Southern Spotlight: Risk Management

James Banahan

James Banahan

Fertilizer prices.  They continue to rankle us, and we continue to wait for the lousy numbers to go down.

Because corn is down, we expect that fertilizer should be as well.  Four years ago, fertilizer prices jumped up, and you were told it was because corn jumped up.  Well…that wasn’t exactly true.  Corn and fertilizer prices are actually rather unrelated.  In fact, fertilizer prices have more to do with global civil unrest than they have anything to do with corn.

But I’m not here to teach you economics.  My purpose today is to talk about successful risk management, especially as it relates to buying fertilizer.  I’ve talked with too many producers still trying to wait out the high prices, which is a riskier endeavor than they might realize: in my eight years in this profession, only once have I seen fertilizer prices drop as the season approached.  If we expand our look back over the past twenty years, we can see that my experience holds true historically.  As the season approaches, fertilizer prices go up, almost always.

That one year though.  It was 2009, and we saw MAP prices drop by $300 a ton in less than 36 hours.  It was dramatic, and recent enough to color our expectations today.  The problem is that 2009 was a total aberration—for any other year in the past twenty, that drop in price isn’t the way it’s gone.  And sitting on the fence this year, waiting and hoping for a repeat of ’09?  It’s bad risk management, and potentially very expensive in the end.

Buying fertilizer shouldn’t be a game.  There’s too much at stake, so instead of risking it, forging ahead with a rational and solid plan is the best risk management approach.  Essentially, you need to know your bottom line and your production goals.  Then buy fertilizer accordingly.  Of course it’s tough to cough up the dough right now, but history gives us a 90% chance that fertilizer prices will go up, and only a 10% chance that they’ll go down.

Let’s take wheat for example.  For the sake of ease, let’s say that you net $30 per acre of wheat.  Urea prices are high right now, so let’s say you wait to buy, hoping that the price will fall by a hundred bucks or so, which equates to about $5 an acre.  You’ve got a 90% chance that fertilizer prices will actually go up instead, costing you that $5 and meaning you’ll net only $25 per acre.  And you’ve got that 10% chance that fertilizer prices will go down, earning you $5 and meaning you’ll net $35 per acre.

The odds aren’t ever in your favor.  A good risk management practice would be to simply buy now, net the $30 per acre and avoid the gamble.  It’s the old saying: a bird in hand is worth two in the bush.

Some of you oldies-but-goodies might be remembering a time when your not buying fertilizer was a way to drive the price down.  At one point in time, this was actually an effective practice.  Unfortunately though, it’s not the way it works anymore.  Global demand has changed things: if an American farmer wants to hold out on buying fertilizer, no worry to the producer, because an Indian farmer or a Brazilian farmer is right there to make up the difference.

I don’t know the future.  Maybe we’ll buck historical odds and fertilizer prices will fall.  But it’s not likely, and if we don’t beat the odds, your waiting could end up costing you a painful penny.  You can be angry about it—that’s fine, really—but don’t let your emotions unnecessarily influence your risk management.  Manage smartly and you’ll absolutely live to see another day.  Maybe even one with fertilizer prices that make us smile.