Month: September 2013

Ohio Budget Bill Changes Property Tax Rollbacks

by Larry Gearhardt, OSU Field Specialist, Taxation

Every two years, the Ohio General Assembly has the formidable task of passing a biennial budget for the state. Unlike the federal budget, the budget for Ohio is required to be a balanced budget. This year, H.B. 59 was passed and signed by the Governor on July 1. This budget will take Ohio through 2014 and into 2015.

Ohio’s budget contains numerous tax provisions that affect taxpayers. For example, the state sales tax was increased from 5.5% to 5.75%. The state income tax rate was decreased by 10%. The Commercial Activity Tax (CAT) was removed from the sale of motor fuels and replaced by a new motor fuels tax. But perhaps the most impact will be felt by landowners with the eventual elimination of the ten percent and two and one-half percent real property tax rollbacks. The Homestead Exemption was also adjusted.

Since 1971, Ohio’s landowners have enjoyed a ten percent reduction in total real property tax on non-business property (with the exception of farming, which is considered non-business use for this reduction) and a two and one-half percent reduction in the tax due on the value of an owner occupied home. These rollbacks were passed to lessen the opposition of Ohio voters to the adoption of a state income tax. The state has been reimbursing local governments for the lost revenue, which in 2012 totaled $1.7 billion.

This year’s biennial budget contains language which phases out these reductions. The new law says that the ten percent and two and one-half percent rollbacks will no longer apply to new levies that are enacted after August 31, 2013. These non-qualifying levies include any additional levies, the increase portion of any renewal levy that contains an increase, and the full effective millage of replacement levies. Levies that will continue to qualify for application of the rollbacks are levies approved at or before the August 2013 election, inside millage and charter millage as they appear on the 2013 tax list, renewals of qualified levies (i.e. those without an increase), and the substitute of qualified school district emergency levies under Revised Code section 5705.199.

In order to avoid confusion by the taxpayer, the nomenclature will be changed on the tax bills. The ten percent rollback will now be called the “Non-business Credit” and the two and one-half percent rollback will be referred to as the “Owner Occupancy Credit.” This change is necessary because the implementation of these changes will reduce the ten percent and the two and one-half percent rollbacks over time so that the landowner will not be receiving a full ten percent and two and one-half percent reduction. The new terms have been taken directly from H.B. 59.

The Homestead Exemption has also been adjusted and will now become a means-tested exemption. Under the old law, any Ohio landowner who currently lives in their home and that home is their primary residence, qualifies for an exemption if:
• He is at least 65 years old or will reach age 65 during the current tax year; or
• He is certified totally and permanently disabled, regardless of age; or
• Is the surviving spouse of a qualified homeowner, and who was at least 59 years old on the date of the spouse’s death.

Eligible homeowners were able to shield $25,000 worth of the market value of their home from local property taxes. Beginning with the tax year 2014, new participants in the homestead exemption program will be subject to a means test. The exemption will only be available to those otherwise eligible taxpayers with household incomes that do not exceed $30,000, as measured by Ohio adjusted gross income for the preceding year. That amount will be indexed to inflation each fall and is expected to be around $30,400 for tax year 2014. Existing homestead exemption recipients will continue to receive the credit without being subject to the income test.

It is important to note that in order to be exempt from the means test, the homeowner must actually receive a homestead exemption credit for tax year 2013. This means that a homeowner who is not receiving the homestead exemption credit for tax year 2012 must file an application by June 2, 2014 to secure the exemption for tax year 2013. Otherwise, the homeowner will be subject to the income test for all future years.

Homeowners who received a homestead exemption credit for tax year 2013 will never be subject to the income requirement even if they move to another Ohio residence. In other words, the grandfather status is “portable” and is associated with the individual alone, rather than with a particular residence.

Employer Notice to Employees Due October 1, 2013 Under Affordable Care Act

by Larry Gearhardt, OSU Field Specialist, Taxation

An important notice requirement for employers is fast approaching under the Affordable Care Act. Employers who are subject to the Fair Labor Standards Act (FSLA) are required to provide a notice to their employees of the availability of insurance coverage under the ACA exchanges. This notice is due October 1, 2013. An excellent explanation of this notice requirement appeared in the August 22, 2013, edition of TAXPRO WEEKLY and is reprinted below.

Notice of Coverage to Employees
The Affordable Care Act (ACA) requires employers to provide all new hires and current employees with a written notice about ACA’s Health Insurance Marketplace, or exchanges, by October 1, 2013. This requirement is found in Section 18B of the Fair Labor Standards Act (FLSA). ACA’s exchange notice requirement applies to employers that are subject to the FLSA. Employers must provide the exchange notice to each employee, regardless of plan enrollment status or part-time or full-time status. Employers are not required to provide a separate notice to dependents or other individuals who are or may become eligible for coverage under the plan but who are not employees. Employees hired after October 1, 2013, must be provided this notice within 14 days of the employee’s start date.

The exchange notice should inform employees about the existence of the exchange and describe the services provided and the manner in which the employee may contact the exchange to request assistance. The notice should also explain how employees may be eligible for a premium tax credit or a cost-sharing reduction if the employer’s plan does not meet certain requirements. The notice must also inform employees that if they purchase coverage through the exchange, they may lose any employer contribution toward the cost of employer-provided coverage, and that all or a portion of this employer contribution may be excludable for federal income tax purposes. The notice should include contact information for the exchange and an explanation of appeal rights. The Department of Labor has provided two sample exchange notices, one for employers who offer a health plan to some or all employees and one for employers who do not offer a health plan.

Employers may use one of these models, as applicable, or a modified version, provided the notice meets the content requirements described above.
Featured in TAXPRO Weekly – August 22, 2013

WHICH EMPLOYERS ARE SUBJECT TO THE FAIR LABOR STANDARDS ACT?
If employers subject to the Fair Labor Standards Act are required to give the notice, the question then becomes, “Am I subject to the FLSA?”

The FLSA establishes minimum wage, overtime pay, recordkeeping, and child labor standards affecting full-time and part-time workers in the private sector and in Federal, State, and local governments. The FLSA is a very complex and extensive law. For the purposes of this article, the discussion about the FLSA is general in nature and readers are advised to consult with professionals to determine if the FLSA applies to them.

There are two ways that an employer can be subject to the FLSA: “enterprise coverage” and “individual coverage.” An “enterprise” is covered if it has an annual dollar volume of sales or business done of at least $500,000 and employs another person other than a family member. An “individual” is covered if their work regularly involves them in interstate commerce. The FLSA covers individual workers who are “engaged in commerce or in the production of goods for commerce.”

Agriculture is considered an industry that is included in interstate commerce. However, agricultural employers are exempt from the minimum wage and the maximum hour limitations if the employer used less than 500 “man-days” of farm labor in any calendar quarter of the preceding calendar year. A “man-day” is considered any day that an employee worked one hour or more during a day. Special rules apply to agricultural employers that use farmworkers who are paid on a piece rate basis.

It is unlikely that agricultural employers will be subject to the October 1, 2013, notice requirement to employees because of the foregoing exemptions. However, if there is any question whether or not the employer is subject to the Fair Labor Standards Act, it is highly recommended that the employer consult with a professional.

Refrains in the phosphorus discussion

Brent Sohngen, AED Economics, Ohio State University
September, 2013.

When talking about how we regulate phosphorus, I hear the same refrains over and over again.

The first one goes something like this: We have solved the attached P problem, now we just have to find the right tools to solve the soluble P problem. These tools invariably include things like reducing winter manure applications, the 4 Rs, cover crops, trapping nutrients in-stream with two-stage ditches, etc.

The second one is: Phosphorus inputs have been declining since the 1970s. Isn’t this evidence that farmers are doing their share to reduce the pollution problem?

Absolutely, there is truth to each of these, but my take on the policy lessons and the implications for what we should do next are completely different than most others (go figure).

Let’s look more closely at the attached P problem we have “solved.” One of the vexing problems with phosphorus in watersheds is that it is so persistent. We have added a lot over the years to our crop systems, and our crops have only used about 40% of what we have added in the past 40 years (Figure 1). The rest remains in the ecosystem or is removed by our rivers. The problem of course, is the part that is removed by our rivers and ends up in our lakes, particularly in soluble form.

Is it?

By my calculation, we have accumulated an astonishing 300 lbs of P per acre of farmland in the Maumee river basin (Figure 2). Using a conversion of 2 lbs of P per 1 ppm, this means that about 150 ppm is attached to soils somewhere in the ecosystem, whether it’s in farmer’s fields, or stream banks, or other parts of the ecosystem in NW. The results probably are not that much different across most other parts of the state or region.

Most of this P is unavailable right now to crops, given that soil tests in Northwest Ohio soils are in the 30-40 ppm P range for available P according to Hermann (2011). Converting to pounds, around 60-80 lbs. P per acre are available for crops, which is actually more than the 25-35 lbs. P (60-80 lbs P2O5) that farmers add to each acre of corn each year. Of these, 15-21 lbs. are removed in crops each year, leaving 10-14 lbs P in stalks and soils, to be further distributed in the ecosystem during the non-growing season.

These numbers are probably an under-estimate of what is left in the ecosystem actually. I have left out inputs due to animal manure. According to Bruuselma et al. (2011), manure P inputs are about 31% of chemical P inputs, so my P input estimate is actually underestimated by quite a lot.

The issue to me is that our effectiveness at trapping P has left a lot of P out there in the ecosystem for us to deal with today. I agree that reducing P inputs will not solve this historical problem right away, but neither will our efforts to continue to trap additional nutrients via our traditional conservation programs. Even supposedly new conservation methods that do nothing more than trap P will not solve the problem, now or in the future.

Now, consider the refrain about declining P input trends. Figure 1 clearly shows that chemical P inputs have declined since their highs of the mid-1970s. In addition, P removal by crops has continued to increase as yields have increased. Removals by the river have fluctuated, but stayed relatively stable in overall terms. River removal is a fairly small part of the total.

So we have added lots of P, but we are adding less and less and our crops are taking up more and more. That’s essentially the point Bruuselma et al. (2011) made, although they suggested that we were nearing the point where P inputs needed to start rising again in order to maintain crop yields.

The question really is, why have we been adding less and less? There are lots of reasons, and I’ll just mention the two most important. First, the aggregate numbers reported by me and others capture corn, soybeans, and wheat. Since the mid-1970s Northwest Ohio has increased soybean acres and reduced corn and wheat acres. Historically only about 34% of soybean acres receive P treatments, compared to over 90% for wheat and corn. And the rates are about 40% less for soybeans than corn. So, in the last 40 years, we have shifted to a less P intensive crop in NW Ohio and it has slowed our overall P application.

Second, looking at the individual crops, P application rates fell modestly from the 1970s to the early 2000s for corn, but actually rose a bit for soybeans and wheat. Then between 2006 and the present, P application rates fell for all crops, and by quite a lot. You can see this in Figure 1 where P inputs have fallen substantially overall. This could be the effect of growing concerns with the environmental effects of P, but I doubt it. The other “thing” that happened after 2005 was a really large increase in P input prices (Figure 3).

Based on this, I’m inclined to believe that the reduction in P inputs from the 1970s to early 2000s was largely driven by crop switching, while the reduction from 2005 to the present was mostly driven by rising prices. Nothing guarantees that these two trends will last forever. In fact, lower energy prices with hydraulic fracturing, or fracking, may drive down the price of P to “normal” levels. This will lead to increases in P use by farmers.

In summary, my concerns with the refrains I keep hearing and my responses are as follows:

(1) I agree, we have done a great job of trapping P in our soils and our ecosystem. Was this really such a good idea? There are really large levels of P out there somewhere in the ecosystem and they are likely to be contributing to our current problems. Should we continue trying to trap P in the ecosystem or should we just reduce P inputs? In addition to filter strips, riparian zones, and conservation tillage, cover crops and two-stage ditches are another form of trapping. I fail to see how more P trapped in the ecosystem equates with better environmental outcomes in the future.

(2) There is no reason why farmers will not go back to increasing P applications when P prices fall. This is particularly true if P applications enhance yields. I believe they do, after all yields have stagnated since the early 2000s at precisely the time when P applications fell the most.

(3) Philosophically, the more we believe in trapping, the less incentive we have to reduce P inputs or even economize on them (i.e., use the 4R’s), especially when prices for P fall.

(4) The 4 R’s are an outstanding guidepost. In fact, the reason why farmers have been receptive at all to the 4 R’s in recent years is that P prices have been so high. When an input is valuable, people don’t waste it. The 4 R’s exhort people not to waste their inputs.

(5) Going forward, the best way to enforce a broad-based application of the 4 R’s is with a tax on P inputs. Then everyone will have an incentive to use the 4 R’s even when P prices fall. Otherwise, as P prices fall, which they probably will, P applications will start to rise again. For completely different reasons, Bruuselma et al. (2011) advocate that P applications should start to increase as farmers use up the chemically available portion in farm fields. With a tax on P, we can ensure that this is done in an environmentally sensitive way.

(6) You will notice here that I fully accept the notion that reducing P will have an impact on crop yields. There is no free lunch. If we want to reduce P in our ecosystems, someone somewhere will have to pay. Right now, the system is set up so that society pays for lots of things that don’t solve the problem through conservation programs. My proposal clearly redistributes the costs towards farmers through taxes on inputs.

(7) To avoid having this be a large financial loss to farmers, I propose using some of the money in the conservation programs, and just simply giving that money to farmers in order to make them financially whole from the higher input taxes. This is the most efficient way to handle a pollution problem, and neither farmers nor society will be worse off than they are now. In fact, both will be better off in the future with better water quality.

References:

Bruuselma, T. W., R. W. Mullen, I. P. O’Halloran, and D. D. Warncke. 2011. “Agricultural phosphorus balance trends in Ontario, Michigan and Ohio.” Canadian Journal of Soil Science 91:437-442.

Heidelberg University. 2012. National Center for Water Quality Research.
http://www.heidelberg.edu/academiclife/distinctive/ncwqr

Hermann, MC. 2011. “ Laboratory Evaluation and Soil Test Phosphorus Trends in Ohio” Unpublished Master’s Thesis, School of Environment and Natural Resources, Ohio State University.

USDA-NASS. 2013. US Department of Agriculture, National Agricultural Statistics Service Quickstats database. http://www.nass.usda.gov/Quick_Stats/

World Bank Data. 2013. http://data.worldbank.org/

 
Click here to acces the entire article including Figures.

Farm Oil Spill Prevention Plans: Required or Not?

Confusion at Federal Level Leaves Farmers Unsure of SPCC Rule Compliance      Peggy Hall, Asst. Professor, OSU Extension Agricultural and Resource Law Program A common joke among attorneys is that the answer to every legal question is “maybe,” and that answer is appropriate when … Continue reading →

Pricing Standing Corn for Silage

by: Dianne E. Shoemaker, Field Specialist Dairy Production Economics

Two perennially challenging questions are how to price a: dairy facilities for rental, and b: crops standing in the field. Since it is September, “b” is the challenging question of the month. If the question is answered correctly, both the buyer and the seller will be satisfied with the transaction. The buyer purchases a good crop at a good price and is able to make good silage. The seller sells a good crop at a good price and doesn’t have to harvest it. Let’s review some information Normand St Pierre, Bill Weiss and I have talked about before.

Base Price
The owner of the crop would like to receive the cost of producing the crop plus a profit. Their base price should be what they would have received if they had harvested the crop as grain less any harvesting/drying/storage/marketing costs.

If corn has been priced, it will obviously need to be harvested to fulfill contract obligations. However for uncommitted corn that would be available for corn silage harvest, how do we set a price? Corn at harvest this month is projected to be worth between $4 and $5 per bushel. If we estimate that on average, a ton of corn silage contains ~7 bushels of corn, then the standing corn for silage would be worth between $28 and $35 per ton before deducting the cost of harvesting for grain (~$40 per acre). Therefore, $26 to $33 per ton after grain harvest costs. This would be a starting point. Additional adjustments must be made.

Optimally, corn silage should be harvested, fermented, stored, and priced at 35% dry matter (DM). If the actual DM is higher or lower, the price should be adjusted. If actual dry matter was 30%, then the value is about $28/t (30/35 = 0.85 x $33/ton) if corn is worth $5/bu. Corn chopped at more than about 38% DM or less than about 30% DM may not ferment properly and can be a problem. The price for this corn silage should be discounted.

Other important considerations when negotiating price for standing crops include:

Feed value – comparing the difference between valuing corn silage using the 7 bushel of corn per ton method plus harvest and storage costs and an adjustment for 10% fermentation loss, vs. pricing based on the prevailing feed nutrient value (Sesame software) pricing method valuing the silage at what it’s nutrients are worth based on a wider selection of feed prices plus the harvest and storage adjustments. St. Pierre found that the ratio of the two methods indicates that the feed value to the cow is usually greater than the market value based on the market price of corn. 27% more between 2005 and 2008.

Risk – When the dairy farmer buys the standing crop from the grower, he plans to get it chopped and ensiled at the correct moisture in a timely manner so that it can ferment properly and he has an excellent feed. However, now all the production risk is the buyer’s. The price for the standing crop should be discounted to reflect this transfer of risk. What is the right amount? That is part of the negotiation process between seller and buyer.

These discussions should take place and an agreement should be reached before the crop is harvested. These agreements are especially important when large amounts of crops (and money!) are involved. Putting them in writing can save disagreements later.

Additional information on pricing forages by Shoemaker, Weiss and St Pierre is available at http://dairy.osu.edu.

Soybean – Corn Price Ratio Since 1975

by: Carl Zulauf, Professor, Ohio State University, September 2013

Overview:
Economists pay as much attention to price ratios as to the level of prices. Within the U.S. crop sector, the price ratio that arguably receives the most attention is the ratio of soybean to corn prices. The emergence of a late season drought in much of the Midwest has the potential to make this price ratio of more relevance than normal this year because a late season drought normally affects soybean production more than corn production. Characteristics of the soybean – corn price ratio are examined in this post. The focus is on both the ratio’s historical trend and annual variation.

U.S. Soybean – Corn Price Ratio:
The price ratio is examined beginning with the 1975 marketing year. The primary reason for this decision is that, prior to 1973, U.S. farm policy was an on-going, important determinant of prices. The corn and soybean prices used in the analysis are from the U.S. Department of Agriculture (USDA), National Agricultural Statistical Service (NASS) Quick Stats program, available at http://quickstats.nass.usda.gov/.

Since 1975, the average soybean-corn ratio is 2.52 (see Figure 1). No trend in this ratio is evident. However, variation in the annual ratio is notable. The standard deviation is 0.33, which means there is a 67% probability that the ratio will be between 2.19 (2.52-0.33) and 2.85 (2.52+0.33). The ratio was less than 2.00 in 2 years: 1975 (1.94) and the current year of 2012 (1.99). In these years, the price of soybeans was less than double the price of corn. The ratio was above 3.00 in 4 years: 1986 (3.19), 1996 (3.17), 1987 (3.03), and 2003 (3.03). In these years, the price of soybeans was more than triple the price of corn. If monthly prices are used, the minimum soybean-corn price ratio was 1.72 in July 1996 while the maximum ratio was 4.11 in May 1977. In other words, the maximum monthly soybean-corn price ratio is more than twice the minimum monthly soybean-corn price ratio.

To put the historical variation observed in the soybean-corn price ratio in a more contemporary context, Figure 2 presents the range of soybeans prices for the current 2013 marketing year given the 2013 midpoint price estimate of $4.90 for corn contained in USDA’s August 2013 World Agricultural Supply and Demand Estimates (WASDE). The implied price of soybeans ranges from $9.49 using the lowest observed price ratio of 1.94 to $15.61 using the highest observed price ratio of 3.19. The average price ratio of 2.52 implies a soybean price of $12.34, with a 67% confidence range of $10.73 to $13.95 based on the standard deviation of 0.33 in the price ratio.

The current price ratio based on the average of all 2013 marketing year corn and soybean futures contracts is 2.75. In contrast, the August WASDE ratio was 2.32 using the midpoint price estimate. This change in price ratios is consistent with the emergence of a late season drought expected to have a greater impact on soybean production than on corn production.

Explaining the Soybean – Corn Price Ratio:
The large variation in the annual soybean-corn price ratio prompts an immediate question: what explains the variation? Time constraints did not permit an extensive investigation, but one obvious potential explanatory factor is the ratio of U.S. production of soybeans to corn, measured in bushels. This ratio is presented in Figure 3. Source of the production data is USDA’s Quick Stats program.

As with the price ratio, there is no apparent trend in the ratio of U.S. soybean to corn production since 1975. The average ratio is 0.27, which means that soybean production is on average 27% of the size of corn production in the U.S. The ratio ranges from 0.20 in 1976 to 0.39 in 1983. The latter year was the year of the payment-in-kind (PIK) farm acreage reduction program that coincided with a severe drought. Soybeans never have had an acreage reduction program and thus was largely unaffected by the PIK program. Excluding 1983, the next highest soybean-corn production ratio was 0.31, which occurred in both 1988 and 2002.

Interestingly, the correlation between the annual soybean-corn price ratio and the annual soybean-corn production ratio is -0.20, which is not statistically significant at the commonly-used 95% confidence level. This finding does not rule out U.S. production as a contributing determinant of the soybean-corn price ratio, but it does suggest that other factors have played a more important role historically. Other factors include the relative strength of demand for soybeans and corn and the world-wide supply of soybeans and corn. Additional analysis is needed.

Summary Observations:
A key price ratio for the U.S. crop sector is the ratio of soybean to corn prices. This ratio has importance because soybeans and corn are not only the largest acreage crops in the U.S. but are also crops that often compete for the same acre of land. Understanding this ratio is important to understanding market prices. Despite all the changes in the supply and demand complex since 1975, the ratio of soybean to corn prices exhibits no discernible trend. However, the ratio does exhibit considerable variation from year to year and over longer periods of time.

The soybean-corn price ratio has become a topic of conversation in the markets due to the emergence of the late season 2013 U.S. drought. Current thoughts in the market are that this drought will likely do more damage to the U.S. soybean crop than to the U.S. corn crop since the key production period for U.S. soybeans occurs later in the growing season than for U.S. corn. As a result, the soybean-corn price ratio has trended up since mid-August. Examination of historical data since 1975 suggests that the soybean-corn price ratio is on average more impacted by factors other than the level of U.S. production, with other explanatory factors being the relative demand for soybeans and corn and the world supply of corn and soybeans. Thus, while the current focus is on U.S. production, which is reasonable and understandable; the future direction of the soybean-corn price ratio may rests more upon production outlooks in the rest of the world and the relative demand for soybeans and corn.

This publication is also available at http://aede.osu.edu/publications.

Click here to read the entire article and to see the Figures.

 

Sampling Home-Based Food Products: Keeping You Responsible for a Safe Food Product

Catharine Daniels, Attorney, OSUE Agricultural & Resource Law Program So far in a series of posts, we’ve discussed how to sell your baked goods at farmer’s markets (here), what’s required for a home bakery license (here), and how to label … Continue reading →

Fertilizer Market Fundamentals Potentially Impacting Prices

by: Barry Ward
Department of Agricultural, Environmental and Development Economics
OSU Extension, Leader, Production Business Management

Fertilizer continues to be the most volatile of the crop input costs and management of this important input may be the difference in being a low cost or high cost producer. Fertilizer prices are currently lower compared to last year at this same time and many producers are asking themselves if this is the right time to buy. While it is hard to know exactly what direction and when prices will move it is wise` to keep up-to-date on important fertilizer products fundamentals.

Healthier farmer balance sheets and continued positive crop profit prospects have signaled the global marketplace to increase planted acreage. These same factors have also caused producers to maintain or increase fertilizer application rates which has led to strong global demand.

On the flipside, potentially large northern hemisphere crops have dampened prices which may lead to tighter profit margins in the short to medium term. These tighter margins may be a precursor to more judicious use of fertilizer as producers look to cut input costs.

Nitrogen (N)
Retail prices have decreased year-over-year for all 3 commonly used nitrogen fertilizers in Ohio. Urea Ammonium Nitrate (UAN) 28% Nitrogen price has decreased approximately 10% while Anhydrous Ammonia (NH3) price has decreased 15% since one year ago. Urea prices have declined approximately 20% at the retail level.

Nitrogen fertilizer price fundamentals are slightly different for the three primary nitrogen fertilizers used in Ohio as their supply and demand differs around the world. For example, urea is used as a nitrogen fertilizer in many parts of the world due to its relative ease of handling and application.

Key issues impacting nitrogen fertilizer prices are crop profit margins (specifically corn profit margins) and nitrogen fertilizer production expansion both domestically and globally. These two primary fundamentals should dictate nitrogen fertilizer prices in the short to medium term as they will be the primary determinants of the supply/demand balance. Potentially lower corn profit margins due to lower global corn prices and somewhat “sticky” crop input costs will possibly restrict N fertilizer demand. This result may lead to supply outpacing demand and may weaken prices. We may already be seeing nitrogen prices react to lower corn prices and lower potential net returns in 2013 and 2014 as suppliers attempt to move product in an ever increasing wait and see marketplace.

The other primary fundamental issue impacting nitrogen fertilizer markets is actual and proposed expansion in nitrogen manufacturing both domestically and globally. A combination of lower domestic natural gas prices (the primary ingredient in manufactured nitrogen fertilizers) due to the expansion of natural gas extraction and the recent period of relatively high net profits in crop production have led to high margins in nitrogen manufacturing. These high margins in nitrogen fertilizer manufacturing have led to a number of brownfield expansion and greenfield (new manufacturing site) development proposals. Although several existing manufacturing sites have been expanded or brought back on line many potential additional expansions and new site development are not certain to be built. One source reports that 30 nitrogen manufacturing expansions or new constructions are being considered in the U.S. alone. The same source reckons that less than half will be finished. With lower potential crop margins affecting demand and more manufacturing capacity globally affecting supply, the short and medium term prospects for nitrogen prices appear to be flat to lower.

Factors that may lead to N price increases include:
+ Large corn acreage prospects for the U.S. again
+ Strong crop farm balance sheet

Factors that may lead to N price decreases include:
– Lower crop prices leading to tighter margins
– Low domestic natural gas price
– More domestic N production coming online Giesmer, La; Donaldsville, La; Augusta, Ga; etc.
– More domestic N production to potentially be built – approximately 9.3m tons (present capacity 13m t)

Potassium (K20)
The retail price of potash has declined approximately 12% since one year ago.

The potash industry essentially operates as a duopoly (two firms, in this case, two consortiums, with dominant control of the market) with Canpotex (Canadian Potash Exporters – Members: Potash Corp., Mosaic, Agrium) and Belarusian Potash Co. (Members: OAO Uralkali and OAO Belaruskali) controlling much of the global potash supply. One estimate is these two entities control 70% of the global potash market. In recent years these two entities have utilized a strategy known as “matching supply with demand”. In other words, they have curtailed supply to keep potash prices at relatively high levels. This strategy has worked well enough that some analysts contend that the potash mining and manufacturing business has had margins of up to 75% in recent years. But all of that may be about to change.

On July 30th, Russia’s OAO Uralkali’s board of directors announced that it would no longer export potash through Belarusian Potash Co. (BPC). This most likely will change the dynamics of the global potash trade and has already impacted global prices. Some analysts have stated there have been disagreements in the past between Uralkali and Belaruskali that have been resolved rather quickly. Vladislav Baumgertner, Uralkali CEO, cited violations of the exclusive exporting arrangement by their partner, Belarusian Potash, as the reason for Uralkali’s decision to leave the consortium. Decree No. 566 by the Belarusian President on December 22, 2012 cancelled the exclusive right of BPC to export Belarusian potash. Following this decree, Belaruskali has made a number of export deals outside of BPC.

Baumgertner, Uralkali CEO, has stated this is not a temporary fall out between Uralkali and Belaruskali and that Uralkali will pursue a volume over price strategy to meet profit goals. He has also been quoted stating the international potash price may decline up to 25% in one interview and $100/MT in another.

Potash Corp. CEO, William Doyle has downplayed the breakup of the other potash consortium stating the break-up would be temporary and that “logic would prevail.” He also stated that no one producer can determine price in response to Baumgertner’s assertion of global price declines.

With the recent arrest of Baumgertner at the hands of Belerusian authorities, the messy affair in eastern Europe is far from over. Analysts speculate that it may come down to a confrontation between Russian President Vladamir Putin and Belerusian President Alexander Lukashenko.

The bottom line is with the break-up of BPC, the global potash market has declined $15- $25/mt. The short term prospects will likely be dictated by the consortium events and potential crop returns (dictated by crop price levels) for 2013 and prospects for 2014. The fundamentals suggest flat to lower (possibly much lower depending on Uralkali’s export activities) potash prices through the end of the year.

An important long term supply and demand issue in the potash industry is BHP Billiton Group’s announcement on August 20th that it will invest an additional $2.6 billion in the Jansen Potash project in Saskatchewan. Jansen may be the world’s best undeveloped potash resource and may be capable of supporting a mine with annual capacity of 10 million metric tons for more than 50 years.

Factors that may lead to K price increases include:
+ Strong crop farm balance sheet
+ Canpotex members may further curtail production?

Factors that may lead to K price decreases include:
– Lower crop prices leading to tighter margins
– Belarusian Potash Co. breakup may increase potash available on the global market?

Outlook information presented here was developed with data from AEDE research, the Energy Information Administration, USDA, other Land Grant research, futures markets and retail sector surveys. While gauged to the best of this author’s capabilities, forward looking statements contained in this document may prove to be incorrect due to changes in supply and demand and other political and economic related events.