Fertilizer helps Koch grow

01/03/2011 3:11 PM

08/08/2014 10:00 AM

ENID, Okla. —It's an exceedingly raw and windy fall day at the Koch Fertilizer plant on the eastern outskirts of town. Tall steel towers and a vast array of densely woven pipes make up the two large anhydrous ammonia units and smaller units that make urea and urea ammonium nitrate. At the edge of the plant are drive-throughs for loading railcars and trucks, and a pipeline comes into the plant grounds.

Each day, the plant is capable of making 3,000 tons of anhydrous ammonia, about 10 percent of the country's production. It also makes 1,700 tons of urea and UAN.

Koch Industries, the world's third-largest maker and marketer of nitrogen fertilizer, has spent millions upgrading the plant in recent years. It is part of a much larger program of buying, leasing, upgrading and expanding fertilizer manufacturing, trading and distribution facilities worldwide. The company is building its position in North America and riding growth in the developing world's population and income.

It seems an obvious play today, with growing populations and incomes in China, India, Brazil and others. Yet it wasn't always so obvious, said Steve Packebush, president of Koch Fertilizer and vice president for nitrogen for Koch Industries.

In fact, Koch Fertilizer came very close to being another one of Koch Industries' ambitious dead ends.

Koch had acquired a fertilizer pipeline almost by accident in the late 1980s, then bought a plant in Louisiana in 1992 and started to develop the business.

But by 2000, the price of natural gas, the key input into nitrogen fertilizer, had spiked in the U.S. while demand for fertilizer had fallen, leaving the plant among the highest-cost producers in the world. By then, the company had acquired a plant in Venezuela, but Koch had second thoughts when that country's leader, Hugo Chavez, started talking about a new way of governing. It was not a happy time.

"We kind of joke about it today," Packebush said. "We not only had one of the highest-cost assets in the world, we had just invested a lot of money in a country that was transitioning away from free markets."

After some deep thinking about demographics, energy markets, technology and politics, Koch leaders decided that time was probably the low point, and that the business could only get better.

"We looked at it and said 'You know, risk/reward, there are probably some opportunities here,' " Packebush said. "That's the great thing about Koch; when other people run for the exits, we try to be a little contrarian if it's justified."

Decade of growth

Fertilizer today is an intensely industrial business more akin to oil refining or chemical production.

Modern agriculture requires fertilizer, mostly various forms of nitrogen, potassium and phosphorous. The Fertilizer Institute estimates that 40 to 60 percent of the world's agriculture production today is attributable to artificial fertilizers.

Koch makes only nitrogen fertilizer. Besides the plant in Enid, it has nine other plants, including one in Dodge City.

It's been a pretty strong decade of growth, kicked off with the acquisition of Farmland's fertilizer business in 2003. Koch Fertilizer now makes or moves five times as much fertilizer as it did in 2002. It has spent more than $250 million since 2005.

As Koch Fertilizer has grown, it has come under fire from environmentalists because one of the main waste products of fertilizer production is CO2, a primary greenhouse gas.

In a statement, Packebush said the company complies strictly with existing rules:

"Emissions, a necessary byproduct of all manufacturing, are strictly monitored and legally permitted by federal, state and local governments. Koch companies, including Koch Fertilizer, have gone to great lengths to ensure environmental, health and safety compliance in our operations and to build positive, collaborative relationships with the U.S. Environmental Protection Agency and other federal, state and local regulators."

The Koch plants do capture some of the waste CO2 and other waste gases for sale to other companies.

As the fertilizer industry grew stronger and asset prices rose around 2006, Koch backed off from buying plants and switched emphasis to trading and distribution. It now owns or leases 65 terminals where it wholesales nitrogen fertilizer to co-ops and grain elevators for sale to farmers, as well as selling to the chemical industry.

But the growth has not been without bumps. In October, Chavez proclaimed that he was nationalizing the FertiNitro plant, partly owned by Koch.

"Venezuela is a pretty good example of what can happen when you transition from a free market economy to one that is more socialistic in nature," Packebush said.

In 2006, Koch decided to start looking globally and opened terminals, warehouses and sales offices around the world. It now has a trading and marketing presence in Europe, South America, Asia and Australia.

"We felt that fertilizer is a global commodity and wanted to be active in the world market," he said.

Outlook good

The future for the business looks bright in the long term because of rising population and incomes worldwide.

As the world gets richer, people want more meat. According to Koch, a pound of chicken takes two pounds of grain to produce, while a pound of pork takes four pounds of grain. For beef, it takes eight pounds.

Packebush is vague about expansion plans, but said the company remains opportunistic.

"We will continue to look for opportunities in nitrogen production and look for opportunities to continue to grow our global terminalling and distribution business."

Koch is also moving in new directions, in one example, leveraging technology generated by Koch unit Georgia-Pacific into making more efficient fertilizer that dissolves more slowly, allowing plants to take up more of the nitrogen. The effort has become a newly created unit called Koch Agronomics.

"That is a big jump for us," Packebush said. "We've been a commodity-based producer, distributor, wholesaler, trader and marketer. Now I've had to become more a crop scientist."

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