Optimal Cash Purchase. Price Risk. Phil Kenkel Oklahoma State University

Transcription

1 Optimal Cash Purchase Strategies t to Reduce Fertilizer Price Risk Phil Kenkel Oklahoma State University

2 Background Fertilizer represents 30-35% 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 for both products fell over 50% in late summer of 2008

3 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 changes of $500/ton in 2008 Dealers are shifting to advance purchases Increased interest in timing purchases

4 Fertilizer Price Risk Tools Futures contracts on CME were discontinued due to lack of liquidity Direct Hedge Exchange, based in Switzerland, has a 5,000 ton contract size OTC products require relationship with broker and involves counterparty risk Cross hedging with natural gas contracts is ineffective

5 Cash Purchase Strategies Attempt to diversity risk by spreading purchases across year Take advantage of seasonal patterns Require working capital and storage facility Could systematically purchasing fertilizer on the same date(s) each year reduce risk?

6 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 and fall application seasons 25%, 50%, 75% and 100% warehouse capacity Prices adjusted for interest

7 Scenarios Baseline-even even purchase each month Examined the effect of purchasing 25%, 50%, 75%, 100% of annual needs at the same date each year Determined best dates

8 Table 1: Impact of Mechanical Purchase Strategies on Average Fertilizer Price for Various Warehouse Capacity, Locations and Product Forms Urea-Tulsa Urea-Enid UAN-Tulsa UAN-Enid DAP-Tulsa 25% % % % Even Monthly Prices shown relative to a base strategy of purchasing an even amount each week 3-7% advantage in systematically purchasing on the best date

9 Table 2: Impact of Mechanical Purchase Strategies on Price Variance for Various Warehouse Capacity, Locations and Product Forms Urea-Tulsa Urea-Enid UAN-Tulsa UAN-Enid DAP-Tulsa 25% % % % Even Weekly Prices shown relative to a base strategy of purchasing an even amount weekly Mechanical strategies can reduce risk by up to 57%

10 Table 3: Difference Between the Minimum and Maximum Average Fertilizer Price for Various Warehouse Capacity, Locations and Product Forms Urea-Tulsa Urea-Enid UAN-Tulsa UAN-Enid DAP-Tulsa 25% % % % Prices shown relative to a base strategy of purchasing an even amount weekly 7-16% Difference between systematically purchasing on best And worst dates

11 Table 5: Optimal Time Periods to Purchase Fertilizer Urea-Tulsa Tl Urea-Enid UAN-Tulsa Tl UAN-Enid DAP-Tulsa Tl Minimum 2 nd week of 1 st week in 2 nd week of 2 nd week of 1 st week in Average July July November November November Price Maximum 4 th week in 1 st week in 4 th week in 4 th week in 4 th week of Average March April April April March Price Minimum Varying Varying 4 th week of 2 nd week in 2 nd week in Variance amounts over 50 weeks of the amounts over 49 weeks of the November January plus 4 th week in November January plus 2 nd week of year year November Maximum 4 th week of 1 st week in 4 th week of 4 th week in 4 th week of Variance October April April April March Prices shown relative to a base strategy of purchasing an even amount each week

12 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

13 Conclusion (continued) 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 to purchase

14 Limitations Historical price patterns may not reflect structural change in the industry Fertilizer markets in the Southern Plains reflect local basis Corn belt producers might have more difficulty in taking advantage of seasonal price patterns Results provide a starting point for dealers and producers who are making decisions in timing purchases