Optimal Cash Purchase
St t i tto R
Strategies
Reduce
d
F
Fertilizer
tili
Price Risk
Phil Kenkel
Oklahoma State University
Background
• Fertilizer represents 30-35%
30 35% of variable
cost of production of grain crops and up to
85% for some forage crops
• The cost of nitrogen and phosphate
products has increased almost 400%
since 1992
• Prices
Pi
ffor b
both
th products
d t ffellll over 50% iin
late summer of 2008
Fertilizer Price Volatility
• Impacts all levels of the supply chain
• Fertilizer dealers have historically
absorbed price swings in their margins
and stockpiled for peak periods
• Within year price swings of $100 have
occurred for the past 3 years with price
g of $500/ton in 2008
changes
• Dealers are shifting to advance purchases
• Increased interest in timing purchases
Fertilizer Price Risk Tools
• Futures contracts on CME were
discontinued due to lack of liquidity
• Direct Hedge Exchange
Exchange, based in
Switzerland, has a 5,000 ton contract size
• OTC products
d t require
i relationship
l ti
hi with
ith
broker and involves counterparty risk
• Cross hedging with natural gas contracts
is ineffective
Cash Purchase Strategies
• Attempt to diversity risk by spreading
purchases across year
• Take advantage of seasonal patterns
• Require working capital and storage
f ilit
facility
• Could systematically purchasing fertilizer
on the same date(s) each year reduce
risk?
Data and Methods
• 17 year time series of weekly fertilizer
prices for Enid Oklahoma (inland) and
Tulsa Port of Catoosa (barge)
• Urea, UAN and DAP
• Spring
S i and
d ffallll application
li ti seasons
• 25%, 50%, 75% and 100% warehouse
capacity
j
for interest
• Prices adjusted
Scenarios
• Baseline-even
Baseline even purchase each month
• Examined the effect of purchasing 25%,
50% 75%
50%,
75%, 100% of annual needs at the
same date each year
• Determined
D t
i db
bestt d
dates
t
Table 1: Impact of Mechanical Purchase Strategies on Average Fertilizer Price
for Various Warehouse Capacity
Capacity, Locations and Product Forms
Urea-Tulsa
Urea-Enid
UAN-Tulsa
UAN-Enid
DAP-Tulsa
25%
.98
.98
.96
.97
.97
50%
.97
.97
.95
.96
.97
75%
.96
.96
.94
.94
.96
100%
.96
96
.95
95
.93
93
.93
93
.96
96
Even
Monthly
y
1.00
1.00
1.00
1.00
1.00
Prices shown relative to a base strategy of purchasing an even amount each week
3-7% advantage in systematically purchasing on the best date
Table 2: Impact of Mechanical Purchase Strategies on Price
Variance for Various Warehouse Capacity
Capacity, Locations and Product
Forms
Urea-Tulsa
Urea-Enid
UAN-Tulsa
UAN-Enid
DAP-Tulsa
25%
1.07
1.03
.82
.85
.70
50%
1.05
.99
.72
.73
.55
75%
.85
.83
.68
.69
.47
100%
.74
.83
.66
.67
.43
Even
Weekly
1.00
1.00
1.00
1.00
1.00
Prices shown relative to a base strategy of purchasing an even amount weekly
Mechanical strategies can reduce risk by up to 57%
Table 3: Difference Between the Minimum and Maximum Average
Fertilizer Price for Various Warehouse Capacity,
Capacity Locations and
Product Forms
Urea Tulsa
Urea-Tulsa
Urea Enid
Urea-Enid
UAN Tulsa
UAN-Tulsa
UAN Enid
UAN-Enid
DAP Tulsa
DAP-Tulsa
25%
.08
.08
.10
.07
.07
50%
.10
.10
.12
.10
.08
75%
.12
.12
.14
.12
.09
100%
.13
13
.14
14
.16
16
.15
15
.09
09
Prices shown relative to a base strategy of purchasing an even amount weekly
7-16% Difference between systematically purchasing on best
And worst dates
Table 5: Optimal Time Periods to Purchase Fertilizer
U
Urea-Tulsa
T l
U
Urea-Enid
E id
UAN T l
UAN-Tulsa
UAN E id
UAN-Enid
DAP T l
DAP-Tulsa
Minimum
Average
Price
2nd week of
July
1st week in
July
2nd week of
November
2nd week of
November
1st week in
November
Maximum
Average
Price
4th week in
March
1st week in
April
4th week in
April
4th week in
April
4th week of
March
Minimum
Variance
Varying
amounts
over 50
weeks of the
year
Varying
4th week of
amounts
November
over 49
weeks of the
year
2nd week in
January plus
4th week in
November
2nd week in
January
plus 2nd
week of
November
Maximum
Variance
4th week of
October
1st week in
April
4th week in
April
4th week of
March
4th week of
April
Prices shown relative to a base strategy of purchasing an even amount each week
Conclusions
• Mechanical cash purchase strategies
would have reduced price by 3-7% or
variance by up to 50%
• 7-16% difference between best and worst
dates for managing price
Conclusion
(
(continued)
i
d)
• Optimal dates for reduced price were in
mid-summer for Urea and November for
UAN and DAP
• Variance was minimized by purchasing
throughout the year or Jan and November
• Spring and October were the worst dates
t purchase
to
h
Limitations
• Historical price patterns may not reflect
structural change in the industry
• Fertilizer markets in the Southern Plains reflect
local basis
producers might
g have more difficulty
y in
• Corn belt p
taking advantage of seasonal price patterns
• Results provide a starting point for dealers and
producers who are making decisions in timing
purchases