Why did fertilizer prices spike in 2008?

The ACCC investigated the rise in prices in 2008 and released a report (available on the ACCC's web site ) which concluded:

“The significant rises in fertiliser prices in Australia are mainly attributable to rapidly increasing global fertiliser prices. These increases have been caused by a substantial increase in world demand for fertilisers associated with an expansion in agricultural production (particularly grains for food, feed for livestock and bio-fuels) and by rises in costs of production associated with the increasing cost of energy. This is occurring in a market where the global supply capacity is limited in the short-to-medium term.” 

Whilst this period of volatility is over ten years ago, the questions raised remain relevant to understanding how the market operates.

Why were prices quick to rise in 2008, and slow to fall in 2009?

The speed with which international prices are reflected in the Australian market is determined by seasonal demand, supply lead time, inventory levels and competitive pressures. When prices fell in 2009 many companies had significant inventory in storage, purchased at higher prices and therefore kept their domestic prices up. When competitors dropped prices many companies were then forced to write down millions of dollars on inventory that was now worth less than they paid for it.

Why couldn't I buy fertilizer when I could see it in the sheds?

Fertilizer is sold under many different contractual arrangements which may include pre-purchase schemes. This means that at some times of the year fertilizer in storage has already been sold but not yet delivered.

Single super must spend time curing after manufacture before the chemical reactions are complete and it becomes hard enough to survive handling. Stockpiles at single super plants may be of “green super” not yet suitable for sale.

When is a purchase agreement binding?

The pricing volatility and subsequent product availability issues in 2008-9 highlighted the lack of clarity on fertilizer purchase agreements throughout the supply chain. In response, Fertilizer Australia developed the Fertilizer Industry Standard Contract which clearly sets out the rights and responsibilities of both buyer and seller.

Some companies will use the Standard Contract and some will use their own. However, the Standard Contract provides a good reference point to understand the issues that should be covered so that both buyer and seller have a clear understanding of what has been agreed and what the remedy should be if things go wrong.

Why can't I buy fertilizer from the point of production in Australia?

This is a commercial decision by the manufacturers based on their analysis of demand and the cost of providing retail despatch facilities. There are several examples in Australia where product can be picked up at the point of manufacture, these include single super at Kwinana (WA) and Portland (VIC) and Urea at Gibson Island (QLD).

How can you say there's competition when prices fell only when other players entered the market?

Whilst there is strong competition in the Australian market it is still possible to have circumstances such as occurred in late 2008 where all the suppliers had high priced inventory in stock and the differential between Australian and world prices becomes larger than normal.

This is rational competitive behaviour, equally rational is that if this gap becomes too great it is an opportunity for new entrants or opportunistic traders to take advantage of. The Australian market is open and competitive, so once cheaper product becomes available, market forces will usually result in prices falling in line with the new benchmarks. This can result in significant losses as companies are forced to write down the value of their stock in inventory.