Wednesday, August 13, 2008

Bell Curve # 3 - Fertilizers

Lofty Prices for Fertilizer
Put Farmers in a Squeeze

May 27, 2008; Page A1WSJ
(See Corrections & Amplification item below.)
At a time when food prices are soaring world-wide, so is the price of fertilizer, producing huge profits for leading fertilizer makers and stirring anger among farmers in the U.S. and India.

Fertilizer prices are rising faster than those of almost any other raw material used by farmers. its weight in the basket of costs is rising In April, farmers paid 65% more for fertilizer than they did a year earlier, according to the U.S. Department of Agriculture. That compares with price increases of 43% for fuel, 30% for seeds and 3.8% for chemicals such as weedkillers and insecticides over the same period, according to Agriculture Department indexes.

Those skyrocketing costs are making it harder for farmers to expand their harvests in response to the global food crisis that has sparked rioting, rationing and export controls in many countries. Food prices have soared in recent months as the world's growing demand for grain, coupled with stagnant yields, inclement weather which has exceeded production for much of this decade, has reduced stockpiles to extremely low levels.

That's helped to draw attention to farm-production costs, including fertilizer. Farmers say too much market power is concentrated in the hands of a small group of companies in the U.S., Canada and Russia that dominate global production of potash and phosphate. Along with nitrogen, potassium, usually in the form of potash, and phosphorus, in the form of phosphate, are the main ingredients of fertilizer.

The price of fertilizer "defies rational explanation," says Robert Carlson, president of the North Dakota Farmers Union, one of the state's most influential farmers' groups. In a May 8 letter to North Dakota's three-member congressional delegation, he accused fertilizer companies of "price gouging," and asked for an investigation. Clear indicator that when events are beyond 'rational explanation' then one takes action against the perceived perpetrator of the wrong. But, if one sees the problem in the correct light then one can take mitigatory steps. Action against the incorrectly perceived perpetrator can make things worse, whereas, correct identification of the problem, will lead to working towards a solution. Something like being part of the problem vs being part of the solution. (I witnessed the most appropriate use of that phrase by Nik). :) will explain offline :)

On Friday, Sen. Byron L. Dorgan, a North Dakota Democrat, said he is asking the Federal Trade Commission to scrutinize the industry's business practices. Sen. Dorgan heads the Senate Commerce subcommittee that oversees the FTC.

Tight Supplies Blamed
Major fertilizer producers deny any allegations of gouging. They say they are simply raising prices to reflect tight supplies and growing demand after years of relatively low prices.

But there's an unusual piece in the pricing puzzle: In several countries, obscure laws shield makers of potash and phosphate from certain antitrust rules. In the U.S., for example, phosphate makers are among a handful of industries empowered by the 1918 Webb-Pomerene Act to talk with competitors about pricing and other issues. 1918 was a time when fertilizer was a new and valuable commodity. Maybe thats why they were given priveleges; pure speculation on my part. Point is, the 1918 Act or collusion between producers doesnt explain the rapid rise in prices. All cartels / collusions / market manipulations can be thought of only if there is a fundamental short supply.

Some legal experts think that law has outlived its usefulness. "It's an obscure act that's moribund," says Jim Mongoven, an attorney in the FTC's Bureau of Competition.

In India, the head of one of India's largest buyers of fertilizer is appealing to the United Nations for help. "The fertilizer prices are artificially going up due to the manipulation of traders and suppliers," said Udai Shanker Awasthi, president of Indian Farmers Fertilizer Co-operative Ltd., in an interview Friday. Chidambaram too complained about a year ago, I think it was in Davos, that the Middle East countries were manipulating the price af oil and jeopardizing development of the poorer countries; fear of facing reality and slithering into denial hamper the ability of folks to face reality. Result of that denial is a Rs. 200000 Crore Deficit staring into his face with less than a year for the elections. Who is the loser?

China, after initial protests, recently agreed to pay $576 per ton of potash, up $400 from its previous deal in 2007, to Canpotex, a potash export cartel protected by an exemption in Canada's Competition Law.

In March, Russian antimonopoly regulators required the country's largest potash maker, Uralkali, to cut domestic prices of the plant nutrient after wrangling with the company over its pricing behavior in court. Brazil's government is considering nationalizing the country's fertilizer deposits to help reduce farmers' production costs.

Helped by soaring potash prices, Potash Corp. of Saskatchewan Inc., one of the companies that make up Canpotex along with Minnesota-based Mosaic Co. and a smaller Canadian producer called Agrium Inc., posted first-quarter net income of $566 million, or $1.74 a diluted share, nearly triple the year-earlier figure. The company's stock has risen nearly eightfold to around $200 from about $25 three years ago. For those interested in Peter Lynch’s multi-baggers there couldn’t have been an easier eight-bagger Mosaic's latest quarterly earnings came in at $520.8 million, up more than 10-fold from a year earlier.

Phosphate, a mineral found in fossilized marine life, provides essential nutrients for plant-cell development, while potash, a rock mined from the earth, helps plants grow strong. Prices of both are climbing faster than those of nitrogen, which is manufactured in a process that requires lots of natural gas.

In North America, nitrogen fertilizers are applied liberally to corn and wheat fields. Urea, a nitrogen-carrying fertilizer, is selling for around $600 a ton, twice the price a year ago, mostly because of a steep run-up in natural-gas prices. 94% correlation between nat gas and fert prices
The price of phosphate has climbed to about $1,000 a ton, up from $365 last year, according to Green Markets, a trade publication, while the price of a ton of potash is now more than $700, up from $230. people have talked about the visibility of bell curves in potash and phosphates in the not too distant horizon

Industry executives say their companies are trying to ramp up production by making their mines run more efficiently, but there are few new mines on the drawing board.

Michael R. Rahm, vice president of market and economic analysis at Mosaic, said his company's prices are a true reflection of supply and demand. "The industry was not equipped to deal with the surge" in demand, he said. Still, he said he understands how farmers might be concerned as prices continue to rise. Once again it is not so much the surge in demand as the supply constraints; wrong framing of the issue. It isn’t a problem necessarily.

Bill Doyle, chief executive of Potash Corp., told investors in April on a conference call about quarterly earnings that buyers could soon be paying $1,000 a ton for potash. He added during the call that continued price rises will "be a shock" to some consumers.

In an interview Monday, Mr. Doyle called recent complaints about prices an emotional reaction. Fertilizer prices began rising in earnest about a year ago after a nearly decadelong period of stability. "People don't like higher prices," Mr. Doyle said. But "you never hear from anyone complaining when prices are low."

Mr. Doyle said he welcomes any investigation into his business but added that regulators will come to realize that the higher prices are "a pure function of the marketplace."

Outside analysts say the industry has plenty of supply. Even today there are registered members of the Flat Earth Society!!! "There's not really a supply issue at the moment," said Steve Jesse, an agriculture economist at Rabobank Group of the Netherlands, a large lender to agribusiness around the world. The U.N.'s Food and Agriculture Organization said in a forecast in February that the world's supply of nitrogen, phosphate and potash is "comfortably sufficient to cover demand growth" through at least 2012. markets do price in constraints (at times) beyond a 4 year time-frame

Chemical fertilizers are so effective in raising crop yields that I think he WSJ is missing the word “few” here economists figure farmers would be able to feed billions fewer people without them. Fewer than a dozen countries have substantial potash reserves, while more than 160 countries consume the fertilizer.

“This is a basic problem, to feed 6.6 billion people,” said Norman Borlaug, an American scientist who was awarded a Nobel Peace Prize in 1970 for his role in spreading intensive agricultural practices to poor countries. “Without chemical fertilizer, forget it. The game is over.”

Fertilizer manufacturers say they intend to focus on increasing the productivity of their existing mines. Mosaic, in which Cargill Inc. of Minneapolis holds a controlling stake, said it plans to "de-bottleneck" some of its Florida phosphate mines to boost supply.

Phosphate Mining
Potash Corp. said it can raise production to 15.7 million tons by 2015 from its current capacity of 10.2 million tons by improving the operation of its existing mines.
Opening a new potash mine can cost more than $2.5 billion and take about seven years, the company said.

"Developing new production takes a long time, a lot of money, and an expertise that few possess," Potash Corp.'s Mr. Doyle recently told investors.

In the U.S., Potash Corp. and Mosaic are the sole surviving members of a phosphate export cartel called the Phosphate Chemicals Association. Under a 90-year-old law designed to promote American exports, the companies are allowed to legally market and sell their product overseas as a single entity at a price set in consultation with one another. Similarly, Canada has Canpotex, and Russia has Belarus Potash Co., another export cartel.

While the individual cartels can't legally collaborate among themselves on pricing, they regularly -- and legally -- follow each others' price increases. After the Russian cartel recently said potash prices would rise to $1,000 a ton, Potash Corp.'s Mr. Doyle said Canpotex would soon match that price.

Denis Evstratenko, a UBS metals and mining analyst, said the cartels have little incentive to undercut one another in the current supply constrained environment.

To protect American consumers, members of the U.S. cartel are required by law to compete against each other in selling their wares at home. But in today's global markets, the global price sets a benchmark so American farmers pay essentially what the cartels dictate.

"That's the whole key that we're running into this year," said John Hawkins, a spokesman for the Illinois Farm Bureau. "The barriers that we have seen in the past between domestic and international prices have just fallen down. We're now participating in a global fertilizer market." In a world plagued by energy shortages, rising prices of energy will feed into other markets and drive prices up everywhere.

--Vibhuti Agarwal and Scott Kilman contributed to this article.
Write to Lauren Etter at

Peru Guards Its Guano as Demand Soars Again

Wars have been fought over Guano, aka birdshit. Some of these wars shaped political maps with lasting consequences for regional and world geopolitics and history as well as science in an abstruse way.

Published: May 30, 2008

ISLA DE ASIA, Peru — The worldwide boom in commodities has come to this: Even guano, the bird dung that was the focus of an imperialist scramble on the high seas in the 19th century, is in strong demand once again.

Tomas Munita for The New York Times
Workers collect guano on Isla Guañape off Peru, which conserves the resource to prevent depletion. Guano's status as an organic fertilizer has increased demand.

Peru's Guano Trade
The New York Times

Surging prices for synthetic fertilizers and organic foods are shifting attention to guano, an organic fertilizer once found in abundance on this island and more than 20 others off the coast of Peru, where an exceptionally dry climate preserves the droppings of seabirds like the guanay cormorant and the Peruvian booby.

On the same islands where thousands of convicts, army deserters and Chinese indentured servants died collecting guano a century and a half ago, teams of Quechua-speaking laborers from the highlands now scrape the dung off the hard soil and place it on barges destined for the mainland.

“We are recovering some of the last guano remaining in Peru,” said Victor Ropón, 66, a supervisor from Ancash Province whose leathery skin reflects his years working on the guano islands since he was 17.

“There might be 10 years of supplies left, or perhaps 20, and then it will be completely exhausted,” said Mr. Ropón, referring to fears that the seabird population could be poised to fall sharply in the years ahead. It is a minor miracle that any guano at all is available here today, reflecting a century-old effort hailed by biologists as a rare example of sustainable exploitation of a resource once so coveted that the United States authorized its citizens to take possession of islands or keys where guano was found.

As a debate rages over whether global oil output has peaked, a parable may exist in the story of guano, with its seafaring treachery, the development of synthetic alternatives in Europe and a desperate effort here to prevent the deposits from being depleted.

“Before there was oil, there was guano, so of course we fought wars over it,” said Pablo Arriola, director of Proabonos, the state company that controls guano production, referring to conflicts like the Chincha Islands War, in which Peru prevented Spain from reasserting control over the guano islands. “Guano is a highly desirous enterprise.”

Guano is also an undeniably strenuous enterprise from the perspective of the laborers who migrate to the islands to collect the dung each year. In scenes reminiscent of open-pit gold mines on the mainland, the laborers rise before dawn to scrape the hardened guano with shovels and small pickaxes.

Many go barefoot, their feet and lower legs coated with guano by the time their shifts end in the early afternoon. Some wear handkerchiefs over their mouths and nostrils to avoid breathing in guano dust, which, fortunately, is almost odorless aside from a faint smell of ammonia.

“This is not an easy life, but it’s the one I chose,” said Bruno Sulca, 62, who oversees the loading of guano bags on barges at Isla Guañape, off the coast of northern Peru. Mr. Sulca and other workers earn about $600 a month, more than three times what manual laborers earn in the impoverished highlands.

Peru’s guano trade quixotically soldiers on after almost being wiped out by overexploitation. The dung will probably never be the focus of a boom as intense as the one in the 19th century, when deposits were 150 feet high, with export proceeds accounting for most of the national budget.

The guano on most islands, including Isla de Asia, south of the capital, Lima, now reaches less than a foot or so. But the guano that remains here is coveted when viewed in the context of the frenzy in Peru and abroad around synthetic fertilizers like urea, which has doubled in price to more than $600 a ton in the last year.

Guano in Peru sells for about $250 a ton while fetching $500 a ton when exported to France, Israel and the United States. While guano is less efficient than urea at releasing nitrates into the soil, its status as an organic fertilizer has increased demand, transforming it into a niche fertilizer sought around the world.

“Guano has the advantage of being chemical-free,” said Enrique Balmaceda, who cultivates organic mangoes in Piura, a province in northern Peru. “The problem is, there isn’t enough of it to meet demand with new crops like organic bananas competing for what’s available.”

That explains why Peru is so vigilant about preserving the remaining guano, an effort dating back a century to the creation of the Guano Administration Company, when Peru nationalized the islands, some of which were British-controlled, to stave off the industry’s extinction.

Since then, Peru’s government has restricted guano collection to about two islands a year, enabling the droppings to accumulate. Workers smooth slopes and build walls that retain the guano. Scientists even introduced lizards to hunt down ticks that infested the seabirds. We don’t know if the law of unintended consequences will suddenly rear its head there

The guano administrators station armed guards at each of the islands to ward off threats to birds, which produce 12,000 to 15,000 tons of guano a year. Armed guards guarding bird-shit??

“The fishermen instigate the most mischief here,” said Rómulo Ybarra, 40, one of two guards stationed at Isla de Asia, which otherwise has no regular inhabitants. (The island has a tiny cabin called Casa del Chino, a reference to the Asian ancestry of former President Alberto K. Fujimori, who used to come here to unwind in solitude.)

“When the fishermen approach the island, their engines scare away the guanay,” Mr. Ybarra said, referring to the prized guanay cormorant. “And further out at sea, the fishing boats pursue the anchoveta, something we cannot control.”

The anchoveta, a six-inch fish in the anchovy family, is the main food of the seabirds who leave their droppings on these rainless islands. The biggest fear of Peru’s guano collectors is that commercial fishing fleets will deplete their stocks, which are increasingly wanted as fish meal for poultry and other animals as demand for meat products rises in Asia.

While the bird population has climbed to 4 million from 3.2 million in the past two years, that figure still pales in comparison with the 60 million birds at the height of the first guano rush. Faced with a dwindling anchoveta population, officials at Proabonos are considering halting exports of guano to ensure its supply to the domestic market.

Uriel de la Torre, a biologist who specializes in conserving the guanay cormorant and other seabirds, said that unless some measure emerged to prevent overfishing, both the anchovetas and the seabirds here could die off by 2030. complexity at play – human population increase led poultry demand leads to poultry feed demand leads to fish meal demand leads to overfishing leads to diminished prey for seabirds leads to them shitting less leads to less guano leads to less fertilizer for human domesticated weeds like wheat and rice leads to less grains & food for humans leads to human population ____________?

“It would be an inglorious conclusion to something that has survived wars and man’s other follies,” Mr. de la Torre said. “But that is the scenario we are facing: the end of guano.”

Andrea Zarate contributed reporting from Lima, Peru.

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