this document web posted: Thursday February 27, 2003 20030227p1

By Adrian Ewins Saskatoon newsroom

The price of nitrogen-based fertilizer is climbing toward unprecedented levels.

A $30 a tonne increase in the wholesale price of nitrogen by a major manufacturer in mid-February has retailers talking about urea prices in excess of $400-$410 a tonne.

That's approaching a 10-year high, said Steve Epp of Wendland Ag Services in Rosthern, Sask.

"Farmers don't like it but the sad part is they know there's nothing they can do about it."

According to farm input price statistics from Alberta Agriculture, the average annual price of bulk urea (46-0-0) over the past five years was $315 a tonne.

Some farmers will have purchased much of their nitrogen-based fertilizer last fall or early winter at prices 25-30 percent below current levels.

But for many, the high price will be an unavoidable additional expense.

"If you were in a drought area and have no grain in the bins and bills still from last year, boy it's going to be tough with these kind of prices," said Terry Hildebrandt, president of Agricultural Producers Association of Saskatchewan.

Fertilizer industry officials say the current price reflects two factors:

• The global supply and demand situation for nitrogen is tight. On the supply side, production is down in Venezuela and there is no new capacity coming on stream. On the demand side, the prospect of better grain prices is boosting fertilizer demand from farmers in North and South America.

• The price of natural gas, which accounts for 80 to 85 percent of the cost of producing nitrogen-based fertilizer, has been rising to historical highs due to cold winter weather, lower production and political instability.

Fertilizer manufacturers have responded to the high natural gas price by scaling back production to levels they expect will meet, but not exceed, spring sales.

For example, Calgary-based Agrium Inc., Canada's largest nitrogen producer, cut production in January at two Alberta plants, in Joffre and Fort Saskatchewan.

"We're very conscious of not ending the spring season with too much inventory, especially when gas prices are as high as they are, because that's high-cost inventory," said Agrium spokesperson Jim Pendergast.

But one farm industry leader said the increase in natural gas prices is just an excuse for fertilizer manufacturers to extract more money from producers.

"They price according to what the market will bear," said Darrin Qualman, executive secretary of the National Farmers Union. "Grain prices are up, so they're going to crank up fertilizer prices."

The North American fertilizer market is controlled by four companies, which have the power to set prices, he said.

While manufacturers portray themselves as helpless victims of natural gas prices, history shows that increases in fertilizer prices outstrip increases in natural gas, Qualman said. He added that manufacturers routinely lock in natural gas prices in advance to cushion themselves from price increases.

Hildebrandt acknowledged that it's normal business practice to pass on costs and earn profits. But he also thinks fertilizer is too expensive as a rule.

"We're always paying more than we should for that stuff, no matter what price it is," he said. "There's obviously a whole lot more margin in fertilizer than there is in food for some reason or another."

Related stories, resources and websites:

• Fertilizer still worth using despite price, supply worries

• WP February 27, 2003

• Precision farmer reduces fertilizer, increases yield

• WP November 21, 2002

• New plants find own fertilizer

• WP September 26, 2002

• Experts tackle fertilizer questions

• WP July 18, 2002

• Ideal fertilizer strategy involves homework

• WP March 14, 2002

• Fertilizer prices will shock growers

• WP January 4, 2001

• Fertilizer will likely be affected by soaring natural gas prices

• WP September 21, 2000

• Alberta Agriculture

• website

• Agricultural Producers Association of Saskatchewan

• website

• National Farmers Union

• website

• Cargill Crop Nutrition

• website

• Agricore United

• website

• Saskatchewan Agriculture

• website

External websites are not endorsed by The Western Producer. They will open in a new browser window.

www.canada.com DEIRDRE MCMURDY Freelance Thursday, February 27, 2003

TORONTO - There was jubilation in Whistler, B.C., on Sept. 30, 2002. While the rest of Canada was still easing gently from summer into autumn, the resort town two hours north of Vancouver embraced the first snowstorm of the season - and the eight centimetres of powder it deposited in the surrounding mountains.

For local residents, that premature blast of winter ensured a strong start to a seasonal tourism industry that represents millions of dollars in annual revenue for multinational corporations like resort-owner Intrawest and Fairmont Hotels - as well as the thousands of people they employ and scores of small, independent businesses that serve the market.

Weather has become much more than the subject for stilted small talk in awkward social encounters. In an intensely competitive global economy, it's a variable that affects the performance of almost $3 trillion U.S. in North American economic activity.

In fact, it's now considered such an important determinant of business success or failure that Environment Canada's quarterly seasonal outlook is carefully guarded until its release. At the annual meeting of the American Meteorological Society earlier this month, some experts argued that the federal government must start treating its weather data like insider information.

"Details about the weather can move commodity prices - especially when it comes to trading futures contracts," explained David Phillips, senior climatologist with Environment Canada. "We treat that seriously."

Weather is now taken so seriously, that even the Central Intelligence Agency has started tracking weather patterns based on the rationale that they directly affect economic conditions, which in turn influence political trends.

"Weather is no longer seen as a random act of fate. It's very much part of the long-term decision-making process for business now," Phillips said.

Last year's mild winter in the United States is credited with staving off a full-blown recession by some economists. They claimed that lower heating costs, reduced snow removal bills, higher construction income, reduced transportation costs, fewer insurance losses and stronger retail sales combined to generate about $21 billion U.S. in economic activity - all because of the balmy temperatures. Housing starts, for example, jumped 6.3 per cent in January 2002, the highest level in two years.

That's not about to happen this year, however. Record cold spells - along with geopolitical turbulence in the Middle East and Venezuela - have created an imbalance in the supply and demand for heating fuel and gasoline. Normally at this time of year, refiners begin to build their inventories of gasoline in anticipation of increased driving volumes in the spring. This year, they're still struggling to meet the demand for heating-grade fuel - which could create a gasoline supply shortage later this year.

Natural gas prices have spiked by as much as 40 per cent - again, a function of robust demand outstripping easily-available supply.

Many electric power utilities have also faced a crunch, especially in light of their recent deregulation. Previously, when they encountered sharp increases in demand and soaring costs, regulators would allow them to pass along expenses directly to consumers. Now that they must compete in an open market, it has become tougher to pass along the costs to consumers.

Technology has played a critical role in the business sector's effort to get a grip on variables like weather. Intricate computer models fed by satellite data can now map out where high pressure ridges and storm systems will form weeks in advance. As a result, a three-day forecast is now about as accurate as a 24-hour forecast was 20 years ago.

This technology has also allowed weather to morph into a sophisticated financial product that has even begun trading on the Chicago Mercantile Exchange. The weather derivative market emerged around 1997, and less than three years later, it was valued at $8 billion U.S.

Weather derivatives let a corporation limit its weather-related losses by transferring a portion of the risk to an investor.

Given the heightened emphasis on forecasting weather and its economic effects, a growing number of companies are hiring in-house meteorologists. Transportation companies, oil and gas producers, utilities - even large brokerage firms now have them on staff to track conditions for futures traders and their clients.

Despite its formidable scientific and economic force, however, weather will never cede its place in our social interaction. After all, there's no subject quite as relevant anywhere in Canada: So is it cold enough for you?

Deirdre McMurdy is host of Moneywise, Monday to Friday at 12:30 p.m. on Global Television.

news.ft.com By Julie Earle and Lauren Foster Published: February 27 2003 4:00 | Last Updated: February 27 2003 4:00

These are unsettling times. US investor optimism fell to the lowest level in at least seven years this month and consumer confidence dropped to a nine-year low, both on fears of war with Iraq.

Last month, nervous equity fund investors withdrew $1bn more than they invested - the first January outflow for equity funds in more than a decade.

Adding fear to already jittery war nerves, Iraq released new information on its weapons of mass destruction, including a biological bomb. The disclosure further divided the United Nations Security Council over whether to back a US-led war against Iraq, which Washington is expected to be preparing for mid- to late-March.

Many investors are wondering if they should head for the exits. Vanguard, the second largest mutual fund firm, says it has had a significantly higher number of calls in recent weeks from investors worried about war and the economy.

So what could happen in the markets if war breaks out?

If the conventional wisdom holds true, war is good for stocks and the economy. Historically, stocks tend to fall in the run-up to war as investors reduce their holdings and allocate funds to "safer" or less-risky investments, such as Treasury bonds or gold. When the bombs start to fall, the saying goes, stocks rally. The adage is: "Buy on the sound of gunfire."

While many people believe this scenario will play out if the second Bush/Saddam showdown takes place, sceptics caution that Iraq is not the only reason behind the recent market malaise and once the war factor is out of the way, investors will once again have to confront the bleak underlying US and global economy.

In the three days following Iraq's invasion of Kuwait the Dow Jones Industrial Average dropped 6.31 per cent.

As the US began gearing up for Operation Desert Storm, stocks started climbing. Within four weeks of the campaign, the Dow gained 17 per cent.

"Once the war starts, it is not unreasonable to expect that investors could start betting on a favourable outcome. After all, the US is hardly the underdog. A quick decisive victory would create at least a temporary big rally," says Alexander Paris, chief economist at Barrington Research Associates, a brokerage and research firm.

But there are caveats: the success of the initial operations, the length of the war and whether the US is in Iraq as part of broad-based coalition that has the support of the international community or not.

"It is clearly different this time around," says Joseph Keating, chief investment officer of AmSouth Funds, referring to the Gulf war, which started in January 1991. "The last time, the US was pushing Iraqi forces out of Kuwait whereas now the effort is to bring about a regime change - this is a different ball game."

Providing there is a quick, successful turn of events, there should be a broad rally in the equity markets. "There is a lot of money sitting on the sidelines. There is a buyer strike out there right now," says Mr Keating. "Investors are waiting to get in."

Phil Dow, market strategist at RBC Dain Rauscher, cautions that investors should not expect "bluebirds and rainbows" once the war fears are taken out of the market. There is still North Korea, he says.

While stocks have been hammered, the debt market has remained strong. Frazzled investors have poured money into bond funds, which have had record inflows. But there is concern now that the bond market may fall apart because bond prices have gone up sharply, and their yields are falling.

US Treasuries, a traditional haven, would likely face a sell-off after the start of the war.

Gold funds have also seen strong inflows as the metal is often viewed as a hedge against war and other potential crises. But once the war is under way, the gold price is expected to fall.

The price of gold soared amid the panic buying just after the start of the Gulf war but fell when it was clear the war was going in the US's favour.

As for the oil price, that, too, should drop. In the last Iraq conflict, oil soared after Iraq's invasion of Kuwait but fell sharply once the war began.

In today's prices, the cost of abarrel of oil jumped from $23 in July 1990 to an average of $47 in October 1990. By February 1991, with the war under way, it was down to $25.

Mr Paris believes that if the war is concluded successfully - and Venezuela's production is back on track - the price of oil could be around $20 by the end of the year. "There is a war premium in oil prices," he says. "Take out the war and you take out the premium."

If Saddam Hussein uses a "scorched earth policy" and sets fire to the oil fields, the price of crude would soar. Some analysts are discounting a worse scenario: that the Iraqi leader could use dirty bombs to destroy the oil fields.

And what if the US goes into Iraq with only Britain and Spain on its side? Or Mr Hussein uses weapons of mass destruction? Or the conflict drags on?

"If the war goes badly, the West fractures and the Middle East explodes, obviously it will create more uncertainty and further disrupt economic activity and world trade," says Barton Biggs, global strategist at Morgan Stanley, in a research note.

"The price of oil will soar, delivering a lethal blow to the world economy. The result will be a worldwide recession and new lows in the stock markets. Cash, government bonds and gold will be the safe havens in a dark and dangerous world."

reuters.com Wed February 26, 2003 06:02 PM ET By Anna Willard

WASHINGTON, Feb 26 (Reuters) - Latin America's economies should grow faster this year than originally expected despite the uncertain global economy, a top World Bank official told Reuters.

The bank is now expecting regional growth of around 2.2 percent in 2003, higher than the 1.8 percent it forecast at the end of 2002.

"2003 should be somewhat better than last year and we would expect capital flows to recover," the bank's chief economist for Latin America, Guillermo Perry, said in an interview by video link from Colombia on Tuesday. "We are expecting some recovery."

A lengthy war in Iraq could lower the forecast, but Perry said the bank has not yet calculated growth for such a scenario.

"Clearly you could have a combination of events...a more protracted Iraq war, turbulence in financial markets and a credit event in one country," he said.

"But the probability of this happening -- all of them together -- is relatively low at this moment."

Perry estimated that growth in the region shrank 1.2 percent in 2002, largely due to the economic crisis in Argentina, which had knock on effects for Uruguay, and political turmoil in Venezuela. The bank had predicted a drop of 1.1 percent.

Apart from Venezuela, where political unrest persists, Perry said that Argentina, Uruguay and most other countries in the region should see more economic stability this year.

"We are seeing a clear recovery in Chile, we are seeing a recovery in Colombia and Ecuador," he said. "We see Peru going well. We don't foresee any major problems there."

ARGENTINA COULD HAVE SHARP GROWTH

But several countries will have to be keenly focused to keep reforms on track. The government in Argentina, for example, has a lot of work to do, Perry said.

"Both us and the IMF encourage the present administration to deal with (reforms), but they prefer to leave it to the next administration," Perry said.

The interim government of President Eduardo Duhalde will stay in office until a new team is chosen in elections at the end of April.

Improving the capital base of the banks and regulatory supervision, taking moves to ensure sustainable long term fiscal stability and rebuilding the credibility of its institutions, particularly the central bank, are key challenges for Argentina.

"There are a lot of problems going forward for the long term fiscal stability," he said. "The loose structure with the provinces has to really be put in place in a more consolidated long term way."

If the government makes the necessary changes, there could be a sharp rebound in the economy as it profits from the competitive exchange rate, Perry said.

BRAZIL ON THE RIGHT TRACK

Brazil's economy is also looking better after turbulence in its financial markets last year.

"Brazil in our view is looking well. Obviously some risks remain. We all know that," he said.

But Perry did not comment on Brazil's enormous debt load. Investors were alarmed last year by fears that newly-elected president, leftist Luiz Inacio Lula da Silva, would not follow conventional economic policies, thereby threatening debt repayments.

"The debt dynamics (are) very sensitive to external or domestic shocks because of the composition of the debt," Perry said.

Brazil has said its total public sector debt should rise in 2003 to between $263 billion and $285 billion from $250 billion last year.

VENEZUELA DESPERATE

The future does not look so bright, however, for Venezuela. Perry estimates the economy, which is heavily dependent upon oil, shrank around 9 percent in 2002. He said estimates for this year vary from a contraction of 4 percent to market estimates for another 9 or even 10 percent decline in growth.

"It is difficult to predict, but obviously it is not going to be a good year in Venezuela," Perry said.

Opponents of President Hugo Chavez recently staged a two-month national strike during which the oil industry was particularly hard hit.

Perry called the country's decision to impose currency controls an "act of desperation" and said Venezuela should not keep them for longer than six months.

"We hope that is the case because otherwise it will be very, very costly," he said, adding that such controls can create distortion in the economy.

A recovery in oil production and some political stability would be preconditions for lifting the controls, Perry said.

CHALLENGES FOR URUGUAY

Uruguay is still facing some challenges, Perry noted.

"It was a very bad year for Uruguay, and they are not completely out of the woods yet," he said.

Perry said in the bank's view the country's debt situation in "not unmanageable" as long as it sticks to the fiscal targets agreed with the IMF.

"With those levels unless there are further shocks, Uruguay should be able to have a sustainable path for its debt," he said.

But the country does have liquidity issues for making debt repayments to international financial institutions like the bank and IMF this year and in 2005 and 2006.

"I think what they are working on is like a voluntary swap, and it should be able to work because they need something like this for liquidity purposes."

www.globeandmail.com By MATHEW INGRAM Globe and Mail Update

When the Internet frenzy was at its peak, the United States was seen as the pinnacle of economic perfection, while Canada was a sleepy backwater of oil drillers and tree choppers. Now the tables have turned, and Canada is growing while the U.S. struggles to find its footing, amid war fears and a rising debt load. But how long can our fortunes and those of our major trading partner continue to go their separate ways?

As the rising loonie and bullish job-growth reports amply illustrate, all the various stars seem to have lined up for Canada recently, economically speaking. While the United States deals with a ballooning trade deficit — something that has contributed to the pressure on the U.S. dollar, since it implies that the American economy is too weak to support itself — Canada's trade surplus has grown, thanks to demand for commodities.

The United States is wrestling with the prospect of runaway budget deficits that could total $1-trillion (U.S.) over the next five years, adding to a debt that is already so huge Congress has been forced to ask for approval to lift the legislated debt ceiling from its current level. Despite high spending by Ottawa, Canada is likely to have a series of large budgetary surpluses, and the debt has been reduced (somewhat).

Over the past six months or so, each time the new job numbers for Canada came out, economists and other analysts were flabbergasted by the strength of the economy, as job growth blew away even their most optimistic forecasts. Last year, Canada's job market grew by 3.7 per cent, the largest increase in 15 years. In the United States, meanwhile, unemployment rates remain high as companies continue to cut back to reduce costs.

Despite the sluggish overall economic growth south of the border, sales of cars and houses continue to rack up new records in the United States — and both of those markets rely heavily on supply from Canada. The lower Canadian dollar makes it more cost-effective for American companies to buy from us, and to focus on their Canadian assets if they do business here, as lumber giant Weyerhaeuser and most of the major auto makers do.

When it comes to commodities, the two we specialize in that have boosted the economy the most recently are oil and natural gas. As strikes in Venezuela and fears of war in Iraq have crimped the global supply of crude oil and driven prices up dramatically, Canada has benefited handsomely — and more recently, the same effect has occurred with natural gas. The Scotiabank Commodity Index climbed by 5.7 per cent in January and is up 23 per cent over 2002, while energy prices are up 87 per cent.

Canada turned in overall economic growth (as measured by gross domestic product) of about 3.3 per cent in 2002, the best performance of any of the major G7 industrialized countries, and better than the U.S. for the third year in a row. More than half a million jobs were added — although productivity advocates said this kind of job growth wasn't necessarily reason for celebration, since it meant Canada was adding workers instead of trying to become more efficient, the way the United States economy is.

Despite the currently sunny outlook, there are economic clouds on the horizon. Whether they wind up turning into a storm remains to be seen. The largest is the simple fact that Canada's economy is tied so closely to that of the United States, with more than 80 per cent of our exports heading south in an average year. If the U.S. economy remains weak, that is bound to impact our growth eventually, even if we are currently immune.

Canadian money manager Brian Trenholm of Agilerus Investment told Dow Jones that he thinks the U.S. economy will remain weak this year and next, and that this raises the risk that Canada's strength will slow as well. "I think the Canadian economy will follow the U.S. economy. There's a bit of a lag because our currency is currently weak," he said. As the dollar rises, "that will have a dampening effect on some export industries... so I think that will help to temper the Canadian economy."

Signs of that have already appeared, with Canada's trade surplus falling in December to $4.1-billion (Canadian) from $4.3-billion in November. For the full year, the trade surplus sank $9.4-billion to $54.6-billion — the lowest since 1999. "The ongoing woes of the U.S. economy have dealt a blow to Canada's export sector over the past few months, and December's tally was certainly no exception," economist Marc Lévesque of Toronto-Dominion Bank said recently. Exports dropped by 0.3 per cent in December.

It's true that Canada's economy is basking in some powerful sunlight at the moment. Hopefully, the clouds on the horizon will break up before they turn into anything serious — but with an economy the size of the U.S. sitting right next to us, you never know.

E-mail Mathew Ingram at mingram@globeandmail.ca