Fertilizer Forecast

When it comes to fertilizer, “urea is the component that does most of the growing,” explained Bob Andrews, president, The Greenskeeper, Carmel, Ind. “It makes your grass grow up – or down; it gives it color. It’s an important part of the mix.” But just as the grass can grow up or down, the price of urea can fluctuate, leaving lawn care operators (LCOs) with questions and concerns in currently tense economic conditions.

Urea production depends on natural gas, and economic struggles worldwide and impending war in the Middle East are causing urea prices to rise. “With recent events, a lot of people are concerned as to what the fuel oil supply is going to be,” Andrews commented. Though there was not a great deal of instability with gas prices toward the end of 2002, some contractors are sure that prices will rise.

“I think you can expect prices to go up straight across the board,” asserted Michael Hornung, president, Valley Green, St. Cloud, Minn., who predicted a price increase of $40 to $60 per ton. “Because it’s a petroleum-based product, what suppliers seem to be doing now is hedging their bets,” he observed, reasoning that as gas prices rise, producers will raise their prices sooner rather than later to make sure they meet their margins.

BUY, BUY, BUY. Natural gas and urea prices are already on the rise, with a 20-percent increase in some places and at least another 10-percent jump forecasted for the spring. Additionally, suppliers predicted spot shortages of urea throughout 2003.

“There are possible spot shortages coming up this spring because inventories are lower,” said Randy Vogel, president, Spring Valley, Jackson, Ill. Vogel explained that the Mississippi River has a hand in the situation, but determining the locations of potential shortages is difficult. “Most of the material is shipped up the Mississippi River to various ports. How fast it warms up this spring and how long it takes for ice to melt could certainly affect where shortages occur. If the barges can’t move, they can’t get the product out.”

Moreover, Tim Ankrum, special products manager, United Suppliers, Eldora, Iowa, noted, “historically, the bottom of the Mississippi gets fed with shipments first, and as they run out, the top end markets usually get hit the worst. Even so, LCOs shouldn’t panic. “We’ve gone through this many times before,” Ankrum continued. “It’s part of the daily business that you position yourself to make sure the end user customers are going to get their product.” He insisted that because the urea market is so large, suppliers might be able to alleviate spot shortages in one area by pulling on resources from another part of the country. 

Knowing this, the better-safe-than-sorry mindset dominates among contractors, most of whom purchased at least their first round of 2003 fertilizer in 2002.

Andrews bought his first round of fertilizer in advance and was happy to note that the company paid less this year than it did for its first round in 2002. At the same time, Andrews cautioned against buying too much fertilizer too far in advance. “Round one fertilizer contains preemergent crabgrass control,” he noted, “so if we don’t use that product in round one, we don’t use it for the rest of the year.” He added that getting rid of excess product may be wasteful, but because fertilizer doesn’t have a very long shelf life, storing unused portions rarely makes sense. That’s why contractors need to compare usage from the previous year with projected square footage for the coming year, and try to only purchase what they’ll need.

“We pre-bought ours in December 2002, as well,” said Hornung. “Usually I’ll buy enough inventory to carry me through round one or round two because demand should ease by that point,” he noted. Also, making a purchase in late fall lets LCOs get price breaks from suppliers eager to decrease their stockpiles.

Some contractors take advantage of being able to lock in fertilizer prices with their suppliers. “In December, we start contacting our suppliers for the following season, so we know what it’s going to cost us,” explained Kevin Johnson, president, All-American Turf Beauty, Van Meter, Iowa. “So far, prices have only gone up about 2 or 3 percent.”

Dennis Salwei a sales representative for United Horticultural Supply, Minneapolis, Minn., mentioned that some LCOs called in for quotes as early as November 2002. “They want to know what’s going on so they can adjust their pricing,” he commented, adding that price fluctuations on materials like urea can intensify competition that already exists in the lawn care industry.

“Most people don’t have the space to store fertilizer for the winter,” Salwei said. “Some can pay for it in advance and we won’t deliver it until the spring.” For the most part, only bigger companies are able to use this strategy, but Salwei and Ankrum agree that if contractors have the space and the resources, purchasing fertilizer supplies in advance is a good idea.

Having a basic knowledge of why prices are so precarious is important for LCOs both so they can compare inventory and price accordingly and so they can brief customers when their bills are slightly higher. First, ammonia production occurs during a chemical reaction involving natural gas, a catalyst and air. Manufacturers then sue ammonia to create urea, which is a main component of fertilizer. Therefore, when gas prices rise, so do fertilizer costs.

Additionally, Kirk Guillebeau, a financial analyst for the oil and gas exploration and production company Borero Enterprises, Tyler, Texas, explained that crude oil prices initially affect natural gas prices. “When crude oil prices get too high, some people switch to natural gas for their energy needs,” he said. “For example, many homes in the Northeast and Midwest will switch from heating oil – a crude oil product – to natural gas, which increases the demand and inflates the price.” Worldwide economic issues are currently affecting crude oil prices, beginning a chain of price increases.

“Price will average well above $3 per MMBtu (million British thermal units) for the next several years,” Guillebeau observed, and said that, “extremely cold or hot weather will cause price spikes to the $6 to $7 per MMBtu range,” and may even be as high as $10 per MMBtu. These increases will certainly affect urea prices, but price increases per ton and per bag of fertilizer will not be that great. For instance, if some projected increases are correct, regional fertilizer prices could rise to about $300 per ton. With 1 ton yielding 40 50-pound bags, the cost would only increase to $7.50 per bag.

SELL, SELL, SELL. As with any business, the priority is to make a profit by providing quality products and services. In that case, as natural gas prices rise and urea follows suit, business owners must raise their fees accordingly. Andrews routinely raises prices for lawn services. “Most contractors have settled into the idea that we have to raise our prices annually,” he said. “If we don’t, then we’re forced into a big jump later on and that’s when you get into customer resistance.”

Hornung agreed. “This year we’re going to raise prices – not a lot, but a 2- to 3-percent increase is going to absorb a lot of what we’ll need,” he noted. “Hornung went on to say that customers don’t usually balk at the smaller percentage increases, but complaining begins when fees rise 5 to 10 percent at once.

“The bottom line is that If your cost of providing the service goes up significantly, you have to raise your prices,” Johnson stressed. “If you keep your prices the same and provide the same service, you’re not going to make money.” However, because Johnson’s company is already at the higher end of the pricing scale, he has opted to keep prices where they are this year. This decision is safe because previous annual increases built up a cushion of profit that will offset any extra costs. Also, Johnson’s competitors have kept prices flat for several years, so raising his fees could cause too great a disparity and hurt his business.

Still, routinely raising fees is recommended by most veteran contractors, and can be especially necessary when product prices rise. “Really look at your true cost of operation for 2003,” Hornung urged, “because we’d hate to see anyone become a statistic.” In order to appease any customers who may be caught off-guard by a price increase, Hornung suggested that switching clients from a five- to a four-application program might be one solution. “That way, you get the price you need for that application and they save money on the whole package,” he noted. “I’m certainly not one to cut corners and lighten up the product we’re putting down or put on less, so this is a better solution.”

Andrews agreed that applying thinner applications is not a good idea and can hurt the lawn and a company’s reputation. “I try to emphasize to customer that to maintain the quality of service and the quality of product,” he remarked, “we have to increase our prices.”

The author is Assistant Editor of Lawn & Landscape magazine and can be reached at lspiers@lawnandlandscape.com.