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Plan fertilizer purchases to cut risk: report

Rising and volatile prices for fertilizers, as well as growing global demand for limited nutrient supplies, will only continue to raise risks for Canadian farmers’ input budgets, according to the George Morris Centre.

A new study by the Guelph, Ont.-based ag think tank, commissioned by the Canadian Fertilizer Institute and released Tuesday, is meant to point to strategies farmers can use to manage said risks.

“These risks appear to be persistent over the foreseeable future,” the centre said in a press release Tuesday, referring both to volatile prices and to demand, driven by increases in demand for crops for both food and non-food uses, as well as by rising demand for fertilizer in emerging economies and by high prices for natural gas, used to make some fertilizers.

The risks, however, are still “mitigated by recent record, and continuing high, grain prices which have improved the outlook for grain production,” study authors James Oehmke, Beth Sparling and Larry Martin wrote.

“Matter of opinion”

“Fertilizer price risk, in general, is the risk that the farmer purchases fertilizer at ‘too high’ a price, with ‘too high’ often being a matter of opinion,” the centre observed in its report.

“More objectively, fertilizer price risk is the risk that fertilizer prices will be higher than expected. In particular, farmers are subject to risk if fertilizer prices are volatile and thus farmers purchasing at a peak may pay substantially more than the average price.”

To replenish inventories in Canada, wholesalers buy fertilizers on the
international market and are subject to increasing prices, the centre said. Urea and potash prices have thus increased by about a third and prices for phosphate have “nearly tripled,” the report said.

“These prices are subject to other factors such as transportation costs, shrink and margins, as well as conversion to Canadian dollars and metric tonnes before becoming the prices that farmers might see in Canada. However, the point is that North American fertilizer prices have increased significantly year over year.”

The centre outlined several ways in which it said farmers can plan ahead to reduce their risk exposure, including:

  • forward contracting, beneficial management practices and volume purchases, to deal with rising prices;
  • pre-purchasing and building business relationships with fertilizer dealers, to address volatile pricing;
  • exchange-rate hedges, to reduce risk from the exchange rate on the Canadian dollar; and
  • pre-purchasing, forward contracting and building dealer relationships to reduce risk of reduced supplies and increased global demand.

The report offered no additional action on farmers’ part to deal with the risks to gross margin and cash flow from fertilizer prices, especially if their fertilizer prices are locked in.

The report also suggested farmers look into volume discounts, possibly through buying co-operatives — which, it said, could also provide the size necessary for some types of hedging on prices.

Further, the report’s authors wrote, “we note that not all farmers will or should engage in all risk-mitigating actions. Some tools will be more valuable to some farmers; other tools will be more valuable to other farmers.

“It is important to note that application of risk-mitigating tools may be time-consuming and/or costly,” the report warned.

The centre also suggested farmers could cut their risk in the fertilizer market by re-evaluating their use of beneficial management practices such as soil testing, variable rate application, nutrient management plans, crop rotations and balanced fertilizer applications, to improve efficiency in nutrient use and boost economic returns.

The centre said the CFI commissioned the report in keeping with its stated mandate of “promoting the responsible, sustainable and safe production, distribution and use of fertilizers,” in order to provide farmers with a better understanding of fertilizer price volatility and risks and actions they could take to ease those risks.

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