Buy Better for Profit

December 4, 2009 07:57 AM

Dan Anderson, of Anderson Wheat Farms in Haxtun, Colo., already has a good idea of his 2010 and 2011 financial risk. In the fall, he booked the next two years' nitrogen supply at a significantly lower price than this year's.

"We paid $315 last year. Now, with $4/bu. corn and $200/ton nitrogen, that is going to make you some pretty good money," says the 7,500-acre corn, soybean, wheat and cereal grain grower, who also runs a small retail chemical facility. By locking in his fertilizer, he is now managing for margin.

Anderson is a meticulous record keeper, and that allowed him to analyze the purchase price of his 32% urea (UAN). "We said, ‘Hey, this is something we're looking at doing the next two years. How does that compare to years past?' We found that the price was about two-thirds our five-year average."

Fertilizer Volatility. Global demand, the falling U.S. dollar and changing energy and transportation costs have increased market volatil-ity, says Harry Vroomen, vice president of economic services for The Fertilizer Institute.

"U.S. fertilizer imports were down for July 2008–June 2009, falling by 31% from the prior year. U.S. nitrogen imports, which fell 24% in 2008/09, are down 23% for July–September 2009 compared with the same three months in 2008," he says.

Farmer reaction to high prices over the past two years is limiting imports due to reduced retail demand.

Many retailers lost significant revenue last year when high-priced nitrogen drove farmers away and they changed plans late in the game, says Dave Coppess, executive vice president of the Des Moines-based Heartland Co-op. Heartland and several other retailers are now limiting fertilizer supplies to only what is booked and paid for this winter, according to Vroomen.

"Suppliers call us and say, ‘How many tons do you want us to position at the terminal?' The last two years, we had the supply, but we got left at the altar by farmers," Coppess explains. "The price wasn't where they wanted it and they cut back. Retailers were wrong in their estimates. Now, we are only going to position what we know is sold."

Retail Changes. At the same time, Coppess realizes last year's market confusion left many farmers bitter and now retailers must work extra hard to win back their trust. Harvest delays may give them that opportunity because timing for fall applications will be critical. But with bigger farms, it must be done quickly. 

"I think farmers have figured this out faster than the retail sector. The terminals don't differentiate between the farmer who can buy a truckload of fertilizer and retailers, who can buy multiple truckloads," he says. 

"Discounts have gone away for us and large farmers can buy just as aggressively as we do," says Coppess. "But when time becomes an issue, is it worth their time to make the purchase and take delivery? Last year, when the savings were $500/ton, yeah, it was worth it for the farmer. This year, with a $30–$35/ton difference, it may not be worth it."

Relying solely on prepay for nitrogen supplies leaves farmers open to counterparty risk, however. Anytime you pay in advance for inputs, you become an unsecured creditor.

That's where due diligence pays off, says Pat Duncanson of Duncanson Growers in Mapleton, Minn. He has trust in the retailers with whom he works and he's confident in their ability to meet their obligations.

"We maintain relationships with several suppliers and we try not to prepay any one so much that it puts the farm at risk if they don't come through," Duncanson explains.

"We try to make sure the suppliers are sound and they're going to be here," he says. Before Duncanson writes any big check for prepay, he has a conversation with the retailer or the general manager to get a feel for their business. That mitigates some risk, but it does not eliminate it.

Plan Purchases Now
> Retailers are limiting advanced booking of fertilizer this year due to recent high end-of-season supplies.
> Worldwide fertilizer demand is down, but so are imports.
> Increased buying power for larger farms allows them to take advantage of lower prices direct from terminals.

One Size Doesn't Fit All

Don't put all your eggs in one basket might be the best way to describe the input-purchasing approach for farmers like Darren Furbeck of Dearborn, Mo., and Pat Duncanson of Mapleton, Minn. Beyond that, they take different paths.

Furbeck is predominantly a price buyer on the 2,500 acres he farms with his father, Larry. "I look for price and some service. We spray our own chemicals, so I don't need much service. I go to one retailer for that. Fertilizer, we need somebody who can apply that for us, so I go to another one."

Furbeck finds he gets the best deals by looking outside his immediate area for anhydrous ammonia and his chemical needs on his farm just north of Kansas City, Mo. The East Kansas Chemical co-op is well-known for low prices. Another eastern Kansas retailer provides most of the farm's nitrogen needs.

"I think we're far enough out of their trade area that they'll lower their price just to be competitive," he says.

While price is a factor for Duncanson and his brother Karl, they rely on more local relationships and value when buying for their 4,500-acre operation. That has paid off with a glyphosate purchase he booked at $9/gal. last summer for his 2010 needs.

"I don't know if that was the result of working the input buying hard or just having a darned good relationship with my retailer. There's more to value than just price. I work with several suppliers and we're careful to make an effort to keep all of those relationships strong, because just about every retailer has their strengths," Duncanson says.

Solidifying and expanding strengths is a challenge for most retailers, says Dave Coppess of Iowa's Heartland Co-op. It is important, he says, to find a supplier who understands the needs of each individual customer.

Helping farmers navigate those issues is where Coppess sees the future of the retail market going. "The retailer needs to understand your needs, first of all, and can then adapt to meet them. How do we change from an operational focus to meet the risk-management needs of our farmer customers?"

Top Producer, December 2009

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