Top Crop Manager

Plan fertilizer purchases to cut risk

Risks for Canadian farmers' input budgets will continue to increase as volatile prices for fertilizer continue to rise and as global demand grows reports the George Morris Centre.

June 12, 2008  By

June 11, 2008

Rising and volatile prices
for fertilizers, as well as growing global demand for limited nutrient
supplies, will only continue to raise risks for Canadian farmers' input
budgets, according to the George Morris Centre.

A new study by the Guelph, Ont.-based ag think tank,
commissioned by the Canadian Fertilizer Institute and released Tuesday, is
meant to point to strategies farmers can use to manage said risks.


"These risks appear to
be persistent over the foreseeable future," the centre said in a press release
Tuesday, referring both to volatile prices and to demand, driven by increases
in demand for crops for both food and non-food uses, as well as by rising
demand for fertilizer in emerging economies and by high prices for natural gas,
used to make some fertilizers.

The risks, however, are
still "mitigated by recent record, and continuing high, grain prices which
have improved the outlook for grain production," study authors James
Oehmke, Beth Sparling and Larry Martin wrote.

"Matter of

"Fertilizer price
risk, in general, is the risk that the farmer purchases fertilizer at 'too
high' a price, with 'too high' often being a matter of opinion," the
centre observed in its report.

"More objectively,
fertilizer price risk is the risk that fertilizer prices will be higher than
expected. In particular, farmers are subject to risk if fertilizer prices are
volatile and thus farmers purchasing at a peak may pay substantially more than
the average price."

To replenish inventories in
Canada, wholesalers buy fertilizers on the international
market and are subject to increasing prices, the centre said. Urea and potash
prices have thus increased by about a third and prices for phosphate have
"nearly tripled," the report said.

"These prices are
subject to other factors such as transportation costs, shrink and margins, as
well as conversion to Canadian dollars and metric tonnes before becoming the
prices that farmers might see in
Canada. However, the point is that North
American fertilizer prices have increased significantly year over year."

The centre outlined several
ways in which it said farmers can plan ahead to reduce their risk exposure,

  • forward contracting, beneficial management
    practices and volume purchases, to deal with rising prices;
  • pre-purchasing and building business
    relationships with fertilizer dealers, to address volatile pricing;
  • exchange-rate hedges, to reduce risk from the
    exchange rate on the Canadian dollar; and
  • pre-purchasing, forward contracting and building
    dealer relationships to reduce risk of reduced supplies and increased
    global demand.

The report offered no
additional action on farmers' part to deal with the risks to gross margin and
cash flow from fertilizer prices, especially if their fertilizer prices are
locked in.

The report also suggested
farmers look into volume discounts, possibly through buying co-operatives —
which, it said, could also provide the size necessary for some types of hedging
on prices.

Further, the report's
authors wrote, "we note that not all farmers will or should engage in all
risk-mitigating actions. Some tools will be more valuable to some farmers;
other tools will be more valuable to other farmers.

"It is important to
note that application of risk-mitigating tools may be time-consuming and/or
costly," the report warned.

The centre also suggested
farmers could cut their risk in the fertilizer market by re-evaluating their
use of beneficial management practices such as soil testing, variable rate
application, nutrient management plans, crop rotations and balanced fertilizer
applications, to improve efficiency in nutrient use and boost economic returns.

The centre said the CFI commissioned the report in keeping
with its stated mandate of "promoting the responsible, sustainable and
safe production, distribution and use of fertilizers," in order to provide
farmers with a better understanding of fertilizer price volatility and risks
and actions they could take to ease those risks.



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