WINNIPEG, Manitoba (Reuters) - Canadian farmers are plowing profits from bumper crops into fertilizer storage facilities to mitigate the pricing power held by major retailers and producers.
Having their own storage lets farmers buy nutrients more cheaply during the off-season and creates fewer transport bottlenecks in the spring planting season.
Over time, the practice might erode the steep premiums farmers pay in the spring to retail businesses owned by Agrium Inc, Richardson International and Cargill Ltd [CARGIL.UL], while shifting distribution patterns of producers Potash Corp of Saskatchewan, Mosaic Co and CF Industries.
The trend is part of a wider shift by North American farmers to gain more control over both costs and the prices they collect. In the U.S., farmers are building silos and bins to store grains and oilseeds until crop handlers entice them to sell.
Canadian farmers produced record-large harvests of wheat and canola in 2013, boosting their net income to C$6.4 billion, the fourth straight year of gains, according to the most recent Statistics Canada data.
After diammonium phosphate prices spiked in 2008 to $1,200 per tonne, compared with less than $500 a tonne today, Saskatchewan farmer Kevin Hruska spent about C$400,000 in 2010 to build storage for about 6,000 tonnes of blended fertilizer.
“We want to store it all - we don’t want to be held hostage by the logistics of springtime and the games the fertilizer companies play,” said Hruska, who grows wheat and canola and uses about 6,500 tonnes of fertilizer a year on his sprawling 45,000 acre farm. “It gives you a lot of security knowing your fertilizer is in place out of season.”
The difference between harvest and spring fertilizer prices has been almost enough for farmers to pay the cost of storage within one season, said Lyndon Carlson, senior vice-president of marketing at Farm Credit Canada, the country’s biggest agriculture lender.
Fertilizer prices have been higher in April, the month when demand soars just before most planting gets underway, than in the previous October eight times in the last decade, according to a survey of Alberta prices by the provincial government. The price of urea, for example, was C$529 per tonne in October 2013 and C$721 six months later.
Sales volumes of epoxy-lined bins - designed to withstand fertilizer’s corrosiveness - have climbed 20 percent since 2010 at Westeel, Western Canada’s second-largest seller of farm storage, said president Andre Granger.
Farmers in North and South Dakota are also building storage for fertilizer, like their Canadian neighbors, but the trend has not caught on with much smaller U.S. Midwest grain farms. Farmers there lack the same scale to buy storage facilities or fertilizer spreading equipment and rely on local co-operatives to do the work, said Peter Trebuschnoj, Iowa-based director of U.S. operations at Meridian Manufacturing, which makes bins for the farm, industrial and energy sectors.
U.S. hog farmers are avoiding high retail prices for spring fertilizer by cashing in on their own endless supply of free manure.
Iowa grain farmer Chuck Souder said the ability to produce and store excess fertilizer was a deciding factor when his family built a hog barn last fall that can hold about 2,500 animals at a time. He estimates the hogs will produce at least $37,000 in fertilizer a year.
North of the border, bumper crops and the strength of multi-generational farms allow some farmers to pay cash for storage, while others borrow, said Randy James, manager of agriculture in Manitoba for Bank of Montreal.
The growing size of Canadian farms also makes building storage affordable. In Saskatchewan, the average farm is 1,668 acres, five times the average in Iowa.
The benefits go beyond dollars and cents.
The farm input distribution system often becomes congested during spring, with fertilizer in high demand during farmers’ narrow planting window.
For that reason, farmers’ move to build fertilizer storage and buy off-season is positive for retail sellers, even though they might sell less product at premium spring prices, said Tom Hamilton, vice-president of Richardson Pioneer.
To be sure, the more fertilizer farmers store, the more price risk they take. In 2009, retail dealers incurred heavy losses on inventories when prices collapsed.
“Bottom line, the risk of inventory change will always overshadow the desire to store up,” said Potash Corp Chief Executive Jochen Tilk.
Additional reporting by P.J. Huffstutter in Chicago. Editing by Amran Abocar and John Pickering