Not an easy road | Past experience says going could get tough when fertilizer prices fall
Companies wanting to gain a foothold in Western Canada’s grain handling sector are trying to convince farmers to sell their inland terminals.
However, one group is telling producers they should be expanding their ownership of grain industry assets.
“We think that farmers should really seriously consider getting into fertilizer manufacturing,” said Bob Friesen, chief executive officer of Farmers of North America Strategic Agriculture Institute.
The organization recently took out an ad in The Western Producer urging growers to consider the idea.
Friesen said if Glencore’s takeover of Viterra is approved, Agrium will own more than half of Canada’s nitrogen production and “virtually monopolize” the retailing of farm inputs in this country.
Growing control of the fertilizer sector by one company provides impetus to consider such a venture.
“The environment is right now to start talking about it,” he said.
Friesen said there is a good level of interest among the producers he has spoken to about the idea.
Farmer frustration with fertilizer reached the boiling point in 2008 when prices spiked in response to high grain prices, reducing profit margins on the farm.
There is a precedent in New Zealand for the business model that FNA proposes. In that country, growers own Ravensdown and Balance Agri-Nutrients Ltd., two of the country’s leading fertilizer companies.
David Asbridge, president of NPK Fertilizer Advisory Service, applauds FNA for promoting the plan.
“The idea behind what they’re doing I think is a good idea because right now natural gas is really cheap in North America,” he said.
The cost of producing urea is about $100 US per tonne at the plant and around $200 per tonne by the time it is delivered to farmers in the U.S. Midwest, where growers are paying $600 per tonne for the product.
“Margins are phenomenal, I can guarantee you,” said Asbridge.
However, he thinks a farmer-owned plant would face stiff competition in years when margins are tight, which could be around the corner.
Interest in building new capacity increases when fertilizer prices are high, which is what has been happening recently.
Huge nitrogen fertilizer plants have been built in China and the Middle East, causing growth in production capacity to outstrip growth in demand.
Nitrogen fertilizer prices move in a cyclical pattern that Asbridge describes as a sideways “S,” and he believes they’re about to turn down.
“We’re kind of at the tipping point.”
Based on past experience, it would be difficult when prices fall for a small farmer-owned facility to compete with a urea production plant churning out two million tonnes of product per year.
Farmland Industries, the largest agricultural co-operative in North America, declared bankruptcy in 2002, due in large part to a prolonged downturn in fertilizer prices.
Asbridge worked for CF Industries when it was a farmer-owned co-operative. The business had its challenges when prices were low. In 2005, members decided to turn the co-op into a publicly traded company.
A fertilizer manufacturing plant is an expensive venture, he warned, costing about $1.5 billion to build a two million tonne urea facility.
“We know that investing in fertilizer manufacturing would cost a lot of money. There’s no question about that,” said Friesen.
That’s why FNA has met with the federal agriculture minister, the deputy minister and senior officials within the department to discuss rule changes for the more than $1 billion that farmers have saved in the federal AgriInvest program.
FNA wants Ottawa to defer or waive the taxes on the government’s share of the AgriInvest money if it is invested in a venture that maximizes future revenue for farmers, such as a fertilizer manufacturing plant.
“There seems to be interest in what we’re suggesting,” said Friesen.
He hopes it will be a topic of discussion when federal and provincial agriculture ministers gather in Whitehorse in September.