they continue to be sold.

Life teaches us that we need to rely on experts. None of us would contemplate doing open heart surgery on ourselves and most of us trust mechanics to divine the intricacies of electronic engines. When it comes to crop nutrition however it is difficult to separate the morons from the master mechanics. Every farmer needs to have a basic understanding of soil chemistry and plant physiology in order to wade through the marketing bullshit.

Who pays the freight?

2009-10-29T10:25:00.001-07:00

Have you ever thought about why it is that you pay the freight to ship your grain out but you also pay the freight to ship your fertilizer in? That doesn’t seem right (and actually it’s not always true). I’m sure some of you rationalize it by thinking that it is just another case of the farmer getting screwed but it’s really not that simple.

The decision about who pays the freight depends on whether the freight region is a net importer or exporter of the commodity in question. In the grain example the west is clearly an exporter. We export into an international market so the grain has an established market value at tidewater. The costs to get the grain to port are borne by producers because the buyers would simply go elsewhere if we attempted to get a higher price at the port. It is useful to note that the more we are able to differentiate our production the more we are able to extract a premium to compensate us for the freight but that’s the subject for a whole ‘nuther post.

According to the latest available shipping statistics from the Canadian Fertilizer Institute (www.cfi.ca), Canadian manufacturers exported roughly 600,000 te. of ammonia, 1.3 million te. of urea, 200,000 te. of nitrate and 400,000 te. of UAN in the fertilizer year 2007-08. Virtually all of those exports went to the U.S. Most of the Canadian potash production was also doubtless exported but CFI doesn’t report those numbers for current years. For the years 2004/05 CFI reported 17 million te. of Potash exported and for 2005/06 over 12 million te. were reported. Those export numbers are really good news for Canadian farmers.

Before we talk about why high fertilizer exports are good for domestic farmers, let’s look at how fertilizer is priced in North America. Phosphate fertilizer is definitely an import for Canadian farmers. Agrium produces phosphate fertilizer at Redwater but the rock phosphate to produce that fertilizer is imported. So your phosphate fertilizer is ultimately an import, even if it was processed in Canada.

The fact that your phosphate is imported means that you have to pay the freight to get it here. It has a value somewhere on the Mississippi river, for argument’s sake let’s say it is reference Minneapolis. At one time the reference point was New Orleans but it doesn’t really matter exactly where the reference point is. The point is that the fertilizer has an internationally established value somewhere outside Canada.

In order for us to buy the fertilizer we have to be prepared to pay the price wherever the international reference point is. Then in addition we have to pay the freight to get it here. That leads to the bizarre situation where a farmer who can see the Agrium facility at Redwater will actually pay more for his phosphate than one at Yorkton or Morden. The fertilizer will get processed at Redwater, loaded on trucks or rail, hauled to an intransit warehouse, off-loaded or transloaded, delivered to a retail facility somewhere on the east side of Sask. or west side of Manitoba and still sell for less money than it will right next door to the Agrium facility. The simple reason is that the farmers closer to Minneapolis have other options. They can deal with brokers and bring in fertilizer from the US. The simple rule is that the farther your farm is from New Orleans, the more you will pay for phosphate.

So what about nitrogen or potash where we are net exporters? The story is the exact opposite. Imagine you are a manufacturer with more nitrogen capacity than what you can sell into the Canadian market. Your excess nitrogen production has an established market value somewhere in the U.S. Midwest but you have to get it there in order to sell it. The freight to get it into selling position is a cost to you so you could actually sell the nitrogen for less than that market price closer to home and still obtain higher net returns. That in turn becomes a cost of production advantage for Canadian farmers.

About five years ago now when natural gas prices got so ridiculously high I heard the CEO of Saskferco say that it didn’t matter what happened to gas prices. If they got too high to produce nitrogen locally his company would just import nitrogen from offshore. On the surface that seems like a reasonable response but the impact on Canadian farmers is huge. Rather than getting a price break on nitrogen due to freight costs our farmers would then have to pay additional freight to import nitrogen. In effect that is double jeopardy – losing the advantage of the freight plus having to pay the freight is a double hit.

As a higher percentage of our domestic nitrogen production is consumed in western Canada so too will the domestic manufacturers become less susceptible to international pricing. Obviously they have to be aware of pricing in the Midwest U.S. but the closer we get to seeding the harder it is for Canadian producers to substitute U.S. supply. There are also a host of non-tariff barriers to trade that have to be overcome to arbitrage price differences between the U.S. and Canada. For example, we have different placarding requirements for ammonia and different trucking configurations with neighbouring states.

But right now all that really matters is getting the 2009 crop in the bin. Fertilizer for the 2010 crop seems less important when last year’s crop is still lying in the field. Don’t miss the pricing opportunities that the current weather is exposing in the fertilizer market. If you are worried about getting your crop in then perhaps your fertilizer dealer is worried that you won’t get it in too.

The relationship between natural gas & nitrogen fertilizer pricing

2009-10-09T15:35:00.000-07:00

If I had a nickel for every time I have heard that the price of nitrogen fertilizer is directly correlated to the price of natural gas ………….. well .............. I’d have a lot of nickels. And there is quite a bit of truth to the statement – they’re just not as closely tied as some people seem to believe. It would be more correct to say that the price of nitrogen is strongly influenced by the price of natural gas.

If you want to make nitrogen fertilizer the first thing you need to do is make anhydrous ammonia. Regardless of what kind of nitrogen you want to end up with the starting point is anhydrous ammonia. Once you have ammonia you can relatively easily convert it into urea, often in the same facility. You can also run the ammonia through a nitric acid plant and then combine the nitric acid with urea to make UAN or liquid nitrogen. So regardless of your destination the starting point is building ammonia.

Right now you are breathing air that is 78% nitrogen but the nitrogen isn’t in a form that plants (or animals for that matter) can utilize. In 1909 Fritz Haber pioneered the process of converting atmospheric nitrogen to NH₃. Rights to the process were subsequently purchased by BASF and refined by Carl Bosch. The two men were awarded Nobel prizes for associated work. The science that they developed which we now call the Haber-Bosch process has enabled the green revolution. Without the artificial fixation of nitrogen, life as we know it would not be possible but that’s a story for another day.

Nitrogen manufacturing plants take air which consists of oxygen and nitrogen and combine that with natural gas. Eventually the nitrogen from the air is bound to the hydrogen from the natural gas to give NH₃ (anhydrous ammonia). The oxygen from the air and the carbon from the natural gas end up recombining with the anhydrous ammonia to produce urea which for those of you who care has a chemical composition of (NH₂)₂CO.

The point of all that chemistry is to illustrate that the only components needed to manufacture nitrogen fertilizer are fresh air and natural gas. That in turn means that there most definitely is a relationship between the cost of natural gas and the cost to produce nitrogen fertilizer. Modern NH₃ plants will have roughly a 30:1 conversion ratio. That means if the price of natural gas is $4 per million BTUs then the plant will consume 30 times that or $120 worth of natural gas to make a tonne of ammonia. That’s an important number to keep in mind when nitrogen prices start dropping like they have lately or when natural gas prices start climbing like they have in the past. Take the price of natural gas per MMBTU and multiply it by 30. As soon as the retail price of ammonia gets close to that number you can expect manufacturers to start closing plants or shutting down production.

If the cost to produce a tonne of ammonia exceeds what it can be sold for then the manufacturer will need some pretty strong reasons to keep the plant open. They may have contracts to fill or they may have pre-bought natural gas but the bottom line is “if 30 times the current price of natural gas per MMBTUs is more than the ammonia can be sold for then you can expect some plant closures.” That’s what happened a few years ago when California was so short of natural gas during the winter. Ammonia manufacturers could make more money by selling their gas contracts than they could by building ammonia. So they shut the plants down and sold the contracts. Eventually that drives the price of ammonia up because guys like you want the fertilizer and despite what you may say today, you will pay more for it if you have to. For some of the older plants the factor is more like 35 or even 40 times which is why a lot of the old plants in the US got closed down during the gas price increases of the early 2000s.

If you look closely at the chart of the nitrogen index against the natural gas price you can see several periods where the price of nitrogen clearly lags the price of natural gas but appears to follow it. The early 2000s show a pattern of rising gas prices with nitrogen prices delayed but following the same trend. The disconnects between the two commodities get more apparent as we move back in time but that is understandable. Natural gas used to be a surplus commodity until we figured out a bunch of ways to use it – like making fertilizer.

There are a couple of important lessons you can draw from this relationship:

First, you need to keep an eye on the price of natural gas and particularly the forward futures contracts because that will give you a good head’s up for what’s likely to happen to the N price.

Second, if the day comes, and it may, when manufacturers are no longer willing to forward price retail ammonia, then you may be able to run your own hedge program based on natural gas. If you are a urea or UAN user then you can always buy and store. That may create some other difficulties but it is always an option. It’s not an option for ammonia so you are forced to trust your retailer but more importantly you are forced to trust that the manufacturers will continue to offer forward pricing to their retail locations. If you look at that practice from the manufacturer’s viewpoint it really doesn’t make much sense to let you contract ammonia at Dec. 31 pricing if prices are rising rapidly. There was a time when competitive pressures drove that practice and you should appreciate it while it lasts. Right now your major domestic manufacturer is integrating down the retail chain so you have to ask yourself how long they will continue to offer that option.

(added on edit) I was browsing a bit this evening and noticed the charts above. As always form your own opinions - I'm not qualified or authorized to give you advice.

Capital risk management

2009-10-02T16:43:00.000-07:00

Last time we talked about managing price risk when you pre-buy inputs but that’s not the only risk element you face. You also face a capital risk if you pre-buy but don’t take delivery. Put simply if you give somebody $100,000 in return for a promise that he will deliver inputs at some time in the future, what happens if he goes broke between now and then? Well what happens is you get to stand at the back of a very long line and likely you won’t get anything in return for your hundred thousand bucks.

Obviously you can manage that risk by taking the inputs home. That’s relatively easy to do with chemicals although you may have issues with safe storage or need heated storage. With fertilizer it’s a whole different matter. Most of you can’t take home a year’s supply of anhydrous ammonia no matter how good the price is. Even a year’s supply of urea or UAN takes up a lot of room and requires handling and storage equipment. You may also require blends that make it impractical to store your whole year’s requirements or you may simply not have the capital necessary to purchase the storage.

Leaving money with your retailer at yearend has become a standard practice across the industry but be aware that you assume a risk when you do that. You only have to think back to the scramble that happened in January 2003 when it looked like Sask Wheat Pool was going to go broke. Every farmer who had pre-pay money deposited with the Pool was frantically trying to secure his position by taking home farm supplies. Don’t ever think that bankers don’t know that retailers are loaded up with cash at yearend. It is no accident that the Pool’s financial crisis happened in January when they had all that prepaid money on their books. And don’t think that you could necessarily secure your position at the last minute by taking inputs home. If the worst had happened and the Pool had entered bankruptcy the court would have had the power to unwind transactions that happened immediately prior to the bankruptcy. That’s not to say they necessarily would have come out to the farm and taken the inputs back but bankruptcy law clearly allows them to do that.

So how do you secure your position? The simplest solution is to take the inputs home. If that is possible then you probably should do it. You pay your money and you take the stuff to the farm. There’s no pre-pay transaction so there’s nothing to unwind if the shit hits the fan – you just bought farm supplies like any other farm supplies you purchase. That’s not always possible though for a variety of reasons.

If you intend to leave prepay money with a retailer then you should start by doing your own due diligence. Your suppliers aren’t shy about asking you for financial statements if you want credit from them so why shouldn’t you ask for similar disclosure when you lend them money? That’s exactly what you are doing when you give them a cheque at yearend and don’t expect delivery until spring – you are lending them money.

I’ve never seen it done but there is no reason why you couldn’t register a PMSI against the supplier. For those of you that are pre-buying substantial amounts you should at least ask your lawyer about this possibility. PMSI stands for Purchase Money Security Interest. PMSI legislation gives priority to lenders (you in this case) who extend credit that enables the debtor to purchase something else.

Typically a supplier will use PMSI security to obtain an interest in a growing crop. If he supplies the inputs that are used to grow a crop then obviously he can’t repossess the inputs but he can claim security in the crop under PMSI security. Similarly a company that supplies a business with inventory can register PMSI security against the proceeds from the sale of that inventory. The neat thing about PMSI security is that it often ranks ahead of secured creditors – in fact it usually ranks ahead of just about everybody.

If you are lending your supplier $100,000 or more at yearend think about PMSI security. At the very least ask the question “How do I know that I will get the inputs that I am paying you for?” It may not make your supplier happy but it’s just business. Isn’t that what they tell you when they want you to sign all those forms?

Managing risk

2009-09-26T10:22:00.000-07:00

When you hear the phrase “risk management” what comes to mind? For most people insurance will be near the top of the list or perhaps the only thing on the list. However risk management for farm businesses consists of much more than simply buying or not buying crop insurance or property insurance. You manage risk in a host of ways – when you swath canola with the prevailing winds, when you spread chaff, when you bury power lines or when you purchase machinery. The topic for today is a narrow segment of risk management related to pre-buying crop inputs.

Pre-bought inputs have obvious tax advantages if you are taxable. They also have risk management implications. The two important risks are price risk and capital risk. Price risk is the one that farmers most often think about. “Should I buy in August or should I wait until December?” sums up the thinking for most farmers. I have already discussed taking advantage of the lower retail margins at year end. To put it in risk terms, your risk of paying too much due to retail margins is lowest at yearend. That doesn’t mean that yearend pricing will always be better than spring pricing, just that the margin component of pricing will likely be lower at yearend than in the spring.

For western Canadian farmers the power of manufacturers to control price increases as spring approaches. As it gets closer to seeding time it gets less likely that you can arrange offshore shipments and accordingly more likely that a manufacturer can successfully impose a last minute price increase. All these factors tend to support lower pricing at yearend but don’t guarantee it.

If we had access to a futures market for fertilizer this would be much easier. Grain companies can purchase grain from you and then forward sell it through the futures market. From the point where they buy the grain from you and sell the futures contract all they have to do is keep their costs down, prevent the grain from spoiling and deliver it on time in order to make the profit they locked in when they hedged it. You could do the same thing if you had access to a fertilizer futures market but you don’t. “IF” is such a big word – if the queen just had balls she’d be the king. So what to do?

One technique that would have worked well last fall when fertilizer prices were jumping every week would have been to back to back fertilizer purchases against crop forward sales. A typical grain farm will have a contribution margin of 30 or 40 percent. (if you don’t know what your own contribution margin is watch for a future column but for now think of it as what’s left over after you pay your variable costs) So for every $100 that a typical grain farm earns in revenue they will have spent roughly $60 in variable costs. Therefore you could have said “I want to pre-buy $60,000 of fertilizer so maybe I should simultaneously forward contract $100,000 of grain sales.” It’s by no means a perfect hedge but it would have been a lot better than having your ass hung out last October the way many farmers (and dealers) did.

Of course last October you would have looked at the available contracts and said “I don’t want to forward contract grain at these prices.” Which then would have logically led to the question “well then, why the hell do you want to buy $100,000 of fertilizer?” It’s not a perfect system but it might have helped you take a second look at the options available. And you might have gone ahead and not signed the grain contract but still bought the fertilizer. At least in that case you should have clearly understood that you were making a speculative decision rather than a business decision.

Next time we’ll talk about the other risk element of pre-bought fertilizer – capital risk. In the meantime try to think about the components of your business decisions that are speculative and those that are managerial. That in turn will help you better understand the risk profile of your farm.

Managing or speculating?

2009-09-23T22:19:00.001-07:00

Most good farmers are also really good speculators. It comes with the territory. You grow grain and you have to sell it so as to maximize your returns. Over time you have figured out that selling it off the combine into distressed pricing isn't a great idea. Over time you have noticed that grain prices tend to be lowest just at the same time that input prices tend to be lowest. So it usually makes sense to buy your inputs early and sell your crop late. It doesn't alway happen that way - if you bought your nitrogen at the wrong time last year you might have been able to buy it cheaper in the spring but usually you don't go far wrong by buying inputs at yearend and delaying grain sales as long as possible.

This quote from Mayo Schmidt's 3rd quarter news release shows that you aren't the only person in the industry that struggles with unpredictable commodity prices:

Lower fertilizer margins during the quarter reflect negative margin sales and very little in-season appreciation linked primarily to phosphate fertilizer.

Translation: we really really like the speculative gains that we usually get on fertilizer and had in fact planned on those gains in our budget but we got whacked by the market, just like everybody else.

Those speculative gains on your fertilizer can make a huge difference to crop profitability so it may be helpful to think about the components of the fertilizer price. In the fall of the year the whole fertilizer industry cuts its margins to generate sales. That means that regardless of what is happening in the global market, if you can buy during the period of time when margins are typically depressed then you have at least taken your pound of flesh out of the retail system.
You can't however ignore the world market because it can still whack you, no matter how good a job you do of beating up your local supplier. Western Canada is isolated from the world market by geography but given enough time the geography can be overcome. If the retailers and brokers have time on their hands they can arrange barges from New Orleans to Minneapolis, offload them onto trains, bring the trains into western Canada, transload them to trucks and deliver the fertilizer to western farmers. That all takes time. Even if they manage to cut out the trip to Minneapolis and rail the fertilizer direct from New Orleans it still takes a long time. There has been a very limited amount of fertilizer brought in through Thunder Bay and even some through Churchill but both of those ports have their own challenges in terms of established shipping patterns and offloading facilities. The point is that western Canada is isolated and that gives our local producers market power to raise the price as we approach spring.

In general phosphate fertilizer in western Canada is priced FOB New Orleans plus freight. That gives rise to the bizarre situation where a farmer who can see the plant at Fort Saskatchewan pays more than his brother in law who farms at Carmen, Manitoba despite the fact that the fertilizer in Carmen has been trucked 1000 miles from Fort Saskatchewan.

Nitrogen fertilizer is even more isolated by geography because none of the forms used in western Canada easily lend themselves to long distance shipment. Urea can obviously be trucked longer distances but it is relatively unconcentrated so the cost of freight quickly becomes a significant portion of the total cost of the product to the end user. Ammonia requires specialized transport equipment and the manufacturers are quick to exploit the differences between the regulatory systems in Canada and the US to prevent easy cross border arbitrage. Liquid fertilizer is just too dilute to consider shipping it long distances.

That's a chart from IRM (International Raw Materials - which includes the remnants of what we once knew as Sherritt). It clearly shows the nitrogen spike a year ago and looking at it with the benefit of hindsight we really have to say "well - we should have seen that coming."

So realistically you are stuck with getting supply from your local manufacturers but your negotiating power increases exponentially as you move farther out from spring. On May 10th you haven't got many choices but on October 10th you can beat the basis out of your local retailer and play the international market against your local manufacturer. Another day we'll talk about the risks you take on when you prebuy fertilizer, the relationship between nitrogen prices and natural gas, on-farm storage versus dealer storage and negotiating strategies to get the best prices but right now its late and I'm going to quit typing.

Welcome to farming for profit

2009-09-21T22:10:00.000-07:00

Over the course of my career I have had the privilege of working with some extremely successful farmers. While we owned the dealership some of those successful farmers were our customers and I grew to appreciate their business acumen as well as their understanding of agrology. Since selling the business I have again had the opportunity to work with some extremely successful farm businesses.

At the same time I have seen some catastrophic farm failures as well as some guys who just shouldn't have been farmers. The blowups were usually obviously not farmers but there is a group of farmers who never accomplish much and in fact would be further ahead if they sold out. This weblog isn't written for either of the latter two groups. I hope it will appeal to the first group however and perhaps it will help them fine tune and grow their already successful farm businesses.