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4 risks in buying fertilizer

Jul 1, 2006 12:00 PM
David Hest


PERHAPS THE biggest lesson learned by the agricultural supply industry in the past year is that the business environment is riskier than ever, especially when it comes to fertilizer. Getting a handle on the key risks influencing your future can help reduce their impact, although these risks won't disappear.

According to Bruce Vernon, head of crop nutrients marketing for Agriliance, full-service agricultural retailers face four key risks as they approach fertilizer procurement and sales.

  1. Price risk

    The heightened price risk facing agricultural retailers is underlined by this year's rapid devaluation of nitrogen fertilizer prices from early winter record-high prices to the soft spring and summer markets that cut retail prices by more than $100/ton. Not too many years ago, it was typical for nitrogen prices from manufacturers to be good for 30 days at a time. Now nitrogen is re-priced at least every day and sometimes several times a day.

    “In the past, the difference between the high and the low in the market year was maybe $15 to $20/ton,” Vernon says. “Now it's as much as $100.”

    Vernon says that retailers who are coming to grips with increased price risk are working with customers to share this risk.

    “Acquiring fertilizer or any product without any kind of plan to reduce price risk is nothing more than speculation,” he says. “Many retailers think of themselves as low risk takers, but their actions are high risk if they don't have a plan.”

  2. Supply risk

    In the past, it was common practice for distributors to stockpile fertilizer to enable them to fulfill in-season demand. Now that's a rarity. Nobody wants to be left holding inventory at the end of the season.

    This new approach leaves retailers with the risk that distributors may not have supply necessary for late-season demand.

    “The amount of supply risk you face depends on your location,” Vernon says. “The further away you are from production, distribution centers and transportation corridors, the greater your risk.”

    Unfortunately, the solution may require taking on additional price risk, unless you are able to work with customers to assume some of it.

  3. Demand risk

    More than ever before, farmers are holding off on making planting decisions until just before the crop goes in the ground. This affects the entire supply chain's ability to pre-position supplies, given the recent price volatility that has increased price and supply risk. The solution? Know your customers as best you can.

  4. Expense risk

    The size of your standing expense load overshadows the three other major risks and determines to an extent what your options might be for controlling them, Vernon says. “Your expense load determines how much risk you can take on,” he says. “If you have minimal investment, you have a different risk profile that if you have a major plant investment. You may not be able to do much about your expense risk, but understanding it is important.”







 

SEFP ATE




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