MARKETING

m a n a g e m e n t
Minimize your fertilizer price
Increasingly, it pays to use the same skills when buying your
nitrogen as when you’re selling your crops
By Gerald Pilger
ne of the biggest decisions farmers
face each year is when should they
price their fertilizer needs. Not only
is fertilizer the biggest input expense
in many crops, but prices can change
dramatically in a relatively short period of time.
Purchasing at the “wrong” time (i.e. when fertilizer
prices are high) can seriously impact the farm’s
financial situation. But how can a farmer know
when the time is right?
Here are four strategies to consider in the new era
of increasingly volatile fertilizer prices.
1. Pre-buy
Pre-buying fertilizer months before it is required
has become standard practice for most growers, with
the goal of taking advantage of the seasonal nature
of fertilizer prices.
In most years, fertilizer prices are lowest in the late
summer or fall. Growers with fertilizer storage capacity
and available cash or credit can save money by purchasing
in this time period. However, this is not always
the case. Growers who bought their fertilizer in the fall
of 2008 found they paid nearly twice as much as those
who waited to purchase theirs in the spring of 2009.
That year, the commodity price crash was largely
responsible for the sharp drop in fertilizer demand
and prices between fall and spring.
On the other hand, in the spring of 2012 fertilizer
prices shot up by more than 50 per cent in three
weeks at seeding time, largely due to a shortage of
supply. In fact some growers simply could not get as
much fertilizer as they intended to use at any price.
As well, many farmers experienced delays in
delivery of fertilizer even though they had pre-paid
for all they needed.
These are all symptoms of an increasingly volatile
fertilizer market, and in light of this, it’s easy to see
why combining pre-buying with on-farm storage is
becoming common practice, with growers trying to
build as much certainty into their fertilizer supply as
possible.
At Minnesota State University, agricultural economist
Mike Boland says there are a number of factors
which impact fertilizer prices. Factors which can
affect fertilizer prices include crop prices, crop supply
and demand, expected fertilizer supply and demand,
natural gas costs, exchange rates, transportation
costs, government policy decisions, and consolidation
within the fertilizer industry.
Boland also emphasizes that fertilizer is now a
globally traded commodity, and farmers and fertilizer
retailers have very little pricing power.
2. Lock in a Profit margin
Jonathon Driedger, a market analyst with Farm-
Link Marketing Solutions, suggests growers should
be looking to lock in a profitable margin rather than
simply trying to pick the lowest fertilizer prices.
Driedger recommends forward selling grain at
the same time that you pre-buy fertilizer in order to
ensure profitability.
Minnesota’s Mike Boland agrees, recommending
growers link the purchase of needed crop inputs with
futures sales of the crops you will be growing.
3. Hedge nitrogen Prices
Farmers are well aware of the value of using
hedging to lock in commodity prices. Unfortunately,
there are no futures contracts for fertilizer.
Until 2005, natural gas futures could be used as a
proxy for nitrogen fertilizer hedging because nitrogen
prices tended to follow natural gas prices relatively
closely. After all, natural gas is the primary component
of nitrogen fertilizer, accounting for up to 80
per cent of the cost of nitrogen fertilizer production.
However, there has been a decoupling of the
natural gas/nitrogen fertilizer relationship. Instead,
grain prices now are a bigger influence on fertilizer
pricing, with higher grain prices resulting in higher
fertilizer prices.
At least one major retailer of fertilizer publicly
acknowledges this new pricing relationship and in
fact is offering farmers a risk management contract
that connects fertilizer prices with canola prices.
This fall Cargill has introduced the Nitrogen Risk
Reducer Contract. A grower pre-buying nitrogen fertilizer
from Cargill has the option to purchase a contract
which adjusts the price of pre-bought nitrogen
should the average price of canola decline between
the time of fertilizer purchase and March 16, 2013.
For every dollar per tonne the averaged futures
price of canola drops during the contract period,
growers are refunded $1 per tonne of fertilizer purchased
(or booked) and protected under this contract.
The premium for Nitrogen Risk Reducer Contract
is $20 per tonne and must be paid at time of
purchase or booking of the fertilizer. It is up to growers
to determine how many tonnes of their fertilizer
purchase they want to protect with this contract,
although there is a minimum of 25 tonnes and growers
cannot protect more fertilizer than they purchase.
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