MERCHANDISING FERTILIZER. MWAMMmm. IN NORTH DAKOTA. Donald E. Anderson Gordon W. Erlandson James M. Moench. Agricultural Economics Report No.

Transcription

1 Agrcultural Economcs Report No. 132 Augus '197 r I I lrlr ~de~cc~l 'C MWAMMmm. f FERTILIZER MERCHANDISING IN NORTH DAKOTA _ lil I d L L_ I II LI II By Donald E. Anderson Gordon W. Erlandson James M. Moench Department of Agrcultural Economcs North Dakota Agrcultural Experment Staton North Dakota State Unversty Fargo, North Dakota

2 FOREWORD The authors wsh to acknowledge the contrbutons of the clercal and professonal staff of the Department of Agrcultural Economcs who have partcpated n the preparaton of ths report. Dr. Delmer Helgeson, Mr. Tmothy Petry, and Mr. Donald Thomson have been especally helpful wth ther comments and suggestons. Apprecaton s extended to the managers of the fertlzer frms who asssted by supplyng data and nformaton. Grattude s also expressed to regulatory personnel for ther cooperaton. Fnancal support for ths study came from the North Dakota Agrcultural Experment Staton.

3 TABLE OF CONTENTS Hghlghts Hstory of the Fertlzer Industry..... The Mxng and Dstrbuton Market Trends n Fertlzer Consumpton n the U.S.. Trends n Fertlzer Utlzaton n North Dakota The North Dakota Mxng and Dstrbuton Market Sze and Number of Frms Retal Sellers... Dry Versus Lqud Fertlzer.... Type of Retal Frm and Locaton... Market Characterstcs Product Dfferentaton... Type of Dscounts Barrers to Entry..... Terms of Trade... Fertlzer and Sol Condtoner Law Inspecton Regulaton Fertlzer Prce Analyss.. Fertlzer Prce Adjustments.. Analyss of Varance Results.. Transportaton.... Complementary Busness Actvtes Total Tons of Fertlzer Sold.. Percent of Total Income..... Type of Ownershp Appendx Lterature Cted Lst of Tables Fgures r 33 S r ~ - r r c r r Page

4 Hgthghhts The utlzaton of commetcal 6eAttzeA n the U.S. has ncaeased neaacly ouadold n the past 25 yeals, when measured on the bass of pamaty nutaents. Most of the ncaease has been n the uase6 o n&togen. Important tegonal shfts n fe'tezer uttlzaton nclude a teducton n the eastern and southean regons and gans n the CoAn Bett and Plan State. FeAttzeAw uttzaton n NoIth Dakota ncreaesed neatýy sxfold dutng the peaod. Heavy applcatona per acre have been common n the Red Rver VaLtey, but theae has been a gaaduat nctease n the othea atea o6 the state as well. In 1964, 52 peacent o6 the wheat acae harvested weare enttzed. About 65 peacent o6 the wheat ac/es receved some feattzet n TheAe were 109 commeacta whozesate erttzea dealers n NoAth Dakota n The laagest fou Awholestale Ams accounted fot 58 petcent o0 the featuzet zsoald n the state duang the ouwt-yeat peaod, The top eght nams accounted fol 77 peacent of the market duang thk peod. TheLe were 205 Aetat bulk featzea mxng fzams n About 45 petcent of these weae located n the Red RveA Vatdey. Only 22 peacent of the Ateta deateus weae located n the western half of Noath Dakota. The most common terms of trade tha t accompany etttzea sate nclude custom btendng, applcator lentaus and secvce, sol tejtng, credt pouces, and a varety o6 dscounts. DeateAs state that bulk prteadng and ctedt teams ace thea most mpoatant szevces offaeed. Ptovsons aae made ota the nspecton o att commercal ferttzea sold n the state. Deate~ are requ~wed to submt semannual tepoats on tonnage shpped nto NoAth Dakota. Inspecton, samptng, and analyss aae conducted by the State Labotatoaes Department. 0&

5 FERTILIZER MARKETING IN NORTH DAKOTA by Donald E. Anderson, Gordon W. Erlandson, and James M. Moench* The volume of commercal fertlzer sold to North Dakota farmers has ncreased from 98 thousand tons n 1957 to 628 thousand tons n The consequences of ths ncrease have had mpacts on the entre agrcultural sector. Fertlzer merchandsng has developed nto a substantal ndustry wthn the state. Changes n the product, method of applcaton, as well as rapd ncreases n volume have requred adjustments n the marketng channel. Ths report presents a descrptve overvew of the marketng channel for fertlzer sold n North Dakota. It hghlghts changes n fertlzer utlzaton and the adjustments made by wholesalers and retalers. Data on sze and number of frms, types of operatons, types of ownershp, entry condtons, degree of specalzaton, and concentraton measures are ncluded n the analyss of the ndustry structure. Conduct dmensons nclude prcng dfferentals, compettve actvtes, servces granted, and the effectveness of brands and trade names to attract consumer loyalty. Prmary data for ths study were gathered from a mal questonnare sent to all bulk (commercal fertlzer dstrbuted n a nonpackaged form) fertlzer dealers n North Dakota. Informaton was obtaned on the general market structure of the North Dakota fertlzer ndustry and on specfc market conduct elements. The perod of study covered the marketng years of 1972 and Secondary data were obtaned from numerous fertlzer bulletns and publcatons from state and federal agences. Hstory of the Fertlzer Industry Tradtonally, the fertlzer producng ndustry has had a hgh degree of concentraton. The perod before World War I mght be characterzed as one of natural monopoles n the most mportant fertlzer branches. The natural ntrate of soda deposts n Chle controlled by a Chlean ntrate cartel was the fertlzer ndustry's prncpal source of ntrogen before World War I. * Anderson and Erlandson are professors and Moench s a former graduate research assstant, Department of Agrcultural Economcs.

6 -2- At the outbreak of World War II, 90 percent of the fertlzer marketed n the U.S. stll came from Chle plus two domestc producers (5:163). Untl World War II, potash prces and sales n the U.S. were generally controlled by European cartels. A German cartel suppled nearly all the potash used n the U.S. untl World War I. Between World War I and World War II, a French-German mportng agency and from one to three domestc potash mnes were the only sources (6:363). Phosphate rock was dscovered n Florda n the 1880's. Intally, ownershp of rock-bearng land was wdely dspersed. The hgh-cost producers soon elmnated themselves, leavng seven or eght producers wth control of most of the phosphate. When phosphate rock was dscovered n North Afrca n 1917, the U.S. phosphate frms formed a cartel to protect ther export nterests. Soon the same cartel was operatng n the domestc markets. An nternatonal cartel arrangement proved to be mutually advantageous to both U.S. and North Afrcan producers n the early 1930's. After World War II, phosphate was dscovered n the western states, ncludng Montana and Idaho. Other countres have entered the mnng of phosphate also. Ths brought an end to the domestc and nternatonal cartels (7:36). Before 1903 most of the sulphur was mported from Italy. Between 1903 and 1952 domestc sulphur producton ncreased from 35,098 long tons to 5.3 mllon long tons. Ths producton was concentrated n the hands of four producers, wth the largest two accountng for 90 percent of the total output (7:75). Concentraton of control has tradtonally been hgh n the prmary raw materal markets and the sellers of these materals have been nvolved n numerous anttrust actons. The Mxng and Dstrbuton Market The mxng and dstrbuton aspect of the fertlzer ndustry s dfferent than the raw product market structure. Whle sellers of mxed fertlzers buy n hghly concentrated markets or are vertcally ntegrated wth them, they sell n a market structure whch s qute compettve study of 73 Nebraska countes showed that each county had an average of 12 fertlzer dealers (17:18). Fertlzers are not avalable to feld crops n pure elemental form and are suppled n chemcal combnatons wth one or more of the essental A

7 elements. Ths nvolves manufacturng or processng complexes.. Thus, the fertlzer ndustry s a subndustry of the chemcal ndustry whch s characterzed by a few frms controllng most of the market. The fertlzer ndustry s one of the largest chemcal ndustres n the U.S. The fertlzer ndustry may be defned as comprsng all producers, processors, and mxers of fertlzer ntrogen, phosphate, and potash--the three prncpal plant nutrents. A fourth element, sulphur, sometmes s ncluded. The most mportant phosphatc materal, superphosphate, s produced from approxmately equal quanttes of sulphurc acd and phosphate rock. Thus, the farmer's supply of fertlzer depends upon several sources of raw materals. Ntrogen stmulates the vegetatve or leafy porton of the plant. Ntrogen fertlzers are derved from (1) natural products, such as petroleum or natural gas; (2) the by-product ammona produced n the manufacture of coke; and (3) from the atmosphere by means of chemcal processes known as ntrogen fxaton (4:144). Phosphorus, an essental part of protoplasm, greatly stmulates plant growth--especally the roots. Sources of phosphorus fertlzers are (1) mneral phosphates, generally desgnated as phosphate rock; (2) basc slag, a by-product of the steel ndustry; and (3) bones, a by-product of the meat packng ndustry. Mneral phosphates or phosphate rock are by far the most mportant source of phosphorus (4:147). Potassum functons n plants wth the synthess of ther foods. The prncpal potash fertlzers n the U.S. are potassum chlorde and potassum sulfate. Nearly all the world's supply of fertlzer potassum s n the form of water-soluble salts derved from salt lakes and other brnes and chefly from deposts of water-soluble mnerals. The potassum reserves of the world are very large and they are found n most parts of the world. The greatest reserve of potassum outsde of sol tself s sea water, whch contans about 2,000,000 tons of potash per cubc mle (4:149). Superphosphate s the prncpal phosphatc fertlzer used n the U.S. and most other countres. Untreated phosphate rock s low n avalable phosphorus for plants. Phosphate rock, plus sulfurc acd, produces ordnary superphosphate wth 16 percent to 20 percent avalable phosphorc acd (P ). Trple superphosphate can be obtaned by combnng phosphate rock wth

8 -4- orthophosphorc acd to reach a hgher analyss phosphate fertlzer wth 44 percent to 48 percent avalable phosphorc acd (4:147). Markham n hs study of the fertlzer ndustry mantaned that the producers of phosphatc fertlzers occupy a "pvotal poston" n the flow of plant nutrents from the producer to the farmer. A large porton of the fertlzer mxng ndustry s vertcally ntegrated wth the producton and processng of phosphate rock. Ntrogen and potash producers do not sell sgnfcant amounts drect to farmers; nstead they sell to ntegrated phosphate producers and unntegrated fertlzer mxers who n turn sell to farmers (6:361). The U.S. Department of Agrculture has compled a flow dagram whch defnes the market channels through whch fertlzer s moved from the ntal producer to the fnal consumer (Fgure 1). Trends n Fertlzer Consumpton n the U.S. The total consumpton of fertlzer ncreased from 18 mllon tons n 1950 to nearly 49 mllon tons n 1976 (Table 1). When measured on the bass of prmary nutrents, the ncrease n consumpton was more than fourfold. Most of the ncrease has been n the use of ntrogen, whch ncreased from about one mllon tons to over ten mllon tons snce Sgnfcant shfts n regonal consumpton of prmary plant nutrents have occurred snce 1950 (Table 2). Important reductons have taken place n the eastern and southern regons. Gans n the relatve postons have taken place n the other regons, but most notceably n the Corn Belt and the Plans States. Trends n Fertlzer Utlzaton n North Dakota The mpact of fertlzer utlzaton s ndcated by earler North Dakota studes. In a fve-year perod ( ), records show that the use of fertlzer on 32,739 acres of small grans ncreased farm ncome by $71,900 for an added return of $2.20 per acre (8:8). Fgures 2 through 6 portray the trends n fertlzer utlzaton n North Dakota wth respect to applcaton rates throughout the state durng the perod A vsual nspecton of the contour maps reveals use of fertlzer was a well-accepted fact n the Red Rver Valley by 1954;

9 - 5- Fgure 1. Domestc Fertlzer Dstrbuton Channels n the U.S., 1967 SOURCE: U.S. Department of Agrculture, Economc Research Servce, "Domestc Fertlzer Dstrbuton Channels, Ndg. ERS (9)." whereas, t was a relatvely new and untred practce n the rest of North Dakota. One notable excepton to ths n 1954, however, s McKenze County where there was consderable rrgaton beng used. Ths encouraged early expermentaton wth fertlzer. (See Appendx for actual data.) The total quantty of fertlzer used n North Dakota ncreased from about 54,000 tons n 1954 to nearly 157,000 tons n 1959, an ncrease of 191 percent (16:12). Every county ncreased consumpton of fertlzer from 1954 to One county (Emmons) ncreased ts utlzaton 59 tmes. The total quantty of fertlzer used on farms n North Dakota ncreased from 157,000 tons n 1959 to over 179,000 tons n 1964, an ncrease of.14 percent (12:6). Average amounts of fertlzer appled per acre tended to be hghest n the eastern, more humd areas of the state and lowest n the western, drer areas. Ths east-west varaton s roughly n accordance wth average annual precptaton, wth the notable excepton of some rrgaton areas n the western part of the state.

10 -6- TABLE 1. TOTAL AND PRIMARY NUTRIENT CONSUMPTION OF ALL FERTILIZERS IN THE U.S.a Total Consumpton of Prmary Nutrents Year Endng Consumpton Ntrogen Phosphates Potash on June 30 (Product) (N) (P ) (K 2 0) Total ,000 ton ,343 1, , , , ,726 1, , , , ,877 2, , , , ,567 3, , , , ,615 3, , , , ,844 3, , , , ,681 4, , , , ,836 4, , , , ,532 5, , , , ,081 6, , , , ,743 6, , , , ,949 6, , , , ,589 7, , , , ,118 8, , , , ,206 8, , , , ,288 8, , , , ,094 9, , , , ,508 8, , , , ,864 10, , , ,767.7 a Includes Puerto Rco. Prelmnary. SOURCE: Paul, Duane A., et al., "The Changng U.S. Fertlzer Industry," U.S. Department of Agrculture, Economc Research Servce, Agrcultural Economc Report No. 378, Washngton, D.C., August, 1977, p. 48. The total fertlzed acreage n North Dakota ncreased from 1,682,000 acres n 1954 to about 5,232,000 acres n Wheat and barley together accounted for 88 percent of ths ncrease n fertlzed acreage (16:11). Total fertlzed acreage n North Dakota ncreased to 5,539,000 acres n Most of ths ncrease resulted from ncreased fertlzaton of wheat. Fertlzed acreage of barley decreased by 467,000 acres, due largely to reductons n barley acreage as a result of the feed-gran program (12:6). Fertlzer was used on 48 percent of North Dakota farms n Despte the tremendous ncrease n use of fertlzer, North Dakota farmers had not yet reached the pont of optmum fertlzer usage. Studes show only 52 percent of the wheat acres harvested n 1964 were fertlzed. If

11 TABLE 2. CONSUMPTION OF PRIMARY PLANT NUTRIENTS BY CROP PRODUCTION REGION AS A PERCENTAGE OF TOTAL U.S. CONSUMPTION Ntrogen Phosphate Potash (N) (P ) (K 2 0) Total Regon peacent Northeast Lake States Corn Belt Northern Plans Appalachan Southeast Delta States Southern Plans Mountan Pacfc Other alncludes Alaska, Hawa, and Puerto Rco. SOURCE: Paul, Duane A., et al., "The Changng U.S. Fertlzer Industry," U.S. Department of Agrculture, Economc Research Servce, Agrcultural Economc Report No. 378, Washngton, D.C., August, 1977, p. 49. Fgure 2. Average Pounds of Fertlzer Appled to Cropland Acres by County.n North Dakota, 1954

12 -8- Fgure 3. Average Pounds of Fertlzer Appled to Cropland Acres by County n North Dakota, 1959 Fgure 4. Average Pounds of Fertlzer Appled to Cropland Acres by County n North Dakota, 1964

13 -9- Fgure 5. Average Pounds of Fertlzer Appled to Crapland Acres by County n North Dakota, 1969 Fgure 6. Average Pounds of Fertlzer Appled to Cropland Acres by County n North Dakota, 1974

14 the other 48 percent of wheat acreage had been fertlzed, farmers n North Dakota could have added another $3,950,000 to ther net wheat ncome (12:8). Fertlzer utlzaton has ncreased steadly, followng the same east-west pattern already establshed. The proporton of wheat acres recevng any fertlzer n 1976 was about 65 percent, whch compares wth the natonal average of 71 percent for all wheat (14:67). The North Dakota Mxng and Dstrbuton Market Sze and Number of Frms The wholesale frms that merchandse fertlzer products n North Dakota were nvestgated to develop an overvew of the ndustry. There were 109 commercal wholesale fertlzer regstrants on record wth the North Dakota State Laboratores Department n There were 340,635 tons of fertlzer sold n North Dakota durng the two reportng perods n 1971 when these 109 companes were on record (Table 3). From January to June of 1972 there were 233,938 tons sold. The top four wholesale frms reported total sales of 178,035 tons mported nto and dstrbuted to the North Dakota retal fertlzer market durng the frst sx months of The January to June tonnage fgure appears hgh when compared wth the total year's fgure of 368,897 tons. However, accordng to Koehler, most of the fertlzer sold n the state durng any gven year s shpped durng the reportng perod January to June (11). Retal dealers are then assured of ther supply before the plantng season, provded they have adequate storage facltes. There were 1,370,112 tons of fertlzer sold n North Dakota durng the four years from 1969 to The Top four wholesale frms sold a total of 798,104 tons durng ths four-year perod. These fgures show that the top four wholesalers accounted for 58 percent of the fertlzer sold n the state durng the four-year perod from 1969 to Ths percentage fgure ndcates that the concentraton rato of the top four wholesale dealers was relatvely hgh durng ths perod (Table 4$. The concentraton rato* of *Concentraton rato--a measurement tool whch takes nto account both the number and sze dstrbuton of frms n a market, yet presents the results n a form smple enough that s s easy to nterpret. To compute, rank the frms n order of sze startng wth the largest. (Usually measured n sales or number of employees.) Then startng from the top of the lst, add up the percentages for the top X frms. Publshed statstcs usually gve concentraton rato for the largest 4, largest 8, and sometmes the largest 20 frms n the ndustry.

15 TABLE 3. TOTAL TONS OF FERTILIZER SOLD IN NORTH DAKOTA STATE LABORATORIES DEPARTMENT, DAKOTA AS REPORTED TO NORTH Year Tons Sold Year Tons Sold , , , , , , , , , , , , , , , , , , , , ,209 SOURCE: North Dakota Pestcdes Report," State Laboratores Department, "Feeds, Fertlzer, Annual Bulletns, , Bsmarck, North Dakota. TABLE 4. PERCENTAGE OF TOTAL REPORTED SALES ACCOUNTED FOR BY THE TOP EIGHT FERTILIZER WHOLE- SALE REPORTING FIRMS DURING THE PERIOD , NORTH DAKOTA Jan-Jun Jul-Dec Jan-Jun Jul-Dec Jan-Jun Jul-Dec Jan-Jun Jul-Dec Four-Year Sales Sales Sales Sales Sales Sales Sales Sales Total Frm Sales Top Four Frms Top Eght Frms SOURCE: Fertlzer tonnage report submtted semannually to the North Dakota State Laboratores Department. 58 percent, although hgh, does not approach the 100 percent concentraton rato of a monopoly (one frm) ndustry; therefore, the North Dakota wholesale fertlzer may be classed as an "olgopoly" (an ndustry wth "few" frms). The top eght frms accounted for 77 percent of the market durng the perod. Because of the relatve mportance of these large frms, t s desrable to examne the type of ownershp, type of busness organzaton, and ther busness polces. Two of the top eght wholesale frms are cooperatve organzatons. The frms wholesale to a varety of busnesses (gas statons, gran elevators,

16 etc., as well as retal bulk blendng plants) whch are members of the cooperatve chan, as well as to prvate fertlzer retal enterprses. The cooperatves sell dry bulk, bagged, and lqud fertlzer as demanded by the area served. Fertlzer was sold under ther own brand names, wth major dependence on brand-name advertsng to nspre patron loyalty. Of partcular nterest s the one frm n the top eght whch at the tme of the study handled lqud fertlzer exclusvely. Ths frm s unque due to ts rapd growth n the last decade. Lqud fertlzer has enjoyed ncreased popularty n North Dakota durng recent years, especally n the Red Rver Valley farmng area. Lqud fertlzer has the advantages of ease of handlng and storage, versatlty, and lower cost of applcaton per acre (although the ntal customer nvestment for a lqud applcator s hgher than for comparable bulk dry fertlzer applcator equpment). The lqud fertlzer frm has grown from ffth poston n 1969 to thrd place n Ths fact attests to the growth n popularty of lqud fertlzer n North Dakota. Three of the top eght wholesale frms sell fertlzer as ther domnant product. Fertlzer sales account for 90 to 100 percent of ther total earnngs. Retal Sellers There were 205 retal bulk mxng frms regstered wth the North Dakota State Laboratores Department and n the Drectory of North Dakota Manufacturers. The percentage of these frms located n the four farmng areas were: Red Rver Valley, 45 percent; East Central, 33 percent; West Central, 13 percent; and Western, 9 percent. The major porton (78 percent) of the bulk retal fertlzer frms are located n the agrculturally ntensve eastern half of the state, whch ncludes the Red Rver Valley and the East Central farmng areas accordng to these fgures. The average retal fertlzer dealer employed less than 10 workers. 22 percent of the retal dealers were located n the western half of North Dakota. The western half has tradtonally been consdered the ranchng and cattle rasng secton of the state, although small gran farms are found throughout the area. Bulk fertlzer plants were classfed as ether cooperatvely or prvately owned (Table 5). the 101 frms surveyed. owned companes. Only Cooperatve type ownershp accounted for 58 of Forty-three of the frms surveyed were prvately

17 TABLE 5. TYPE OF OWNERSHIP OF FERTILIZER RETAIL DEALERSHIPS LOCATED IN THE FOUR MAJOR FARMING AREAS IN NORTH DAKOTA, 1973 Red Rver East West Total Number Type of Frm Valley Central Central Western of Frms Cooperatve Prvately Owned Total SOURCE: North Dakota Fertlzer Questonnare, Dry Versus Lqud Fertlzer The data on fertlzer nstallatons obtaned from the North Dakota State Laboratores Department ndcated that bulk blenders were dvded nto two groups, wth 64 percent handlng dry mx and 36 percent handlng lqud. These fgures contan some naccuraces because the North Dakota State Laboratores Department does not classfy the frm whch handles both lqud and dry. Data from the mal questonnare were summarzed n Table 6 to gan further nsght nto spatal dsperson of the bulk fertlzer plants and the type of fertlzer they sell. Dry fertlzers were sold n all areas of the state and by the largest number of dealers n all areas. Dry fertlzer was popular throughout the state due to the ease wth whch t can be moved over great dstances and stored. Lqud fertlzer requres specalzed, hghcost tanks and equpment for ts storage and transportaton. Lqud fertlzer plants were found n the largest concentraton n the Red Rver Valley (near the large wholesaler outlets). Frms whch sell both lqud and dry were found only n the Red Rver Valley due to the larger amounts of fertlzer used on the varous specalty crops grown n the Red Rver Valley. Lqud fertlzer requres apprecably less labor to apply than dry bulk fertlzer. The labor-savng characterstcs of lqud offset the ntal hgh cost of the applcator system n areas where the applcaton rate of fertlzer per acre s hgh. Type of Retal Frm and Locaton The products and the servces whch a frm offers other than fertlzer were used to segregate the frms wth bulk fertlzer mxng

18 TABLE 6. BULK RETAIL FIRMS IN THE FOUR FARMING AREAS BY TYPE OF FERTILIZER SOLD, NORTH DAKOTA, 1973 Area Lqud Dry Lqud and Dry Total Number Red Rver Valley East Central West Central Western Total SOURCE: North Dakota Fertlzer Questonnare, facltes nto the eght separate categores (Fgure 7). The eght categores and the percentages of frms n each were: 1. Fertlzer mxng only--2.5 percent. 2. Gran elevators wth fertlzer mxng--30 percent. 3. Retal gasolne statons wth fertlzer mxng--24 percent. 4. Wholesale fertlzer sales wth mxng facltes--1.5 percent. 5. Retal farm equpment dealers wth mxng facltes--.5 percent. 6. Feed stores wth fertlzer mxng--2 percent. 7. Farm supply stores wth fertlzer mxng--40 percent. 8. Retal stores wth fertlzer mxng--.5 percent. The number of frms correspondng to each category s shown n Fgure 7 to llustrate the locaton of each of the 205 bulk blendng frms ncluded n ths analyss. Certan wholesale fertlzer frms supply other retal frms wth products n addton to mantanng ther own retal sales faclty. The data n Table 7 ndcate that the largest number of retal frms were located n the Red Rver Valley area. The number of bulk mxng frms n each area of the state decreased from east to west. Farm supply stores and gran elevators wth fertlzer mxng ranked frst and second n total numbers of bulk fertlzer plants n the Red Rver Valley and East Central farmng areas. Retal gasolne statons and farm supply stores wth fertlzer mxng ranked frst and second n the western half of the state. Statewde, farm supply stores, gran elevators, and retal gasolne statons ranked one, two, and three, respectvely, n terms of total number of frms that retal bulk fertlzer. Market Characterstcs Product Dfferentaton If one producer's output can be dstngushed from another's, the products are sad to be dfferentated. Dry and lqud fertlzer n the

19 Fgure 7. North Dakota Fertlzer Frms by Type of Frm and Locaton, Fertlzer, Mxng Only 0 Farm Supply Stores Wth Fertlzer Mxng 0 Gran Elevators Wth Fertlzer Mxng 6 Other Fertlzer Mxng Facltes & Retal Gas Statons Wth Fertlzer Mxng

20 - 16- TABLE 7. NUMBER OF FERTILIZER MIXING BUSINESS AND LOCATION, 1973 FACILITIES IN NORTH DAKOTA BY TYPE OF Red Rver East West State Farmng Area Valley Central Central Western Total Fertlzer Mxng Only Gran Elevator Wth Fertlzer Mxng Retal Gas Statons Wth Fertlzer Mxng Wholesale Fertlzer Sales Wth Fertlzer Mxng Retal Farm Equpment Dealers Wth Fertlzer Mxng Feed Store Wth Fertlzer Mxng Farm Supply Store Wth Fertlzer Mxng Retal Store Wth Fertlzer Mxng Total SOURCE: North Dakota Fertlzer Questonnare, bulk ndustry are two physcally dfferent products whch requre totally dfferent equpment to transport, measure, and apply. If physcal appearance s used as a measurement of product dfferentaton, t s soon apparent that one brand of fertlzer looks remarkably lke another. The only apparent features dstngushng one from another s the brand name on the label. To determne f the word "brand" was a form of product dfferentaton, frms respondng to the mal survey were questoned to reveal any strong brand dentfcaton. The retal dealers were asked how many brands they sold. The average number of brands sold was 1.7, whch would ndcate that about half the frms respondng to the survey sold only one brand and the other half sold more than one. The reason that many of the frms sold only one brand was due to an afflaton wth a cooperatve wholesaler. Brand was

21 not consdered to be of major mportance n the sellng of fertlzer by dealers. The dealers when asked what factors nfluenced retal sales stated that sol testng servces were the most mportant and custom blendng and bulk spreadng were ted for second n producng sales. Prce per ton was consdered the most mportant factor by farmers when purchasng fertlzer. Fertlzer brands can also be dfferentated n ways not found n the physcal product tself. Brand name dd not play a major role n producng consumer preference n fertlzer retalng. The "condtons of sale" can dffer n many ways, partcularly f the manufacturer sells to retal dealers through hs own wholesale outlets. Two questons were asked to dentfy the "condtons of sale" the retal frm faced: 1. Who sets your retal prce? Your supplers at the tme of delvery or you, to meet your competton? 2. Do you receve the followng dscounts from your suppler? a. Bulk purchase dscount. b. Cash purchase dscount. c. Off-season dscount. d. Transportaton dscount. Nne percent sad that ther prce was set by the suppler at delvery tme, whle the majorty (88 percent) ndcated that ther prce was set to meet competton. Only 1 percent clamed to be nfluenced by both. Type of Dscounts Data n Table 8 show that retal frms most frequently receved cash purchase and off-season purchase dscounts. The table also dentfes the percent of retal dealers who passed these types of dscounts to ther customers n some form. These dscounts may play an mportant role n product dfferentaton snce 50 percent of the retal dealers surveyed felt ther-customers shop frst for prce per ton and other dealer servces are a secondary consderaton. Barrers to Entry The condtons of entry--measurng the advantage of establshed frms compared to potental entrants or, more precsely, the ablty of establshed sellers to elevate prces wthout attractng new compettors--were dffcult to measure precsely from data avalable. be estmated n some areas. However, the barrers to entry can

22 TABLE 8. TYPE OF DISCOUNTS RECEIVED BY BULK RETAIL FIRM AND PERCENT WHICH OFFERS DISCOUNT TO CUSTOMER, NORTH DAKOTA, 1973 Type of Dscounts Receved Percent Whch Offers Dscount by Retal Frm Dscount to Customer Yes No Bulk Purchase 45% 55% 20 Cash Purchase 65% 35% 24* Off-Season 75% 25% 55 Transportaton 20% 80% 20 *Ths fgure also ncludes delayed nterest payments untl fall. SOURCE: North Dakota Fertlzer Questonnare, There are four major barrers to entry (2:24): 1. Control of patent rghts. 2. Scale economy barrers. 3. Absolute cost barrers. 4. Product dfferentatons. There were no patent rghts beng controlled by any one frm; therefore, ths does not pose a barrer to entry n the retal fertlzer market. Also, the costs faced by retal dealers for materal, equpment, and labor were bascally smlar. There appeared to be no absolute cost barrers unless one dffferentated between lqud and dry bulk fertlzers. It was common for the wholesaler n lqud retal outlets to own the bulk tanks and the stored fertlzer. The tanks may be leased to the retaler and the retaler must purchase the equpment necessary to transport and apply the lqud to the feld. Dry bulk retalers generally owned the blendng faclty and all the necessary feld equpment. There was a basc dfference n the cost of the lqud versus the bulk plant at the tme of ths study. Sales representatves estmate that a 600-ton dry bulk plant wth all the necessary equpment would cost 50 to 60 thousand dollars compared to 20 to 25 thousand dollars for a 600-ton lqud faclty. Whle a 600-ton lqud plant was of adequate sze, 1,000 tons or larger was consdered necessary for a bulk dry plant. The reason for the dfference n sze was cted as dstance from source of supply, whch was usually closer for lqud. located n the Red Rver Valley (Table 6). Most of the lqud plants n North Dakota were

23 Sze barrers to entry seemed to exst at the wholesale level. The top eght frms consstently sold 70 to 80 percent of the fertlzer sold n North Dakota (Table 4). These fgures would ndcate wholesale frms wth a large organzaton, and market control enjoyed some degree of sze barrers to entry. Ths was not true at the retal level where no evdence was found to show that retal frms were secure n ther market smply due to ther sze or scale. The average sze retal frm n North Dakota only sold between 3,000 and 5,000 tons of fertlzer a year. Any frm wth the necessary captal can enter the retal market at any tme. The number of brands sold by each frm was analyzed as a measurement of product dfferentaton (Table 9). Ffty-sx frms stated they sold only one brand, whle 20 frms sold two brands, 21 frms sold three, and 3 frms sold four brands at retal. The average number of brands sold was 1.7 per frm. Ths would ndcate that a lttle more than half the frms respondng to the survey sold one brand exclusvely, whle a lttle less than half sold two or more. It appears that brand names alone do not present a product dfferentaton barrer to entry snce t s possble for nearly half the reportng frms to retal two or more brands from the same faclty. TABLE 9. NUMBER OF DIFFERENT BRANDS OF FERTILIZER SOLD PER FIRM IN THE FOUR NORTH DAKOTA FARMING AREAS, 1973 Number of Dfferent Named Brands Sold Red Rver Valley East Central West Central Western Total Number of Frms Total Reportng SOURCE: North Dakota Fertlzer Questonnare, Terms of Trade There are fve basc terms of trade that generally accompany fertlzer purchase. These terms of trade nclude custom blendng, applcator rentals,

24 sol testng, credt polces, and varous forms of dscounts. Other concessons may be consdered terms of trade wth partcular purchases, but the fve mentoned are the most common. Of the fve servces, bulk spreadng and credt terms were offered by equal percentages of dealers as ther most mportant servce (Table 10). Seventy-seven percent of the respondents stated they offered these servces. A very close second (76 percent) n the order of servce offered by the most dealers was applcator equpment rental. The thrd most frequently offered servce was custom blendng (73 percent) and the fourth was sol testng (68 percent). TABLE 10. SERVICES AND DISCOUNTS OFFERED BY FERTILIZER RETAILERS BY FARMING AREA, NORTH DAKOTA, 1973 Delayed Applcator Transpor- Payments Custom Sol Bulk Equpm ent taton Seasonal Quantty Untl Area Blendng Testng Spreadng Rental Credt Dscount Dscounts Dscounts Fall pec C/CCl t Red Rver Valley East Central West Central Western SOURCE: North Dakota Fertlzer Questonnare, Bulk spreadng and applcator equpment rental have long been mportant terms of trade n North Dakota, especally n the western porton of the state. Ths s due to the larger acreages found n the Western farmng area. The average sze farm n the western porton of the state n 1974 was approxmately 1,270 acres compared to approxmately 700 acres n the Red Rver Valley (15). The avalablty, speed of applcaton, and ease of handlng of bulk fertlzer materal especally appeal to farmers wth larger acreage n the western half of North Dakota Nnety-one percent of the reportng dealers offered bulk spreadng n the Western farmng area. one area to offer any specfc servce (Table 10). Ths was the largest percentage of dealers n any The two servces whch enjoyed the next strongest acceptance by dealers were custom blendng n the Red Rver Valley and applcator equpment rental nthe Western farmng area. Eghty-one percent of the dealers offer both the servces.

25 A transportaton dscount was ncluded n the terms of trade least frequently offered by dealers. A transportaton dscount s gven when the buyer supples the means to move the fertlzer from ts storage faclty to the farm. Only 19 percent of the dealers n the Red Rver Valley and 10 percent n the East Central farmng area offered a transportaton dscount n ther terms of trade. No dealers n the West Central or Western area even offered ths dscount. Ths s not dffcult to understand when a comparson s made between the sze of area served by the frms n varous parts of the state (Table 11). Over 50 percent of the frms serve an area 20 mles n dameter or smaller n the Red Rver Valley where the dscount was offered. Over 50 percent of the frms n the Western area, where the dscount was not offered, serve an area of 30 mles n dameter or larger. TABLE 11. DIAMETER OF AREAS SERVED BY RETAIL FERTILIZER DEALERS IN THE FOUR FARMING AREAS, 1973 Dameter Red Rver East West Entre n Mles Valley Central Central Western State perlcevht SOURCE: North Dakota Fertlzer Questonnare, The servce whch dealers ranked as the most mportant n "producng" retal sales n North Dakota was sol testng (Table 12). Eghteen percent of all dealers ndcated sol testng as most mportant. Thrty-sx percent of the dealers n the Western area found sol testng most helpful n producng retal sales. The two servces whch were ranked second most mportant to purchasers were custom blendng and bulk spreadng. Thrteen percent of the dealers ranked these two as the most mportant. The Red Rver Valley dealers felt custom blendng was the most mportant n ganng customers.

26 TABLE 12. RELATIVE IMPORTANCE OF SPECIFIC SERVICES TO PRODUCING RETAIL SALES AS RANKED BY RETAIL DEALERS, 1973 Red Rver East West State Servce Valley Central Central Western Total per-centz Custom Blendng Sol Testng Bulk Spreadng Applcator Equpment Rental Credt Transportaton Dscount Seasonal Dscount Quantty Dscount Delayed Payment Untl Fall No Opnon SOURCE: North Dakota Fertlzer Questonnare, Ted for thrd place were applcator equpment these two, credt was ranked hghest by the Red Rver cent). Fertlzer and Sol Condtoner Law rental and credt. Of Valley dealers (13 per- The North Dakota State Laboratores Department s charged wth the nspecton and regulaton of any person nvolved n the dstrbuton of commercal fertlzer.* The dutes whch are to be admnstered by the State Laboratory are contaned n Chapter of the Fertlzer and Sol Condtoner Law. The law, n summary, begns by namng the enforcng offcal and defnng the terms wth whch the offcal wll be workng. *As defned by Chapter , Fertlzer and Sol Condtoner Law. Paragraph (defnton of words and terms), person ncluded ndvdual, partnershp assocaton, frm, and corporaton. Commercal fertlzer means any substance contanng one or more recognzed plant nutrent(s) whch s used for ts plant nutrent content and whch s defned for use or clamed to have value n promotng plant growth (except unmanpulated anmal and vegetable manure, meal lme, lmestone, wood ashes, and gypsum).

27 The regulaton whch deals wth regstraton states that each brand and grade of commercal fertlzer must be regstered before beng dstrbuted n North Dakota. A fee of $5.00 and the followng nformaton was requred for regstraton: 1. The net weght of contents. 2. The brand and grade. 3. The guaranteed analyss. 4. The name and address of the regstrant. 5. The source from whch the ntrogen, phosphorus, and potassum are derved. Provsons are made for the nspecton of the commercal fertlzer sold n North Dakota. An nspecton fee of $.10 per ton of fertlzer dstrbuted wthn the state was collected and used to defray the cost of the nspecton vsts, samplng, and analyss. The regstrants were requred to submt semannual reports on tonnage shpped nto North Dakota. The State Laboratores Department compled and publshed ts own reports n bulletn form from these reports. Inspecton The State Laboratory had two permanent agents whose major functon was to conduct the samplng and nspectons that the drector fnds necessary n order to comply wth ths secton of the Fertlzer and Sol Condtoner Law. Each agent had about one-half the state to sample and nspect. The agents dvded the state n half along a lne approxmately the same as exsted between the East Central and West Central farmng areas. The two agents were also nvolved n the State Laboratores regulatory actvtes concernng the commercal feeds and pestcdes ndustry. They dvded ther actvtes accordng to such crtera as tme of year, progress of growng season, type of farmng practced n the area, and weather. Most of the fertlzer was sold between March 1 and June 1. Therefore, ths was the perod when the agents concentrate on fertlzer, although bagged fertlzer s sampled n the wnter. The agents dd the samplng and nspecton; however, the actual analyss of the fertlzer samples was performed n the State Laboratores faclty n Bsmarck. Regulaton The Fertlzer and Sol Condtoner Law defnes the mnmum plant food content requred by law for a fertlzer grade to reman regstered.

28 A fertlzer found to be mslabeled or msbranded cannot be dstrbuted n North Dakota unless steps are taken to relabel or to remx t to the prescrbed standards. To enforce the act, the State Laboratory Department s empowered to cancel the regstraton of any brand of commercal fertlzer found to be usng fraudulent or deceptve practces. The Department s also gven power to ssue "stop sale" orders, seze and/or condemn a fertlzer found not n complance wth the provsons of the law. However, all these actons must be followed by a hearng and the offender s gven the opportunty to prove complance wth the law. Once the offender has reprocessed or relabeled hs product to comply wth the law, any penalty that has been mposed s usually lfted by the State Laboratory Department. Fertlzer Prce Analyss Sx varables were analyzed to determne f they nfluenced the retal prce charged for fertlzer. The varables analyzed were transportaton costs, locaton of the frm, complementary busness actvtes, total tons of fertlzer sold, percent of total frm ncome obtaned from retal fertlzer sales, and type of ownershp. The analyss of prcng varables was made usng the Analyss of Varance statstcal technque. Ths procedure dentfes the varables whch nfluence the prce structure. Of the 101 questonnares returned, 91 were found to contan suffcent prce data to be analyzed n the Analyss of Varance procedure. Fertlzer Prce Adjustments The fertlzer prces charged by the dealers were adjusted to a common base because of the wde varety of nutrtve analyses and types of fertlzer used n North Dakota. The most popular fertlzer analyss sold n the state was , accountng for more than 50 percent of the observatons n the sample. The prce of the other fertlzer analyss was adjusted to the prce of the base fertlzer The prces pad for the varous analyses were adjusted based on plant nutrent content. The average prce pad for n North Dakota n 1973 was $ per ton. Based on methods found n Dalsted's

29 (3:44) study n 1970 and Bedker's (1:80) n 1973, the prce of ntrogen, phosphate, and potash were found to be n a rato of 2:2:1. By the use of the 2:2:1 rato and a base prce for the analyss of $ per ton, the average cost of ntrogen and phosphate per pound s $.08 and potash s $.04. By usng these fgures on a cost per pound of nutrent, a standard prce for any analyss can be calculated by usng ths formula: Cost Per Ton = (%N X Ibs./Ton X Prce/lb. N) + (%P x Ibs./Ton X Prce/lb. P ) + (%K 2 0 X Ibs./Ton X Prce/lb. K 2 0) where N = Ntrogen P205 = Phosphate Prce/lb. N =.08 K 2 0 = Potash Prce/lb. P =.08 Ibs./ton = 2,000 Prce/lb. K 2 0 =.04 For example: Cost Per Ton =.18 X 2,000 X.08 = X 2,000 X.08 = Prce dfferences were determned by frst adjustng for transportaton costs and then subtractng the adjusted prces dealers charged for fertlzer from the standard prce of $ per ton. These prce dfferences were employed n testng the hypothess that there s a sgnfcant dfference n the prces charged for fertlzer n the dfferent farmng areas of North Dakota by the dfferent type of fertlzer retal frms. Analyss of Varance Results The actual range of the prce dfferences was found to be $5.46 per ton after the fertlzer prces for the dfferent analyses were standardzed accordng to the base prce for Next, the standardzed prces were tested n order to determne whether the dfferent farmng areas have a sgnfcant effect on fertlzer prces. The four farmng areas were found to be chargng prces whch were sgnfcantly dfferent statstcally. Transportaton The transportaton cost to the fertlzer dealers n the varous areas was computed n an attempt to explan some of the dfferences dscovered n

30 the prces charged by retal dealers n dfferent geographc areas of the state. The transportaton cost data were analyzed to determne ther statstcal sgnfcance to prces charged for retal fertlzer. These costs were hghly sgnfcant. Transportaton costs were then subtracted from the standardzed prces n order to further refne the data before further tests were conducted. Complementary Busness Actvtes Sellng fertlzer was the prmary busness for some frms; for others, t was secondary. It was hypotheszed that the type of complementary busness n whch a frm was engaged may nfluence fertlzer prces. It may be possble to sell fertlzer for less markup f the retal dealers were engaged n the sale of other less seasonal complementary goods and servces. The fertlzer frms were dvded nto three major categores due to the lmted number of observatons n some categores mposed by the raw data. The average prce advantages whch were found for dealers n each category are llustrated n Table 13. TABLE 13. AVERAGE PRICE DIFFERENTIAL PER TON OF FERTILIZER SOLD BY THE TYPE OF COMPLEMENTARY BUSINESS IN NORTH DAKOTA, 1972 Complementary Busness Category Average Prce Dfference Gran Elevator Wth Fertlzer Mxng 0.00 Farm Supply Stores Wth Fertlzer Mxng Retal Gasolne Statons Wth Fertlzer Mxng SOURCE: North Dakota Fertlzer Questonnare, Gran elevators ncluded n the study charged a sgnfcantly lower prce on the average than retal gasolne statons and farm supply stores (Table 13). Prces at retal gasolne statons and farm supply stores averaged $2.33 and $5.31 more per ton, respectvely, than gran elevators for the fertlzer products they sold durng the study perod. Total Tons of Fertlzer Sold The varable consdered next was the total tons of fertlzer sold by the retal dealers studed n the 1972 calendar year. Total tons of

31 fertlzer sold n 1972, when adjusted for regonal prce dfference, was found to have a sgnfcant effect on the retal prce charged. An nterestng trend was noted n the average prce advantages enjoyed by the dfferent sze dealers (Table 14). The average prce charged per ton of fertlzer generally declned as tons sold ncreased up to the 4,001 to 5,000 ton per year level. Above the 5,000 ton per year sales level, prces per ton began ncreasng. TABLE 14. AVERAGE PRICE ADVANTAGE PER TON OF FERTILIZER IN THE STUDY AREA BY SIZE OF FIRM'S TOTAL SALES IN NORTH DAKOTA IN 1972 Tons Sold n 1972 Number of Frms Average Prce Dfference 0-1, ,001-2, ,001-3, ,001-4, ,001-5, ,001 or More SOURCE: North Dakota Fertlzer Questonnare, The smallest volume dealers were found to charge the hghest prce per ton. Ths factor can possbly be attrbuted to the low volume whch mght cause hgher than normal handlng costs. The relatvely low volume of fertlzer handled could preclude the small frm from obtanng any of the normal dscounts from ts wholesaler that other larger, hgher volume frms enjoy. The low volume frm was more lkely to sell a hgher percentage of bagged fertlzer whch was also more expensve. The frms whch sold from 1,001 to 2,000 tons a year had approxmately a $1.15 per ton advantage over the two larger sze groups. There are several reasons for ths prce advantage. Ths smaller sze dealershp may not provde as many servces as the larger frms and may not have nvested n expensve servces, such as rental applcaton equpment, custom applcaton equpment, or delvery equpment. The small frm may sell only certan analyses n bags and, therefore, elmnate the custom blendng and handlng equpment. Also, the small frm was lkely nvolved n another busness actvty and, therefore, may not have fully allocated all costs to the fertlzer lne.

32 The frms whch sold from 2,001 to 5,000 tons per year provded the most servces and lkely have hred expert personnel. It was probable that the 4,001 to 5,000 tons per year sze frm enjoyed certan economes of sze whch allowed t to offer the lowest prce. It could be that at ths sze plant many of the servces offered were coverng costs or may have been proftable due to specalzaton n equpment and personnel. The plants whch sold over 5,000 tons appeared to be experencng dseconomes of sze or ther hgher prce per ton may be evdence of market power beng utlzed n ther prcng polces. Percent of Total Income Data n Table 15 ndcate the results of an analyss of the mpact of fertlzer specalzaton on prcng polcy. The hypothess tested was that the percentage of fertlzer sales accounted for n a frm's total sales would have a bearng on the prce charged for that fertlzer. The results of ths analyss ndcate that there was a sgnfcant dfference n retal prces of fertlzer among frms when related to levels of specalzaton. Results ndcate that there was a drect relatonshp between retal prces and specalzaton rate. TABLE 15. THE MEAN PRICE DIFFERENTIAL PER TON OF FIRMS WITH DIFFERENT PERCENTAGES OF TOTAL SALES DERIVED FROM FERTILIZER SALES IN NORTH DAKOTA, 1973 Fertlzer as a Percent of Total Sales Average Prce Dfference SOURCE: North Dakota Fertlzer Questonnare, Fertlzer s a seasonal nput whch enjoys ts perod of greatest demand n the sprng of the year followed by a reduced demand durng the summer and fall. There s almost no demand n ths area n the wnter. Ths may be the prmary reason that the frms whch obtan the greatest percentage of ts total ncome from the sales of fertlzer must charge a