Optimal fertilizer warehousing and distribution systems for farm supply cooperatives
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Date
2004
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
NCR-194 Research on 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.
Description
Paper Presented at
NCR-194 Research on Cooperatives Annual Meeting
November 2-3, 2004
Kansas City, Missouri
Keywords
Fertilizer sales, Optimal fertilizer, Warehousing, Distribution systems, Farm supply cooperatives, Nitrogen fertilizers