Last week there was some excitement in New Zealand over a reduction in superphosphate prices by about 20%.  Both Ballance and Ravensdown dropped their price from about the same level, by about the same amount, at about the same time ("Fertiliser co-ops get in the Christmas spirit" Scoop.co.nz 3 December 2009).  Prices for other fertiliser staples - urea, DAP and potash - remained unchanged.

Here at Xcheque we watch these things very closely and, despite the obvious benefit to farmers of this recent price drop, just can't get enthusiastic about the prices and pricing of fertiliser in Australia and New Zealand.  It became even more galling when in the same week both New Zealand and Australian fertiliser distributors warned of upside risk in pricing in 2010 ("Fertiliser price cuts come with warning" Neal Wallace, Otago Daily Times, 3 December 2009 |"Fertiliser prices tipped to rise" Ray Chan, Farm Weekly, 4 December 2009).

Herein lies a story about marketing techniques, management performance, and shareholder value.  The interesting sub plots are in the value of co-ops and competition.  It's a complicated issue and deserves a longer discussion but I thought I would fire the opening salvo.

So what's the real story here?

At the risk of gratuitous promotion of our subscriber services, Xcheque monitors international fertiliser pricing as well as local Australian and New Zealand pricing.  We have a long history of data that shows the correlations between international and local prices and there is a very clear relationship.  Over time the local price = the international price + freight + trading margin.You can get an indication of this in the Dairy Australia Situation and Outlook Reports.  On page 69 of their full report for 2009 you will find our analysis and a chart showing the price index for a typical NPK "dairy fertiliser mix".   This index tracks the international price and the corresponding price in Australia and New Zealand.  The index clearly shows the dramatic price rise until September 2008 and the subsequent fall triggered by the GFC.

As it stands international fertiliser prices (in US dollars) are now back to about where they were in March 2007 - just before prices kicked away.  The weakening of the US dollar has meant that in Australian dollar terms our international index is back to the same level as it was during the period from late 2004 to early 2007 - a period of relative stability (for international prices at least).  The index for New Zealand hasn't fallen quite as much (their currency hasn't strengthened as much as Australia) but is none-the-less back to the pre-boom level.  The absolute changes in price and international comparisons vary a little between N, P, and K but the story is pretty much the same

Earlier this year we were very critical of Australian fertiliser manufacturers and distributors for their failure to pass on falls in price.  Nitrogen prices in particular fell dramatically in October / November 2008 but it took until May / June 2009 before the local Australian price came into alignment.  This all came at a time when an Australian Senate enquiry was investigating the 07/08 rise in fertiliser prices ("Probe slams fertiliser pricing" David McKenzie, Weekly Times, 21 August 2009).  Amongst other things the Senators called for transparency of international and local pricing and independence of reporting - Hey Canberra, here we are ... and we're doing it!!

Back when Australian suppliers were dragging their feet on price reductions we were very complimentary of the NZ fertiliser market.  Prices there had been very constrained during the rise of 07/08 and dropped quickly after the crash.  They were even ahead of the curve in January / February this year.  The data pointed to the benefits of co-ops and competition in contrast to the Australian situation of a very dominant former co-op turned public company.

Well that all changed.  After May, New Zealand fertiliser prices stopped dead in their tracks, despite ongoing falls in international prices, and despite the recovery of the NZ dollar and their terms of trade.  By our accounting fertiliser prices are 20 - 30% higher than they should be - even after the recent price drop.

Meanwhile Australian prices have continued their inexorably slow fall to international parity.  We are still dragging the chain (10 - 20% above historical norms) but at least the trend is in the right direction.

I'll throw into this news and information mix the reported losses by Ballance NZ for 08/09 ("Ballance in red with write-down" Neal Wallace, Otago Daily Times, 10 August 2009). There were losses as well for Incitec Pivot in Australia ("Incitec Pivot swings to full-year loss on Dyno Nobel write-down" Rebecca Thurlow, The Australian, 16 November 2009).  In the case of Incitec they actually had a very healthy operating profit of $180 million but wrote off a huge slab of money on one of their recent overseas explosives investments.  Ravensdown who operate in both Australia and New Zealand had no such problems reporting a profit for the year "Ravensdown shareholders still get slice of profits after sales slump" Robert Smith, National Business Review, 28 July 2009).

I believe the point is made about international price parity and I'm sure there are lots of good reasons that the management of these companies can provide for why prices have not fallen as far as we might like but the bottom line is that farmers are paying for this - get your act together.  Furthermore, I'm struggling with the current gap in historical price parity and so the message that prices could rise next year is not what we need to hear.  Of course they are going to rise and so can we please have some of the benefit of the low international prices and high AUS / NZ dollar ... now ... please.

And finally what does all this say about the value of co-ops and competition?  Well quite frankly not much.  We might have to go looking elsewhere to demonstrate the importance and benefit of those economic institutions and principles.