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When locking in fertilizer prices, too many farmers don’t also lock in corn prices, even though fertilizer prices have consistently followed corn prices up and down. Lance Unger, Carlisle, Ind., takes a different approach. “It’s the only true hedge in the market,” he says.
Along with fertilizer, the Ungers lock in diesel early. “Welocked in diesel (in the spring), at about $3.20/gal., compared to about $3.80 orhigher later on,” he says. “That was through our co-op.
“We’re not fool proof,” he says. “We can lose money. It can be hard to haul $6 corn to the elevator when the price is $8. Also, with these high prices, some guys get short-sighted. They sit around and think grain prices are going higher. But they also paid high prices for fertilizer. If grain prices go down, they’re in trouble.”
Fuel up early
Along with fertilizer, the Ungers lock in diesel early. In the spring, it was about $3.20/gal., compared to about $3.80 or higher later on, he says. “That was through our co-op. They’re trying to provide a break on diesel for guys who’re being aggressive.”
Irwin says more growers are interested in booking inputs and sales simultaneously, with growers often more comfortable buying than selling, “even though the input markets are far less transparent than corn or soybean markets.”
Adam Dyer, Unger’s marketing consultant, says the old thorn in the side of not knowing total cost of production can lead to mistakes in an input/price management program. “Know your true cost of production before locking in inputs and selling grain,” he says. “True cost of production takes into consideration all costs of doing business, not just direct input costs of cash rent, seed, fertilizer and chemicals: don’t forget principal and interest payments, drying, storage, machinery depreciation, family living expenses, owners’ draw.”
Miller says a major mistake “is the failure to consider all of the risks involved when you lock in the prices. “There are more tools available for locking in the commodity than the inputs,” he says.
“There’s also the counter-party risk. Check out whom you are buying from. If you’re buying ahead, make sure you can take delivery.”
Farmers should know how reliable the supplier is, Irwin adds. “Know what happens if you make a favorable contract and the local fertilizer contractor goes belly up.”
Still, failing to makes sales when inputs are bought is the biggest blunder a grower may face. “Given the correlation of fertilizer with grain, particular with corn; and because inputs are so much more expensive, I would recommend recalibrating and rethinking about scale-up strategies for fertilizer and corn sales,” Irwin says.
“If you buy N at $1,200 and don’t sell corn at the same time – you’re pulling a ‘VeraSun.’ They went bankrupt locking in input prices and letting the output price go unhedged. You can also get into trouble by locking in high cash rents and not hedging corn or bean prices, which helped cause the higher rent prices.”
Unger is still learning the ropes with a lot of direction from his father. “We’re not fool-proof,” he says. “We can lose money. It can be hard to haul $6 corn to the elevator when the price is $8.
“Also, with these high prices, some guys get short-sighted. They sit around and think grain prices are going higher. But they also paid high prices for fertilizer. If grain prices go down, they’re in trouble.”
One of Dryer’s regular farmer clients, Lance Unger, Carlisle, Ind., regularly matches input purchases with grain marketing. He says growers should explore how to enhance their ability to do both. “Talk to your elevator reps,” he says. “Their job is to watch the markets and give advice on what they think they’ll do. Talk to Extension and go to meetings in your area, which may be emphasizing input management.”
Alan Miller, Purdue farm management specialist, encourages growers to seek out people in the fertilizer or seed industry. “If someone comes to an Extension meeting from the fertilizer industry and is knowledgeable of that industry, try to develop a relationship with that guy,” Miller says. “You can’t have too much information.”