Normally around this time of year Doug Chorney would be putting in orders for fertilizer for his farm near Selkirk, Man. Not this year.
"We're definitely waiting," said Mr. Chorney, who keeps in regular contact with his fertilizer dealer to see where prices are headed. "I'm hearing a lot of concern among farmers around here about what they should do at year-end."
Mr. Chorney has good reason to wait. The bill for fertilizer on his 1,600-acre farm has nearly doubled in the last year to $1,100 a tonne. Like many farmers, he's hoping that by waiting a few months, prices may start to fall. He's also planning to change his crop mix, switching some acres from canola to soybeans, which require less fertilizer.
It's not a bad call. Prices for many key fertilizer ingredients, such as nitrogen-based products and phosphate, have dropped in the last few months as farmers across North America and Europe play a similar waiting game.
The price of urea, a nitrogen product, has fallen 20 per cent in the last month while phosphate is off about 8 per cent. And when potash producers tried to push through a $30 (U.S.)-a-tonne price hike this fall, dealers had to offer $20-a-tonne discounts. India has also been pushing for a cut in a previously agreed price for potash and phosphate from North American and Russian suppliers.
"In the last month, every day we have seen negative data points for fertilizer," said Joel Jackson, an analyst at BMO Nesbitt Burns. He also noted that many large fertilizer dealers in North America are holding off on purchases because of weak demand from farmers.
The outlook isn't much better for fertilizer producers. Mr. Jackson expects potash prices to remain largely flat next year and start falling around 2014 when new supply comes on-stream. Phosphate prices are also expected to fall once a new mine in Saudi Arabia ramps up, adding roughly 15 per cent to the global supply.
In a recent report, Joe Dewhurst, an analyst at UBS, said he expects average potash prices to fall from $460 a tonne this year to $420 by 2015. That's mainly due to a drop in the price of corn and soybeans, which both use a lot of potash, as well as a big increase in the supply of the mineral.
On Wednesday, Agrium Inc. announced plans to increase its potash production by 50 per cent through expansion of its Vanscoy facility in Saskatchewan. Potash Corp. of Saskatchewan Inc. is also boosting its supply as are relative newcomers to the industry such as BHP Billiton Ltd.
The extra supply could pose a challenge to big potash cartels such as Saskatoon-based Canpotex Ltd. which includes Potash Corp. of Saskatchewan, Agrium and Mosaic Co.
"Supply addition will consistently be ahead of demand for the rest of this decade, despite a bullish view on demand growth," Mr. Dewhurst said in the report. "If the industry continues to favour a cartel structure we believe there will be requirements for significant production cuts over the next decade to counter the slack."
The share prices of Potash Corp., Agrium and Mosaic have all fallen sharply in recent months, reflecting the gloomy outlook. Since February, Potash Corp.'s stock has dropped from $63.19 to $40.27, Agrium is down from $98 to $67.13 and Mosaic has fallen from $89.24 to $47.36.
On Wednesday, Agrium said it would quadruple its semi-annual dividend to $0.225 per share.
Prices for many grains, including corn, wheat and soybean, have also dropped up to 40 per cent from their 52-week highs, due in part to bumper crops in Eastern Europe, Russia and Australia.
There are still many bullish long-term signs. The amount of agricultural land is diminishing, meaning farmers will have to boost yields through nutrients. Population and food demand are also both still rising, and farmers could jump back into the fertilizer market quickly if commodity prices start heading up again.