xt76m9020q41 https://exploreuk.uky.edu/dips/xt76m9020q41/data/mets.xml   Kentucky Agricultural Experiment Station.  journals kaes_circulars_004_599 English Lexington : The Service, 1913-1958. Contact the Special Collections Research Center for information regarding rights and use of this collection. Kentucky Agricultural Experiment Station Circular (Kentucky Agricultural Experiment Station) n. 599 text Circular (Kentucky Agricultural Experiment Station) n. 599  2014 true xt76m9020q41 section xt76m9020q41   I`I!£E1l@I·UH!lE.JI¤JS>1?A£!.II.5I·$JQI S
  ... LZ‘“.T?112.”.·Z`·.."`.'2·'£."·»..· Fr /M% ‘ r
V .-‘u·ru    
4 §$·  ‘‘''   /§ @\
§:?>!iiaai¥6§    
I s .% K.  
W5 M IN  \  
»........·.»1·.`»··  r_    
mnnum?@I'·»°UE.D'0L
UNIVERSITY OF KENTUCKY
COOPERATIVE EXTENSION SERVICE
Acnncuuuns Ann nom: zcouomcs

 
 · FOREWORD
While its results have considerable significance for farm people,
this publication is meant for use by the educators, businessmen, and
_ personnel of state and federal agencies who work with farm people as
well.
" Since, among other things, the material included bears directly on
_ the effect of farmer cooperatives on the prices farmers pay for fertilizer,
the facts discussed may be of interest to farmer-directors and manage-
ment personnel of cooperatives and to their proprietary competitors.
A The study is based on data from markets served by only seven coopera-
tives which may or may not be typical. With different degrees of
managerial efficiency, different volumes of business, or different local
competitive conditions, the results might be somewhat different. The
results shown should be viewed as illustrative of some possibilities which
may be attainable in a given local market situation. Since each local
situation must be judged on its own merits, farmers should become
aware of and understand these possibilities.
Aubrey   Brown, Chairman
Department of Agricultural Economics
University of Kentucky

 C O N T E N T S T
PAGE
Introduction TT T ..,....,, T t,tt.4.....t.,4.t T Vt.._...V T .t.4 T ,.t.. T TT ,..,,, T .V..,.»....t..t..,..,. 5 T
Ilow Can Fertilizer Costs Be Reduced? ..,. T ,...,........,.,..t..rtt T ..,.. T .r.....,.. 6 U
Discounts r.,.,. T TTTTTT T TTTTTTTTTTTTTT T TTTT TT TTTTT   T TTTTTTTT T TTTTT T TTTT TT TTTTTTTTTTTTTTT 6 I
High-analysis versus Low-analysis Fertilizers-Farmers
Lose l\’lillions TTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT T TTTTTTTTTTTTTTTTTTTT 6 ·
Buying the Least Expensive Sources of Plant Food TTTTTTTTTTTTTTTTTTTT 7
Selecting a Low-cost Dealer TTTTTTTTTTTTTTT T TTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT 8
Cooperatives and 'l`lreir Influence TTTTTTTTTTTTTTTTTTTTTT TT TT T   TTTTTTTTTT   TT 9 p I
Many Farmers Do Not Base Purchases on Price and I
Analysis Information TTTTTTTTTTTTTTTT   TTTTTTTTTTTTTT T TTTTTTTTTTT   TTTTTTTT II
Summary and Conclusions TTTTTTT T TTTTTT T TT T TT T TT TTTTTTT T TTTTTTTTTTT   TT TTTT II
Appendix TT T TTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT   TTTTTTTTTTTTTTTTT T TTTTT T TTTTTTTTTT TTT I3 ‘

 Cutting Fertilizer Costs
4 By ELDON D. SMITH and JAMES E. BERRY
‘ In 1962, over 1% billion dollars was spent for fertilizers in the
United States. In the same year, Kentucky farmers spent $37,700,000
for fertilizer and lime, representing about 12% percent of all current
· _ farm operating expenses. Since fertilizer is a major farm expense, the
prices the farmer pays for it are very important in determining his
" net income. Many farmers, unfortunately, are unaware that they can
_ cut their fertilizer costs. "Shopping" for the best price, buying the
least expensive source of plant food, and using dealers' discounts are
only a few of the ways the farmer can reduce this expense.
_ The problems of increasing prices for farm products and improving
on-farm production have received a good deal of attention. However,
careful buying practices of such farm production needs as feed, seed,
fertilizer, and farm machinery are equally important since a $100
savings in an expense item increases net income by exactly the same
amount.
More effective buying methods will, of course, improve the farmer’s
t net income. VVhether the farmer understands and, consequently, bene-
fits from these methods depends on the effectiveness of public educa-
tion for youth, adult education programs, and public policies, and
whether this education is geared to present and future problems and
opportunities. The same is true for local group efforts to improve
economic conditions.
‘ ln this publication, we examine the possibilities for improving
farmers' income through better buying methods. Although similar
problems may exist in purchasing other production needs, fertilizer
is used here as the specific commodity since it is a large part of farm
C expense. This study, based primarily on a survey of eight retail fer-
tilizer markets in Kentucky, describes (1) some of the factors affecting
the price of fertilizer to farmers and (2) how farmers can cut their
fertilizer costs. Approximately 30 farmers in each of the 8 markets were
interviewed on the survey along with substantially all of the regular
fertilizer dealers who retailed fertilizer in these markets.]
lExcluded were farmer-dealers who sold small amounts of fertilizer and
irregular dealers such as grocery stores and the like which sold fertilizer only as
a side-line or “convenience" item. Complete results of the study are available in:
james E. Berry, "Conventional and Unconventional Determinants of Market Per-
forinanee," unpublished Master of Science thesis, University of Kentucky, Depart-
ment of Agricultural Economics, May 1964.
5

 HOW CAN FERTILIZER COSTS BE REDUCED?
The cost of supplying plant food necessary for satisfactory yields i
en be reduced several ways. These are discussed below.
Discounts ‘
(1) Some dealers gave a discount for those who purchase fertilizer `
in bulk rather than in bags. Nearly one-third of the regular dealers in
eight local market areas in Kentucky covered by the survey offered
such bulk discounts. In most eases the discount was $4 per ton. ` .
(2) Over two—thirds of the firms offered some discount for cash
payment. The value of the cash discounts was normally about 2 per- ‘
cent of the total payment within 30 days, which figures about $1 per ’
ton on most mixed fertilizer grades.
(3) Nearly two-thirds provided discounts for those who purchased
and took delivery of their spring fertilizer during winter months. _
(4) Preseason or “carly movement" discounts varied depending
on the policies of the dealer, both as to amount and the cutoff dates
after which the discount was reduced or cancelled. Normally, this
discount was $2 per ton until a cutoff date in the last half of ]anuary
and about $1 until a date in late February or early March. e
(5) llauling discounts and delivery charges were also generally
used by fertilizer dealers, usually as discounts. However, they varied ‘
considerably, from $l to $2 per ton. ,
\Vhether the farmer ought to take advantage of these discounts
will depend on (l) the availablity of a truck, (2) the availability of
cash or alternative credit sources that are cheaper, and (3) whether
the farmer has facilities or custom-hire equipment available for hand-
ling bulk fertilizer. llowevcr, some farmers can save $8 or $9 per ton_ ‘
by taking advantage of these discounts.
High-¤n¤lysis versus Low-¤n¤lysis Fertilizers-
Farmers Lose Millions »
Due primarily to the weight of fertilizer and the cost of transport-
ing and handling it, low-analysis fertilizers such as +12-S are relatively
expensive per unit of the available plant food obtained. ln these fer-
tilizers, filler materials such as sand or ground limestone and less con-
centrated materials are used which add weight but no value to the
mix. 'l`l1ereforc, farmers can ordinarily get more plant food for their
money by buying triple superphosphate rather than ground rock phos-
phate, lll-Z0-Z1) rather than 5-lf)-lf), and so forth. 'l`his is not always
true. but it can easily be checked. l*`or a given ratio, divide the price by
the number of plant food units per ton or per hundred pounds. The mix
that yields the lowest quotient is the "best buy." l*`or example, if a
6

 1-2-3 ratio is needed and 5-10-10 @ $60 and 6-12-18 @ $68 per ton
were compared, the following computations would be made:
· 5-10-15 6-12-18
Price: $60 per ton, or $68 per ton, or
$3 per cwt $3.40 per cwt
Plant food units:
’ 5+10-|—15=30percwt 6-}—12+18=36percwt
4 Cost per unit of plant food:
$3 + 30 = $0.100, or $3.40 + 36 : $0.095, or
10 cents per lb 9.5 cents per lb
(BEST BUY)
- All this is very obvious. Yet a great many farmers appear to be un-
aware of how much they are losing. At least, many of them continue
to use low-analysis formulations even when higher analysis mixes are
available locally. Computations based on fertilizer tonnage by counties
in 1959 and prices for major grades reported by the U.S. Department
of Agriculture indicated that Kentucky farmers lost, by fairly con-
servative estimates, about $1,650,000 in net income in 1959 simply
because they purchased low-analysis grades. Farmers, on an average,
lost more than $3 per ton of fertilizer actually purchased; i.e., they
could have bought the same amount of plant food nutrients at $3 less
than the average price per ton actually paid —a savings of 6 percent
of the total fertilizer bill.
_ It is important to recognize that the higher analyses are not always
the cheapest. In parts of the state, some higher analyses with micro-
nutrients such as copper, boron, and the like added are sold as “pre-
mium" grades. Although the cost of the micronutrients is small, .
. applications are needed only under special soil conditions or for par-
ticular crops. Therefore the price of these fertilizers is often quite
high in relation to the amount of plant food they contain.?
Buying the Least Expensive Sources of Plant Food
While the discounts mentioned above are important, the base price
will vary at the same dealer depending on the source of plant food that
is used. Organic sources of nitrogen and phosphate such as tankage and
bone meal, respectively, are quite expensive. Nitrate of soda is more
expensive than ammonium nitrate per pound of nitrogen. Generally,
2 See Secondary and Truce Element Needs for Crops on Kentucky Soils, Mis-
cellaneous 30:2, University of Kentucky, Cooperative Extension Service (prepared
by Department of Agronomy). _
7

 straight materials such as ammonium nitrate triple superphosphate, i
and muriate of potash are somewhat less expensive than these same
materials purchased in a mixed fertilizer. If suitable spreading equip-
ment is available, use of these straight materials often means savings.
A study by Fuqua and Walkup indicates savings on the cost of the
material itself ranged from $4.47 to $13.45 per ton for equivalent plant A
food, depending on the analysis of mixed fertilizer used.3 Of course, `
the cost of hiring custom spreading services along with the chance of
getting uneven distribution or covering the ground three times with
the conventional single-hopper farm spreader must be taken into A .
account in deciding whether there are real economies in use of straight
materials. The typical charge for spreading was from $1 to $1.50 per V
acre in the five markets out of the eight where such service was ‘
available. On a tonnage basis, charges were from $5.50 to $6 per ton.
In the Fuqua and Walkup study, reported charges were similar except
the adjustments for spreading on plowed ground, intensive application ,
on tobacco land, and for very large acreages. In any event, in some
cases it is obvious that considerable savings are possible——as much as
$7 per ton~dcpending on the rate of application, the analysis of mixed
fertilizer for which the straight materials are substituted, and so forth.
A method for comparing the cost of straight materials and mixed ’
fertilizer is illustrated in the Appendix. `
Selecting ¤ Low-cost Dealer
For the most part, the ways of cutting fertilizer costs which we
have discussed do not involve selecting a particular dealer or bargaining
with him. Rather, they involve only taking advantage of opportunities
that many dealers offer. Bulk-spreading service which would make it
easier to use straight materials is the main exception. Only a small -
proportion of dealers now offer bulk-spreading service. However, if
more farmers were interested in the economics of straight and bulk
materials, more dealers would probably offer these services. Also, a
particular dealer may not carry a complete line of all analyses and A
concentrations.
Is it valid to assume that one dealer is about as good as another
and that nothing is to be gained by shopping around and bargaining
for thc best combination of price, analysis, and service available? Do
farmers attempts to buy from the dealer who offers the best price for
V *‘ ]oc   Fuqua and Harold C. \Valkup, Bull: Fertilizer Spreading Practices
in Kentucky-\Vith Special Emphasis on Tliree-Hopper Truck Spreader Custom
Services. Bulletin 683, University of Kentucky Agricultural Experiment Station in
cooperation with the Agricultural Economics Branch, Tennessee Valley Authority,
May 1963.
8

 a particular fertilizer pay off in significant savings? D0 farmers who are
better informed about fertilizers get more for their money?
A statistical analysis was made of the prices paid by about 240
, farmers in the 8 retail fertilizer markets which were covered in the 8
_ market survey. What did this analysis show? When other factors were
held constant, including the ratio of plant food nutrients in the formula,
the farmers who checked several dealers’ prices and/ or analysis of the
fertilizer and who bought their fertilizer based on this “shopping,"
‘ paid significantly less per unit of plant food. That is, they paid less
V than those farmers who did not "shop." The most careful buyers, or
the ones who apparently made the most effort to get the best buy, on
the average saved $1.60 per ton on 5-10-15 fertilizer compared with
those who were rated as the least careful or who made the least effort
to find the best buy.
· 1 Furthermore, the farmers who had the most knowledge of fer·
tilizers including their most etiieient use and who were, perhaps, least
susceptible to misleading advertising saved about $1.50 per ton on
5-10-15 fertilizer.
The figures shown above refer to the possible economies that an
individual buyer can realize, irrespective of what other farmers in the
i same market may do. In other words, they tell us what he could expect
to achieve if other farmers in the same market did not change their
buying habits. However, if all farmers were to make greater efforts to
search out the best buys, more competitive pressure would be applied
on the retail firms in the market, forcing them to adjust their prices
to nearer “at-cost” levels. This is exactly what the statistical analysis
. indicates. In the market where the farmers were rated as being, on
the average, the most careful buyers, i.e., as being the ones who made
the greatest effort to base their fertilizer purchases on prices and
analysis, farmers obtained their fertilizer at about $1.75 per ton less
° than in the markets where farmers were least inclined to make this
kind of effort?
Cooperatives ond Their Influence
VK/hen firms have relatively few competitors, regardless of the rea-
sons, prices normally tend to be somewhat higher. In the markets
4 This probably underestimates the possibilities somewhat since the range be-
tween the highest and lowest level among the markets studied is quite low, about
2 points on the 8-point scale used to measure this variable. It is quite likely that
lll SONIC I`(`tilll l]1ilX`l((’tS il] C()l1ll1l('l'Cl1ll filI`I11ll`lg HTCRIS tl1(Y UDDCY llllllt of ilu] i1V(‘l`1lgC
score inight be an additional 2 points higher. If the range were that much greater
and if an extrapolation of the results of this analysis were valid, one would expect
an additional $1.20 per ton potential savings.
  '

 studied the number of primary competitors was quite small, as few
as two in some of the markets. One of the bargaining tools farmers have _ ‘
is the right to organize as cooperatives s0 that they can perform their
own buying or selling operations. Cooperatives operate on an “at-eost”
or nonprofit basis. Any charges for their services in excess of costs
must be returned as refunds to the patron in proportion to his volume ’
of patronage. These may either be in cash, stock in the cooperative, or ‘
other legal claims on the cooperative’s assets. Cooperatives operating ·
in markets with little competition can reduce the cost of farm supplies
to the farmers if (1) the management of cooperatives is highly
efficient, (2) if they are able to obtain sufficient business volume for · _
efficiency in the use of fixed capital items, and (3) if profits of existing
firms tend to be high. However, all of these conditions are not always ·
met. Therefore, it is important to know just how well Kentucky farm ·
supply purchasing cooperatives function as tools for improving the .
economic position of farmers. .
Statistical analysis of the prices paid by farmers for fertilizer in-
dicates that, in the seven markets in which farm supply purchasing A
cooperatives were active, prices at cooperatives, after allowing for the
influence of other factors, were significantly lower—about $1.60 lower
than their competitors.“ This does not mean that the stated price at
time of sale was this much lower. This figure represents the price after V
refunds were computed at the end of the year. Since the estimated i
difference is about the same as the patronage refund, it shows that ~
the price of fertilizer at the time of sale was about the same at the .
cooperative as in other fertilizer retailers. This condition may exist
because cooperatives in most markets are regarded by their competitors
and by the cooperatives managers themselves as price leaders. That
is, the other retailers may have tended to copy the price set by the
cooperatives. llow much higher the prices of other retailers would be -
if the cooperatives did not operate in these markets is not analyzed in _
this study, but the recognition of them as price leaders tends to in-
dicate that they have had some influence in holding down prices. ln
any event. when refunds are considered, it is obvious that they are now i
3 Yl`lll‘Sl‘ l't‘SllllS l’l‘ltlf(? ()l'll}' to lll? tlVCI`llgC f()I' pLltl`OllS of tllli SCVCH C()ODCl'tlfl\'CS
in the eight markets studied and only for the l$)G:3 spring fertilizer season. \Vhethcr
t`UUlN‘l'ilfl\'\‘S lll (llll(‘l` lllt\l`l{(’lS Ol` (lllI`ll'lg ()fll(`l` S(‘l\S()llS ()fT(‘I` SllllllLlI` I`C(.lllCll()llS lll
fertilizer costs will depend, among other things, on the factors noted earlier; namely
(ll management efficiency, (2) volume of business, and (3) local competitive
l'l>ll(llll(lll$. Xlost l·k\l'llI Sllpply (`()()D(‘[`llll\`l‘S lll K('lltll(`l(}' ()D(’l'ilt(‘ llll(lCI` C()lltl`£lC·
fllrll 1\[`I'.lllfIL`lll(`lllS lrf)l" l|Ifllli\l.{(’lll(‘llt Sllp(‘I°\`lSl()ll   Ll lLlI'gC l`(‘gl()l'lLll lllllllllf-Ll(`flll`lllg
and wholesaling cooperative, including five of the seven cooperatives included in
fllli Stllll}'. rl`ll(‘l`l`l;Ul"l‘, \\'C llllglll (’X[)(‘Ct S()lllC lllllf()l`lllll}' lll lllLlllLlg(’lll(¥llt, llO\V·
ever, volume varies widely and possibly competitive conditions do also.
l0

 contributing significantly t0 lowering the cost of fertilizer for their
A patrons.
\Vhile these benefits are significant, these cooperatives, quite likely,
are not contributing as much as they could if their services were used
more by farmers. Most cooperatives in Kentucky now operate at annual
business volumes too small for maximum efficiency. 'l`herefore, the cost
` of their services is above what it could bc, and, thus, their charges
‘ must be somewhat higher to cover their costs. Obviously, unless and
until farmers make a real attempt to discover the best buys in fertilizer
and unless they know enough about fertilizers to recognize them when
. they see them, farmers may not take full advantage of the economies
available and, therefore, may not allow their cooperatives to function
‘ at maximum efficiency.
Many Farmers Do Not Base Purchases on Price
_ and Analysis Information A
Many farmers do not base their purchases on price and analysis, for
` in the 8 markets studied, only one-third of the farmers could be rated
as highly careful buyers. Many bought simply on the basis of habit.
Similarly, only about one—third of the buyers could be rated as very
well informed about fertilizers and their use. As the earlier statistical
analysis showed, this probably means that many of them were paying
significantly more for their fertilizer than they would have to if they
~ were better informed and more careful about purchasing fertilizer.
Since the cooperatives offered substantial benefits, this means that
they did not obtain the additional volume of business necessary to
provide lower cost service to their member-patrons.
From these facts it should be obvious that farmers need to be
trained (l) to understand the importance of buying carefully, of
- checking and comparing the offerings of various dealers, and (2) to
understand key facts concerning fertilizers that will enable them to
I buy effectively and make them unsusceptible to doubtful advertising
claims.
SUMMARY AND CONCLUSIONS
It is evident that more attention is needed in our extension and
public education programs to some of the business aspects of farming,
specifically the purchasing of fertilizers. Undoubtedly, the buying of
_ other inputs such as feed, machinery, and the like is similarly affected by
ineffective purchasing.
These buying habits mean dollars and cents losses to individual
farmers. Ilowever, this study indicates that improved buying practices
can lower the entire price structure in the market.
ll

 Mere knowledge of fertilizer is not so important as the farmer’s `
attempts to buy on the basis of price, analysis, and related services.
'l'his has important implications for educational agencies. The role of
these agencies as disseminators of scientifically established facts to
those who request them will not solve this problem. Basically, the .
problem is to motivate a search for, or receptiveness to, information. ,
'l'o achieve this condition, educators must make farmers aware of the
importance of sound purchasing decisions to financial success. The
problem is to change the purchasing habits of farmers. This is a much _
more complex task than simply acting as a purvcyor of information. A
lt not only involves filling requests for technical assistance, but creating .
an awareness of the need for information not now fulfilled. ,
The study shows that cooperatives in the seven markets in which
they operated provided significant benefits to their patrons, most of
which were received in the form of patronage refunds. However, since i
most of them operated at business volumes insufficient for maximum ·
efficiency, there is reason to believe that if farmers had been more
discriminating buyers and used the services of their cooperatives to a
greater extent, the benefits of these cooperatives could have been
significantly increased. In other words, the potential benefits of a A
cooperative cannot be fully exploited if farmers, who benefit as patrons,
do not learn to take full advantage of them. The success of a cooperative y
is, in some degree, dependent on the buying habits of the farmers in
the service territory it is designed to serve.
l2

 APPENDIX
A METHOD FOR COMPUTING THE COST OF PLANT FOOD EQUIVALENT
TO MIXED FERTILIZERS USING STRAIGHT FERTILIZER MATERIALS
. For illustrative purposes it is assumed that the choice is between a
. 6-12-12 mixed fertilizer and a combination of ammonium nitrate, triple
superphosphate and muriate of potash.
A ton of 6-12-12 costs about $52 (assumed) and contains:
» 20 X Q : LQ pounds of nitrogen.
_ 20 X Q : QE) pounds of phosphorus pentoxide (PEO5).
20 X Q : QQ pounds of potassium oxide (K2O).
Analysis of fertilizer materials:
· Ammonium nitrate contains about 33% nitrogen.
» Triple superphosphate contains about 45% phosphoric acid
(P2O5).
Muriate of potash contains 60% potash (KEO).
Therefore:
120 pounds of nitrogen could be supplied by lg) + .33 = @4
pounds of ammonium nitrate.
240 pounds of phosphoric acid (P2O;) could be supplied by
2j)_ + 45 : QQ pounds of triple superpliospliate.
QQ pounds of potash (KZO) could be supplied by 240 + .@ ==
@0 pounds of muriate of potash.
Prices of fertilizer materials (assumed for illustrative purposes):
` 1. Ammonium nitrate : $@0 per ton : Q per cwt. : 4 cents
per pound.
2. Triple superphospliate :   per ton : Q per cwt. : 4 cents
. per pound.
3. Muriate of potash : @5 per ton : QQ per cwt. : 2.75 cents
per pound.
Total cost of supplying:
Nitrogen : 364 X Sith:  
Phosphorus : §Q_ X   : $21.32
Potash : Q) X   @1
Total Cost : §j@§§
In this situation with 6-12-12 priced at   per ton, the farmer who
used straight materials and spread each separately by conventional
methods would earn a return of @22 per ton for his labor and machine
13 °

 cxpense. If custom bulk spreading were used, an additional saving of
about $4 might be expected for use of bulk materials and the labor and
machine expense connected with spreading the mixed fertilizer would ·
be eliminated. Where such bulk service is available for these prices it r
would clearly be advantageous if the cost of spreading were no more
than $5 or $6 per ton.* VVithout counting in the labor and machine
expense saved, there would be a net gain of $4.22 per ton. — _
Normal cost of bagged materials $46.88 4
Minus——Bu1k discount &
Cost of bulk materials $42.88 l
Plus—Bulk spreading charge j@
Net cost of materials (spread) $47.88 `
Cost of 1 ton 6-12-12 (not spread) $52.00 .
Net cost advantage of straight
materials $ 4.22 per ton
equivalent
6-12-12 mixed
fertilizer
Note: By copying the steps shown above and leaving the underlined
Hgurcs blank, these sheets can be used as worksheets for teaching pur-
poses. Only the sentence denoted by an asterisk   would be in-
applicable.
14

 
 Cooperative Extension Work in Agriculture and Home Economics: College of Agriculture
and Home Economics, University of Kentucky, Lexington. and the United States Depart-
ment of Agriculture. cooperating. William A. Seay, Dean and Director. Issued in further-
ance of the Acts of May 8 and June 30, 1914.
(Filing Code 7) 5M—6-65