Managing or speculating?

Most good farmers are also really good speculators. It comes with the territory. You grow grain and you have to sell it so as to maximize your returns. Over time you have figured out that selling it off the combine into distressed pricing isn't a great idea. Over time you have noticed that grain prices tend to be lowest just at the same time that input prices tend to be lowest. So it usually makes sense to buy your inputs early and sell your crop late. It doesn't alway happen that way - if you bought your nitrogen at the wrong time last year you might have been able to buy it cheaper in the spring but usually you don't go far wrong by buying inputs at yearend and delaying grain sales as long as possible.

This quote from Mayo Schmidt's 3rd quarter news release shows that you aren't the only person in the industry that struggles with unpredictable commodity prices:

Lower fertilizer margins during the quarter reflect negative margin sales and very little in-season appreciation linked primarily to phosphate fertilizer.

Translation: we really really like the speculative gains that we usually get on fertilizer and had in fact planned on those gains in our budget but we got whacked by the market, just like everybody else.

Those speculative gains on your fertilizer can make a huge difference to crop profitability so it may be helpful to think about the components of the fertilizer price. In the fall of the year the whole fertilizer industry cuts its margins to generate sales. That means that regardless of what is happening in the global market, if you can buy during the period of time when margins are typically depressed then you have at least taken your pound of flesh out of the retail system.
You can't however ignore the world market because it can still whack you, no matter how good a job you do of beating up your local supplier. Western Canada is isolated from the world market by geography but given enough time the geography can be overcome. If the retailers and brokers have time on their hands they can arrange barges from New Orleans to Minneapolis, offload them onto trains, bring the trains into western Canada, transload them to trucks and deliver the fertilizer to western farmers. That all takes time. Even if they manage to cut out the trip to Minneapolis and rail the fertilizer direct from New Orleans it still takes a long time. There has been a very limited amount of fertilizer brought in through Thunder Bay and even some through Churchill but both of those ports have their own challenges in terms of established shipping patterns and offloading facilities. The point is that western Canada is isolated and that gives our local producers market power to raise the price as we approach spring.

In general phosphate fertilizer in western Canada is priced FOB New Orleans plus freight. That gives rise to the bizarre situation where a farmer who can see the plant at Fort Saskatchewan pays more than his brother in law who farms at Carmen, Manitoba despite the fact that the fertilizer in Carmen has been trucked 1000 miles from Fort Saskatchewan.

Nitrogen fertilizer is even more isolated by geography because none of the forms used in western Canada easily lend themselves to long distance shipment. Urea can obviously be trucked longer distances but it is relatively unconcentrated so the cost of freight quickly becomes a significant portion of the total cost of the product to the end user. Ammonia requires specialized transport equipment and the manufacturers are quick to exploit the differences between the regulatory systems in Canada and the US to prevent easy cross border arbitrage. Liquid fertilizer is just too dilute to consider shipping it long distances.

That's a chart from IRM (International Raw Materials - which includes the remnants of what we once knew as Sherritt). It clearly shows the nitrogen spike a year ago and looking at it with the benefit of hindsight we really have to say "well - we should have seen that coming."

So realistically you are stuck with getting supply from your local manufacturers but your negotiating power increases exponentially as you move farther out from spring. On May 10th you haven't got many choices but on October 10th you can beat the basis out of your local retailer and play the international market against your local manufacturer. Another day we'll talk about the risks you take on when you prebuy fertilizer, the relationship between nitrogen prices and natural gas, on-farm storage versus dealer storage and negotiating strategies to get the best prices but right now its late and I'm going to quit typing.