You have to know that when a guy names his hog operation Purgatory Pork, he looks at life a little differently than most. So, it was no surprise to his fertilizer dealer when Kriss Lightner, Lohrville, IA, said he wanted to barter part of his growing corn crop for fall anhydrous in 2008, rather than prepay more money to the co-op.
“I already had prepaid expenses at the co-op for seed, chemicals and pasture fertilizer,” Lightner says. “With the volatility of the market this spring, I wasn't comfortable giving them additional money to prepay for fertilizer I wouldn't take delivery on until fall. It makes you a little nervous when you hear stories about co-ops being cut off financially.”
So, Lightner and his wife Deb wrote initial contracts to purchase 65% of their fall anhydrous ammonia needs and a forward contract for corn to cover the fertilizer cost with their 2008 corn crop.
Jeff True, field sales agronomist for Farmers Cooperative Company (FC), Farnhamville, IA, liked the idea. “My gut reaction was that it makes a lot of sense. Our business is based on volume and market share, and there's a lot of competition for grain from other co-ops, feed companies and ethanol plants,” he says. “We want the grain and we sell the inputs, so it made sense. I needed to chew on it awhile to see how it could be a win-win situation.”
THEN THE NEGOTIATIONS began. The contracts used co-op board prices, but the agreement meant FC had to buy the anhydrous with their money. Both parties “chewed” on what a fair interest rate would be for Lightner to pay to offset that cost.
In the final contract, Lightner bought anhydrous at close to $800/ton and agreed to pay for it with corn forward-contracted to the co-op at $5.81/bu. The contract stipulated that Lightner would pay for the anhydrous by Nov. 15, deliver the corn by Dec. 1 and take ownership of the anhydrous by Dec. 31.
By mid-fall, anhydrous prices reached $940/ton, and forward contracts for December delivery had dropped to $3.43. Lightner saved more than $100/ton on anhydrous and almost $2.40/bu on corn. His only additional cost in the deal was the 5% interest he paid the co-op for buying the fertilizer.
“It was one of the better deals I've done. With today's prices it's obvious I didn't prepay nearly enough,” Lightner says. “And, it was a good deal for the co-op, too.”
It's a pilot project. No matter how good a deal looks on paper, there's a big difference between working with one co-op member and offering the program to all 5,300 members, points out True.
“Normally we don't have a prepay program for fall anhydrous. But with the volatility in the market this year, we had a lot of guys wanting to lock in their price,” True says. “Last summer we might have had quite a few guys interested in a deal like we made with Kriss. But with corn below $4 and anhydrous close to $1,000/ton, I doubt we'd have many takers this fall.
“It's a perfect program when inputs and commodities are both high-priced,” True says. “It reduces risk for farmers more than it does for the co-op. But I don't see any reason why it wouldn't work with seed and chemicals, too. It would tie up a lot of the co-op's operating capital, and that could be an issue.”
IF FARMERS WHO prepaid for fall fertilizer aren't able to apply the product before the end of the year, the prepaid amount will become a credit on their account, applicable to any inputs or services they purchase. But, with the end of the year, they lose the price guarantees. “They may end up paying more for fertilizer, or it may actually end up costing them less,” True says.
The biggest drawback to the program from the co-op's viewpoint is: While the forward grain contracts are legally binding, a bank's lien supersedes them. The forward contract doesn't guarantee payment.
Conversely, if the co-op can't deliver the fertilizer, Lightner receives his principal back, plus interest for the amount of time the co-op held the funds. “It behooves both sides of the contract to perform,” Lightner says.
The name, Purgatory Pork, by the way, comes from the small creek that runs near the property where Lightner built his hog buildings, not a personal statement about the status of the industry.