Moneywise WebExtra: Hedge Natural Gas

October 10, 2008 02:13 AM
 


 

The following information is bonus material from Top Producer. It corresponds with the Moneywise department on pages 8-10 in the October 2008 issue.


 

Hedge natural gas. Naturally, you would know that the cost of farming is pretty dependent on natural gas (NatGas) prices. Fertilizer, irrigation, and drying costs all hinge on this energy source. There is now an active "mini” NatGas contract that will allow you to hedge against price increases. One contract will meet nitrogen needs for 816 acres of corn at 150 units of N per acre. Or it will dry about 200,000 bu. at 22% moisture.
 
Natural Gas typically puts in a seasonal rally as we head into the colder winter months. The government's bailout plan (if passed) is highly inflationary, suggesting higher prices. Right now, the price of NatGas has declined from a contract high of 12¢.mmBTU to 7.9¢.
 
In fact, technically, the NatGas chart looks like it is building a rounded bottom. To put it simply, NatGas is cheap and anhydrous is expensive. If we're going to buy, let's buy what has the odds of moving to a higher price rather than buying something that has odds of coming down in price.
 
Our research also suggests that anhydrous/ammonia prices have about a six-month lag to NatGas. Thus, we wouldn't expect NH3 prices to come down until after most of next year's needs have already been purchased.
 
From a producer standpoint, we feel it is more beneficial to buy the NatGas on the board since it has sold off rather than pay up for the higher NH3 prices. The two should come together during seasonal demand for NatGas, and then you could sell out of the NatGas and replace it with ownership of nitrogen.
 
—Bill Biedermann, www.allendale-inc.com
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