Last week, the

Fertilizer prices have responded to this optimism.  The one exception is urea which has been relatively sluggish as the latest Granular Urea Basket Price indicates.  Our friends at Profercy analyze this situation insightfully in their 1 March Urea Forecast.   Our view is that if you are a buyer, urea is currently a competitive source of nitrogen.  On the other hand, speculators trying to run with the bulls in other nitrogen products could face painful consequences.

We write this post from Shanghai as an unseen morning sun rises shrouded by dense smog.   We are here for the IFA's 77th annual conference in one of China's most modern cities.  Shanghai is a showcase of China's future, with spectacular scale, architecture and planning.  It is also a showcase for a new chapter in the Industrial Revolution, seemingly unbridled growth at an astonishing pace.

As an old "Asia Hand" we are able to benchmark this remarkable progress, but we also ask ourselves...at what price?

We have been here for three days and have yet to see the sun.

An article in the 25 May 09 edition of Business Week further frames the issue:

"China's unprecedented growth in recent years has come at a terrible price.  Two-thirds of its rivers and lakes are too polluted for industrial use, let alone agriculture or drinking.  Just 1 in 100 of China's nearly 600 million city dwellers breathes air that would be considered safe in Europe.  At a time when arable land is in short supply, poisoned floodwaters have ruined many productive fields. And last year, ahead of most forecasts, China passed the U.S. to become the world's largest source of greenhouse gases."

One could argue that China's environmental policy is none of our business...but in fact, it is.  Our own politicians in Washington are at this very moment feverishly fashioning an environmental bureaucracy that would make any communist central planner proud.

There is no question that this policy will result in the outsourcing of even more of our pollution to China and to the rest of the developing world.  So again we ask the question...at what price?

Even before the inauguration, Obama's Carbon Busters were hard at work launching a major CO2 offensive. The world’s economic collapse delayed their efforts for a few months, but just as the economy seemed to be finding its feet, the Carbon Busters are now back, with a vengeance.

The offensive is two pronged. In early April, Congressman Waxman tabled a discussion draft of the “American Clean Energy and Security Act of 2009”. Quickly renamed “Waxman-Markey”, this 648 page tome is packed full of nefarious surprises for industry in all forms. The opposition to this legislation has been widespread and aggressive.

Anticipating this opposition, the administration launched an attack on a second front in mid April with the EPA declaring that greenhouse gases are a public threat.

In a speech before The House Energy and Commerce Committee, Congresswoman Marsha Blackburn summarized the “threat” as follows: “Mr. Chairman, last week the EPA positioned itself to regulate carbon dioxide emissions under the Clean Air Act, with or without Congressional consent. We are then, faced with a choice, we can acquiesce to bad regulation that will have certain and disastrous impacts on our economy or we can legislate an even more harmful system. It is as though, when faced with a gun to our heads, Congress is opting to shoot ourselves in the chest.”

The political debate continues. In testimony before the same committee former Vice President Al Gore testified that the legislation was “one of the most important pieces of legislation ever introduced in Congress". Robert Michaels, an economist with The Cato Institute, declared in testimony that Waxman-Markey is: “The most profoundly anti-consumer legislation ever brought before a Congress.” Former House Speaker Newt Gingrich characterized Waxman-Markey as "environmental extremism." And the beat goes on…

As this political drama has played out The Fertilizer Institute and others have been lobbying furiously trying to stay ahead of the curve. The stakes are high. Our friends in the Euro zone are facing Cap and Trade costs of USD 30 per MT in competition with imported product which for the most part does not bear a similar burden. U.S. nitrogen producers would additionally be facing the threat of rising natural gas feed stock costs as other industrial companies and utilities switch to gas from coal and oil to minimize their own CO2 exposure.

Our closing message to our friends in Washington...Don’t drink the Kool-Aid.

As self appointed spokespersons for Ravensdown’s international suppliers, competitors, and now it seems farmer shareholders, we would like to thank the Farmgirl for pointing out that the Emperor "… has nothing on!", a vision that we have all suffered silently with for a long time.

The Emperor is on the left in white gum boots...

As we have watched the Fertilizer Wars unfold, our comments here, as well as on www.fertilizerwars.com have been from the perspective of a fertilizer peddler. What have been missing from this discourse are some observations from a shareholder’s perspective.

We are certainly equity punters, but as a rule we don’t invest in fertilizer stocks. It seems that we have developed far more efficient ways to lose money directly in this sector. That said we have still been curious as to what investors might be thinking while these fertilizer producers have been blasting away at each other. Unfortunately Google searches have netted little of value in the way of analysis, just press clips and protagonists’ propaganda.

Finally a gem popped up today in Forbes: Fertilizer Bids Keep Growing . What is interesting is the nuance expressed by Carl Gutierrez that there may be another unseen force in orbit with the three current protagonists…sort of a death star exerting invisible gravitational forces on at least Terra’s orbit. Is that you Lord Darth?

From our own perspective, it would seem that both Agrium and CF have been a bit stingy. Possibly the Calgary team has some doubts about the potential liquidity of some of their previous nitrogen production purchases. Surely there is a black market for the Egyptian Pound in Chicago. CF has cash of course, but spending it is another matter. Reaching for their check book may be on their play board for the fourth quarter, but it will be after the double reverse, and the Hail Mary pass.

In closing we should observe that we are not qualified to represent any of the shareholders who are caught up in this brawl, but on the off chance that we would land this assignment, our opening position would be: Show me the money.

As the lithograph to the left suggest, the appearance of Robber Barons is a recurring social phenomena.

Wikipedia has several interesting articles on the subject. We particularly like the picture of J.P. Morgan thrashing a hapless news photographer. Robber Barons used to loot and pillaged in earlier history. Today it seems that they are more focused on harvesting stock options. (editor’s note: Bxxxx word omitted)

Consolidation in the world’s fertilizer industry continues at a rapid pace, with significant segments of concentrated market power developing. One’s view of this development is no doubt colored by whether you are riding one of the elephants or being trampled by them.

In the early 12 century, Robber Barons stretched iron chains across the Rhine to facilitate toll collection.

We have seen recently the references to people needing to eat in press releases which were announcing the curtailment of fertilizer production. While some would argue that these curtailments are prudent business practice; others would argue that monopolists are flexing their muscles.

From our no doubt biased vantage point we foresee a probable collision between these self appointed gate keepers to the world’s crop nutrients and the political class.

To track this potential development we have set up a separate blog that will focus on the current skirmishes in North America: www.fertilizerWars.com. Selected clips will be “fair and balanced”. Comments from all industry perspectives will be encouraged.

The International TFI Conference in Seattle stumbled at the start and struggled thereafter. The Westin’s computers were down as guests arrived on Saturday and didn’t recover until the following day. Quickly the lobby resembled Chicago’s O’Hare airport during a midwinter storm. Unfortunately the Westin and our TFI team’s response did not benchmark well, even against airline standards… At least the airlines have learned to pass out blankets and a few free drinks to the stranded.

One overseas visitor having just arrived from over the pole reported that he was handed a tour map by the front desk clerk and encouraged to “enjoy the fresh air”. Furthermore, since he had an overseas cell phone, he was required to check back intermittently as the Westin staff were not able to call him.

Back in the bad old days in the fertilizer business, a late night knock on your hotel room door could have been a lost lady of the night. In Seattle, it was more probably a weary guest who had been given a key to an already occupied room. The confusion continued for 16 hours; well into Sunday morning.

There were Convention highpoints of course. The breakfast meetings were excellent; especially a surprisingly non-partisan speech by Republican Rasputin, Karl Rove. The cocktail party at the Boeing Museum was also a winner.

But the overall mood of the meeting was not. Our Fertilizer market has peaked. It has been a nice run; but we have covered too much ground, too quickly. This ten year graph of our weekly posted Granular Urea Basket Price reflects just how much the urea market has strayed above a moving trend line.

Unfortunately along the way many of us have forgotten that we are in the fertilizer business. Like the weather in Seattle we have had a few sunny days, but winter looms again. As the meeting progressed it was clear that while many had been short hotel rooms as they arrived, they were unfortunately long fertilizer.

Market misery aside, the city of Seattle was a good choice, with lots of good restaurants, friendly people and entertainment opportunities. Besides Boeing and Microsoft, this is also home to Starbucks. A visit to the Pike Place Market took us to their first store which proudly displayed their original logo. Needless to say the political correctness police were not around in 1971.

We also found some good golf options in the area including Chambers Bay the home of the 2010 U.S. Amateur. Another gem up in the mountains to the east of Seattle is Suncadia. We played the Prospector; it was great. Here is a picture of the 10th hole; one of the most spectacular driving holes in memory.

This classic N.C. Wyeth painting “Stand and Deliver” came to mind today as we read a fertilizer dealer’s email response to a rather innocuous question:

Q: “…what is the mood of the Ag-retailer going into deeper and perhaps uncharted water?”

A: “As for the mood of the Ag retailer…it is degrading as we get keel-hauled by our customers for cost increases promulgated by our suppliers who are clearly capitalizing on the situation. We all hear about how the global market situation is entirely responsible for this, much as we hear how the global situation is responsible for the price of gasoline and diesel. Our suppliers apparently think we are too naive to look at their quarterly earnings reports. Yes, we realize we are in a global market situation and yes, we realize that our suppliers are capitalizing on the situation while we are getting our butts chewed off by the people who have to actually pay for this stuff. As I told one supplier the other day…it is my fervent hope that the folks managing their company are still in place when the seeds they are now sowing have ripened for harvest. They are systematically destroying demand that has taken years to build all in the name of short term gain. I have never seen such unbridled gluttony (and ignorance) in XX years.”

The “Lobby” at convention hotels is always a great source of sage commentary. The 76th IFA Annual Convention in Vienna was no exception. The one we liked best this year was the alleged observation by an industry CEO to his marketing aide-de-camp which we paraphrase as follows:

I could go to the zoo to replace you; even monkeys can sell fertilizer.

We naturally take exception with this comment. Everybody knows that the best marketing monkeys are already working on “Wall Street” where they have been busy trading the likes of mortgage backed securities, collateralized debt obligations, credit default swaps and similar ponzi products. In fact that CEO might even be able to sell those monkeys some of his own company’s script…

Similarities between this picture
of King William The Conqueror
and any current fertilizer industry
executive are purely coincidental.

The Fertilizer market has been on quite a run. Industry graybeards are possibly even more astounded by the market’s strength than those who are enjoying their first run with the bulls. As usual, nitrogen took the lead, but Phosphates and Potash are now way out in front. The pace has been frenetic and good profitability has flowed through the entire supply chain.

High Muckamucks have had big paydays. Even those of us further down the food chain have enjoyed a few crumbs falling from the table and a respite from the daily challenges of life in a mature and consolidating (yet critical) industry.

On reflection, survival in this business seems to require a contrarian bias. We therefore keep reminding ourselves that back in 1374 Chaucer reportedly observed that “There is an end to everything, to good things as well.”

For clues as to why we are currently contemplating these bearish thoughts, for starters we suggest reading an article in today’s Baron’s entitled Commodities: Who's Behind the Boom? In essence we are told that USD 250 Billion in “naïve” speculative cash has leapt onto the long side of the commodities game in the last while, fleeing the equity (and debt) markets. The impact has been profound. For instance an estimated 83.6 % of this year’s wheat crop is owned by speculators. The article outlines a situation best summarized by a quote contained therein, “…nonsense on stilts.” Those who attended the second breakfast lecture at the TFI’s winter meeting heard similar views. One could argue therefore that commodity crop prices are heading for an adjustment, which unfortunately could also have an impact on fertilizer fundamentals.

In a related development last week, ConAgra announced that it was spinning off its trading division for a healthy dowry of USD 2.1 billion to Ospraie Management LLC. Pronounced osprey (as in the raptor), Ospraie is run by Dwight Anderson who Bloomberg crowns as “The king of commodity hedge funds”. In this context it is important to note that unlike the commodity index funds and the commodity pools, hedge funds are also able predators on the short side of the market. So with the “King” now seated at the table, one has to ask…, when will the feast begin?

In the way of a closing comment to those currently enjoying their first run with the bulls, we suggest that you get ready to run faster…

It has been a long time since Beantown has seen such an enthusiastic mob of revelers.

In the same measure it has been a long time since the fertilizer industry has seen such prosperity at all levels…production, wholesale, retail, and the growers.

Boston was an excellent venue for the TFI’s ’07 World Conference: convenient, great food, lots of history and culture, and an addicted sports town. Although somewhat isolated, the hotel was good, and the TFI’s breakfast speakers were right on the money. We were particularly impressed by Jeffrey Sachs’s presentation. No doubt he touched on the genesis of our industry’s current and hopefully future prosperity. The trip to the Harvard Club for the closing cocktail party was also a great idea… and that compliment is from a guy who grew up being taught to hate Harvard.

There is not much we can add to the trade press’s hyperbole on market conditions, e.g. “Market still waits for urea tender announcement from India, but sales reported to be being made at higher and higher prices.”

Conventions are a series of vignettes. For us the most telling was the quiet side bar admission by a most seasoned buyer that he was just a “price taker” these days. Even though whispered, you could tell he didn’t like the taste of those words.

Finally the really big news at the convention… the one that had all of the trade pissing their pants… was the announcement that CF was purchasing 50% of Keytrade. The importance of this news, in our opinion, is not just our friend Melih’s good fortune but the fact that CF perceives that there is significant value in having access to the Global Fertilizer Market.

“Goods and services are increasingly global, even if your market is purely regional, purely local.”
Talking About Tomorrow - Peter Drucker - The Wall Street Journal - 1 January 2000

The attendance at this year’s Southwestern Fertilizer Conference in San Antonio was just a few registrants short of the previous record in spite of our industry’s dramatic ongoing consolidation.

This is a reflection no doubt of the fact that most participants in the fertilizer supply chain have just completed a good, and in many cases, an exceptional fertilizer year. Reminiscing “old-timers” favorably compared this past season to the spring of ’74; another boomer but a much more difficult environment.

Here are some additional reflections on what we heard in shadows of the Alamo:

• The farm economy is strong - there will be a generally supportive Farm Bill passed, and the Biofuel Boom will continue. The belief is that growers will continue to be strong buyers of crop nutrients going forward.

• From a supply perspective, consolidation has significantly strengthened the position of North American Potash and Phosphate producers, enabling them to exert unprecedented market power. The only rule that you will need to remember for the foreseeable future is that they set the rules...

• North American Nitrogen producers are also well positioned. They are sheltered in significant measures from offshore competitors who must navigate a long, complex and expensive distribution pipeline. It would appear that currently low feedstock costs are also allowing domestic producers to adjust prices to selectively discourage imports.

• Although nitrogen prices are seasonally soft, producers are not concerned. Prices are still trading within a very high range, and domestic inventories are low. Most bins and tanks bottomed-out at some point during what turned out to be an extended spring season. Several of the large Canadian nitrogen plants have already gone down, or will do so shortly, for extensive turnarounds that will tighten supply further.

• Price risk remains our industry’s biggest unresolved dilemma. Having put some money in their pockets, retailers are now anxious to keep at least some of it. Buying is therefore tepid, but it will happen.

• Traders are also lurking in the tall reeds waiting for their moment as well. With thin liquidity and long supply lines, the opportunity exists for a few players to aggressively start buying barges; squeezing the market.

• The third calendar quarter is traditionally a buyers’ market internationally. India has been featured in the trade press recently as they have worked over Russian, Middle Eastern, and Chinese urea suppliers through a rotation of tenders. Eventually though, European and Latin American buyers will come back to compete with the North Americans for international supply. It is only a matter of time.

• Current ammonia prices offer the best nitrogen value available, but ammonia has a growing list of related transportation, security, and safety challenges. We could try to further develop a metaphor for this mature product, but we are afraid that it would quickly get us into trouble with the Political Correctness Police.

• Finally, it is important to note that we started the last fertilizer year with a significant overhang. This year we are starting with little inventory, but potentially similar demand. While repeating last year’s profitability might not be possible, we will nonetheless in our view have an opportunity to earn a decent paycheck again this year.

As we have mentioned before, there is a lot of great food in San Antonio. One of our absolute favorite breakfast spots in the world is the Guenther House.

From what we can tell it has not been “discovered” yet, at least by the fertilizer industry, although we have been going there for years.

It opens everyday at 7:00 AM. They don’t take reservations, but it is always empty early. Parking is free and the place is cheap!