There’s a chance that American farmers will cut fertilizer use to a level not seen since 1983, said the head of Potash Corp.
Bill Doyle said last week lower nutrient application has serious implications for yield and could lead to a surprisingly small U.S. corn crop, which would drive grain markets higher.
American producers slashed fertilizer use in 1983 because they slashed seeded acreage.
That year, Washington came up with a plan to use huge government-owned grain stocks to pay farmers to idle land.
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Corn area dropped 21.2 million acres to 51.5 million. Wheat dropped 16.5 million acres to 61.4 million.
Overall corn and wheat acreage dropped 37.7 million acres to 112.9 million.
This year, the area in production will be vastly larger. Corn area is expected to be 85 million acres and wheat 58.6 million for a total of 143.6 million.
Yet the amount of fertilizer applied might be the same as in 1983.
“This scenario is unprecedented in magnitude and unpredictable in consequences,” the company said in a release that accompanied its quarterly financial statement.
Doyle said farmers in Brazil and Argentina reduced fertilizer use when they seeded last autumn. The nutrient shortage and drought slashed the size of the harvest, particularly in Argentina.
“A dangerous game is now unfolding around the world. Fertilizer applications are being reduced at unprecedented levels,” Doyle told stock analysts during a conference call.
“Our estimates show North American potash applications falling as much as 30 to 35 percent, phosphate by 20 to 25 and nitrogen by five to 10 percent.”
If the forecast is true, we can’t expect strong U.S. corn yields. Markets have come to expect U.S. average corn yields to climb by a bushel or two each year.
Jim Hilker, an agricultural economist at Michigan State University, has created a 2009-10 supply and demand spread sheet using 155.4 bu. per acre as the average yield, up from 153.9 bu. last year. Using the USDA’s 85 million acre seeded acreage forecast and 77.8 million as the harvested area, he gets a production number of 12.09 billion bu. of corn.
Production, carry in and imports tallied together give a supply of 13.8 billion bu. He sees total demand at 12.55 billion bu., leaving ending stocks of 1.256 billion bu., or an uncomfortably tight 10 percent stocks-to-use ratio.
Even shaving just three bu. per acre off the projected yield to account for nutrient shortages slashes the ending stocks dangerously close to one billion bu. and a record tight stock-to-use ratio. Prices would rise to ration demand.
Doyle also made comments that might anger some farmers.
He thinks the decision to reduce fertilizer use is not driven by economic considerations, but by psychology.
Grain prices and farm revenue are high enough to warrant normal fertilizer use, he said.
His point is proven, he said, by the fact that although nitrogen and phosphate prices nosedived in recent months, farmers are not buying any more of them than they are of potash, the price of which has not dropped as much because his company reduced production.
“Dropping the price does not increase demand on fertilizer products, it only destroyed value for those companies producing those products,” said Doyle.
“Fertilizer is not like shoes… If you have a half price sale, people might buy two pairs of shoes, but if you have a half price sale for phosphate or nitrogen, they are only going to buy that same tonne of nitrogen or phosphate.”
