Are Illinois agricultural retailers increasing their margins for anhydrous ammonia over time? • daily farmdoc
Periods of high nitrogen fertilizer prices draw attention to companies that manufacture nitrogen fertilizer and to retailers that sell nitrogen fertilizer. There are four major nitrogen fertilizer companies in North America (see daily farmdoc, April 5, 2022). Typically, retailers and agricultural businesses purchase fertilizer in bulk from manufacturers, then transport, store, and distribute the fertilizer to farmers. In some cases, farmers can purchase fertilizer directly from manufacturers. During periods of high nitrogen fertilizer prices, manufacturers come under increased scrutiny for potential monopoly prices (see daily farmdoc, April 13, 2022). Agri-retailers who mediate between the company and the farmer are likely also subject to scrutiny from their customers and the public. This article investigates whether agricultural retailers in Illinois have increased their margins for anhydrous ammonia over time, particularly during periods of high nitrogen fertilizer prices. We find that the difference between the agricultural retail price in Illinois and the fertilizer terminal price remains relatively stable from 2008 to 2022.
Difference Between Spot Price and Retail Price, 2008 – 2022
Figure 1 shows the retail price of anhydrous ammonia in Illinois and the spot price of ammonia in New Orleans from 2008 to 2022. The retail price of nitrogen fertilizer in Illinois comes from from the Illinois Cost of Production Report, a USDA Ag Marketing Service survey for Illinois. The first year of the survey is 2008. The New Orleans Spot Price is Bloomberg’s New Orleans Anhydrous Ammonia Price and is often taken as the price charged by fertilizer manufacturers. The lower Mississippi Delta is the location of several fertilizer manufacturers. The difference between the Illinois retail price and the New Orleans spot price is a marketing margin, covering the costs of transporting, storing and marketing the anhydrous ammonia. The marketing margin would also include any profit that fertilizer retailers receive from sales of anhydrous ammonia.
Over time, the margin averaged $266 per ton. Typically, the margin varies between $200 and $350 per ton. Sometimes the price difference is much bigger. For example, the difference reached $760 per ton in December 2008. This difference occurred when the New Orleans price fell and the Illinois retail price did not fall as quickly. Margins were much more variable from the second half of 2021 to the first half of 2022, as anhydrous ammonia prices were very erratic. Given history as a guide, the recent decline in New Orleans spot prices to $907 per tonne in June will be associated with a reduction in retail prices if the New Orleans price decline persists.
The two price series are highly correlated, with a correlation of 0.88. Over time, there is little evidence of persistent variations in margin prices. Adding a trend line shows that the price difference is basically flat for the time period, and even has a slight negative slope (see Figure 2). Agricultural transporters and retailers have costs to cover from the margin, such as storage costs, labor costs, transportation costs, equipment costs, and risks associated with storing the fertilizer. A return for retailers must also be included in the margin. Over time, total costs and returns have not changed.
Potential Reasons for Stable Price Difference
Examination of the data leads us to examine the reasons why agricultural retailers in Illinois do not increase the difference between the spot price and the retail price over time. One reason could be competition in the Illinois agri-retail market. In 2021, Illinois had 369 registered custom fertilizer blenders (Illinois Department of Agriculture, 2021). Although some may be owned by a larger parent company and probably not all retailers are on this list, there are still a number of companies that sell fertilizers in Illinois. Many Illinois farmers have more than one business to choose from within a close geographic radius. Another factor to consider is when and how much fertilizer retailers purchase. Retailers bear the price risk when purchasing fertilizers. They probably buy the fertilizer when prices are lower, store it, and then sell it during times of high demand, such as fall and spring, when prices are generally higher. Another point to consider is that this is not the actual profit margin of the companies, so other costs such as transport, storage, labor and marketing should be subtracted from this margin. Agricultural retailer margins could have increased over time, with the increases masked by declines in these other margin contributing factors.
Often, during periods of high nitrogen fertilizer prices, companies face increased public scrutiny regarding prices. We find that this is not the case for agricultural retailers in Illinois, as the spread between the spot price and the retail price remains stable from 2008 to 2022. Nitrogen fertilizer is a commodity and the risks prices are associated with the buying and selling of this commodity for all parties. involved.
Bloomberg LP “US Gulf NOLA Ammonia Spot Price.” Bloomberg FinishedI. Bloomberg 2022.
Illinois Department of Agriculture. 2021. “Custom Blenders Registered in Illinois.” https://www2.illinois.gov/sites/agr/Plants/Fertilizer/Pages/Fertilizer-Reports.aspx
Schnitkey, G., N. Paulson, C. Zulauf, K. Swanson, J. Colussi, and J. Baltz. “Pricing and Supply of Nitrogen Fertilizers in Light of the Ukraine-Russia Conflict.” daily farmdoc (12):45, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, 5 Apr 2022.
USDA-IL Department of Agriculture Market News Service. Illinois Cost of Production Report (Bi-weekly). https://mymarketnews.ams.usda.gov/viewReport/3195
Zulauf, C., G. Schnitkey, K. Swanson, and N. Paulson. “Monopoly Pricing Power and Fertilizer Prices.” daily farmdoc (12):50, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, 13 Apr 2022.