The fertilizer industry has shifted more price risk to farmers since the industry got stuck with heavy losses when prices shot up, then crashed, four years ago.
Fertilizer companies now carry reduced inventory—about 45 days in 2011 versus 60 days in the years 2005 through 2009. Such a change means that farmers need more fertilizer market transparency, better market information and more opportunities to hedge, according to a new study by Rabo AgriFinance.
The industry has changed dramatically from a stable buyer’s market, where production costs determine market prices, to a volatile market that alternates between a buyer’s market and a seller’s market. With fertilizer markets currently tracking the direction of crop prices, fertil-izer prices have shifted higher, with wider trading ranges. "For example, DAP [diammonium phosphate] is trading at prices well above long-term averages with greater annual price volatility," the study says.
When inventories are low, the result is that fertilizer price risk and inventory decisions are passed through to farmers. "The system of discounts in months of low demand is no longer tenable,"
the study says.
To offset increased risk, farmers’ use of fertilizer hedging tools will likely increase. Retailers can add value by offering hedging products on fertilizer in order to lower price risks for farmers, through pool pricing or separate financial hedging products.
Farmers also may engage in speculative buying in order to buy at the lowest price point. "Adequate knowledge of local fertilizer supply-and-demand dynamics and storage capacity are crucial if this option is to succeed," the Rabo AgriFinance report says. Farmers may also buy
at the average price by spreading purchases over time, hedging price risks or buying with other farmers in a pool.
The good news is that fertilizer prices have been in retreat so far this year. Moreover, global fertilizer production is gearing up.