Growing Koch Industries with Fertilizer
October 2, 2015 By 2050, the world will be home to 9.1 billion people. To feed 25 percent more mouths than today, the Food and Agricultural Organization of the United Nations predicts food production will need to rise 70 percent. The global population will demand nearly 1 billion additional tons of cereals and 200 million more tons of meat.
To satisfy the needs of billions more people, farmers need new technologies to intensify production and smart management strategies to get more out of their cropland – and they need fertilizer.
But 13 years ago, there were skeptics. It was a new world for those with fertilizer assets. The price of natural gas – a key component in nitrogen fertilizer – had jumped to unexpected highs. Slipping grain prices also meant diminishing demand for fertilizer. By the early 2000s, forty percent of U.S. production had been knocked out of business.
Times were tough for Farmland Industries in 2002. After nearly 75 years of business, Farmland was close to $1.9 billion in debt and had filed for Chapter 11 bankruptcy. In fact, the entire fertilizer industry was in trouble.
Companies were getting out of the fertilizer market. Investors were steering clear of a seemingly dying industry. But not Koch Industries. Koch looked beyond the present-day challenges and saw immense opportunities in the future. They saw value in Farmland Industries and in fertilizer. They saw future demand and growth – and an opportunity to help feed the world.
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There is a lot of emphasis in a public company on short-term value and quarterly earnings. Being a private company, Koch could afford to take a long-term view focused on maximizing value.
Steve Packebush: Koch’s keys for success
Under the leadership of Steve Packebush – who at the time was the commercial leader of Koch's fertilizer business and now serves as president of Koch Ag & Energy Solutions – Koch Fertilizer had undertaken a comprehensive global supply and demand analysis. It systematically examined production regions around the world and considered the current and future trends.
After careful consideration, Koch saw an opportunity to invest in the future. The world’s population was increasing rapidly. Not only would there be exponentially more mouths to feed, but more individuals demanding nutrient-dense and protein-rich foods – foods that require more resources to produce.
The agriculture sector would need nitrogen fertilizer to feed the world sustainably and cost-effectively. And Koch Fertilizer would be ready to help meet that need.
Koch Fertilizer was well aware that a turnaround in the fertilizer industry might not be quick and it certainly wouldn’t be easy but the good news is that Koch’s business decisions aren’t made based on immediate payoffs. From the company’s day-to-day operations to its long-term initiatives, the intent isn’t immediate returns, but long-term value – improving businesses, communities and society as a whole.
Steve Packebush: We have to add value
This unique approach is grounded in the guiding principles of Market-Based Management® (MBM®) – a business philosophy for creating long-term value by applying the principles that allow free societies to prosper.
In fact, from investment decisions to employee values, MBM® is the engine that powers Koch Industries. Each year, they reinvest as much as 90 percent of annual earnings in competitively advantaged businesses. Koch can make tough decisions because the company’s shareholders support a strong point of view intent on creating value, even when that viewpoint differs from what is popular.
In the case of Farmland, Koch’s shareholders supported the acquisition because Steve Packebush and his team had a solid argument for how the plants would create value for Koch Industries and society.
Steve Packebush: Many factors determine success
In 2003, when Farmland’s fertilizer assets were up for auction, only two companies showed up to bid on the U.S. locations, Koch Industries and Agrium. Additionally, no one but Koch showed up to bid on Farmland’s interest in an ammonia plant in Trinidad and Tobago. In both instances, Koch submitted a winning bid, and acquired Farmland Industries’ fertilizer business.
Fast forward to today and Koch Fertilizer is one of the biggest producers and marketers of nitrogen fertilizers, with the capability to market and distribute more than 13 million tons of fertilizer products annually. Additionally, Koch Fertilizer is a key subsidiary of Koch Ag & Energy Solutions, which encompasses Koch Fertilizer, Koch Agronomic Services, Koch Energy Services and Koch Methanol.
To get there, Koch Fertilizer has invested more than $775 million to improve efficiencies, streamline overall processes and better systems. Koch Fertilizer expanded operations domestically and moved into countries overseas. In addition to five full-scale nitrogen fertilizer production facilities, Koch Fertilizer now markets product out of 80 state-of-the-art distribution terminals in North America and 30 more globally. Additionally the company has expanded its product portfolio to include ammonia, urea, UAN, phosphate, potash, sulfur-based products, NPK blends and enhanced efficiency products.
In the coming years, a growing population with more disposable income will place greater strain on the world’s food production capabilities – a strain that would be 40 to 60 percent greater without fertilizer. Around the world, fertilizer is feeding and strengthening people and nations. It’s creating real value for society – and so Koch is investing for the long-term.