Optimal fertilizer warehousing and distribution systems for farm supply cooperatives

Abstract

Fertilizer sales and appli cation services are important business areas for farm supply cooperatives. These firms account for roughly one-third of the $800M, which U.S. producers paid for fertilizer, lime and soil amendments in 2003 (USDA, 2004). Many cooperatives are re-examining the struct ure and organization of their fertilizer operations. A number of for ces are impacting the retail fert ilizer industry. Differential production costs have shifted the production of nitrogen-based fertilizer away from domestic manufacturers to off shore suppliers. The portion of nitrog en fertilizer imported into the U.S. grew from 21% in 1999 to 42% in 2002 (U.S. Geological Survey). The production shift has impacted the form of nitrogen fertilizers. Historically, anhydrous ammonia has been the least cost form of nitrogen fertilizer. Because the infrastructure to off-load anhydrous amm onia and transport it to demand regions is limited, the shift toward off-shore supply source s has led to a shift to urea and other dry forms of nitrogen fertilizer (Agriliance). Changing farm demographics have also contributed to the shift to dr y fertilizer forms. Large-sc ale producers typically find it more economical for the input supplier to ap ply fertilizer using la rge-scale machinery. Most agribusinesses offering custom fertilizer application concentrat e on dry and liquid (UAN) forms of nitrogen fertilizers. Secu rity concerns associ ated with theft of anhydrous ammonia for use in the illegal drug manufacturing has also contributed to the shift to dry formulations. 3 Another factor impacting the structure of cooperative fertil izer operations has been the consolidation among local coopera tives. A USDA study identified 367 mergers and consolidations among grain coop eratives during the 1993 to1997 time period (USDA, 1998). As local cooperatives cons olidate and expand their geographic trade territories they often attempt to consolidate their existing systems of multiple warehouses. Determining the feasibility of a centralized warehouse system is complex. Centralization generally reduces warehousing costs since cons truction and operating costs decrease with size. However centralization increases the warehouse-to-field transportation costs. Shifts in fertilizer product forms further increases the complexity of analyzing warehousing centralization as per-unit warehousing and tran sportation costs differ dramatically across anhydrous, dry and liquid formulations. This study pursues two objectives re lated to fertilizer warehousing and application: (1) Identify th e major cost components of a typical fertilizer warehousing and distribution system and product margins and fees needed to cover costs; (2) Determine the optimal level of warehouse centralization and equipment complement.