In a previous issue I wrote about the importance of top growers aligning with input suppliers to reduce price risk and increase the likelihood of having adequate supplies.
In recent months we've learned manufacturers are shifting much of the price risk to suppliers. This has occurred for several reasons. The manufacturers' costs are higher and margins are slimmer. They can't continue to take the risks they have in the past and continue in business. For example, in nitrogen (N) production, some foreign countries' N production has lower natural gas costs to manufacture.
Suppliers, on the other hand, can't take the increased risk, either. If the price of N varies $120-150/ton/year and there's less than a $60/ton margin, suppliers don't have deep enough pockets to withstand that risk.
Bruce Vernon, director of marketing and risk management, crop nutrients for Agriliance, recently spoke at the Conservation Tillage Conference in Sioux Falls, SD, sponsored by The Corn And Soybean Digest.
At that conference Vernon shared the chart below.
If the trend continues, we'll likely import most of the N that we use in 2007. That presents considerable price risk due to currency valuations, transportation costs and risks and timing of purchasing decisions for producers.
If a barge is loaded with urea in Kuwait, it takes approximately 45 days to reach Houston, New Orleans, Louisiana or other destination ports. Then it may take another five to six weeks for that urea to reach the Midwest, providing rail cars or barges are available.
Suppliers can't take that kind of pipeline risk and not know who will purchase the product, and what they can get for the product when it arrives at the farm gate. That risk will ultimately end at the producer's desk if not properly managed.
Now, I'd suggest a producer could go to his supplier and say: “I will agree to purchase my inputs from you for the next three or five years.” Then, suppliers would know they have a customer and producers would know they have a supplier.
Price discovery can be another issue. I think that if both work together there can be savings of up to 10% or 15% of product costs as well as increased likelihood of supply.
Vernon indicated Agriliance can commit to a price for 10-12 months ahead of delivery. That's valuable because then one can manage both price and supply risk. This not only provides peace of mind, but also enhances bottom line profits.
He also cautioned attendees at the conference that even if you sell 2007, 2008 or 2009 crops at these attractive prices, you are not truly hedged unless you have input costs locked in. This provides an opportunity to do that.
With increased volatility ahead, use available tools to lock in price and cost risk.
The range expansion of December corn from 1970 through 1972 vs. 1973 through 1975 increased about four fold from about 50¢/bu. to about $2/bu.
If you use the same potential range expansion data and extrapolate to today, the contract life range of December corn for the last 37 years has been 99¢. It's logical to expect the December corn price range could increase to nearly $4/bu.
Does that sound unrealistic? I don't think so. In fact, you could probably describe a scenario that could justify $2.50 or $6.50 corn next fall, depending on weather, acres and demand.
Traditionally, many farmers had their downside protected by loan rate for corn and soybeans. With costs rising, you'll need to protect the downside with market tools as costs rapidly increase and break-evens are well above loan rate. This will require additional Risk Wise strategies.
Moe Russell is president of Russell Consulting Group, Panora, IA. Russell provides risk management advice to clients in 28 states. For more risk management tips, check his Web site (www.russellconsultinggroup.net) or call toll-free 877-333-6135.