New season 2019
It is likely we will see a higher starting value for ammonium nitrate fertiliser in the UK this year. Recent announcements on the continent have indicated a rise of at least £20 - £25/tonne is likely. In addition, the granular urea market remains very firm and the pound has weakened; both of which lead industry commentators to predict a significantly higher price than last year's opening of £217 - £220/tonne. In light of this, and with uncertainty remaining around wheat yields and prices, it's more important than ever to consider options for managing risk associated with fertiliser purchasing.
But how can farmers manage risk and target consistent profitability in a nitrogen market that can't be linked to futures and is subject to unpredictable price swings throughout the season?
Well, there is a way to manage risk and cash flow and over the last four years Frontier's fertiliser risk management tool, Flexi N, has delivered on this. But before I come to that I want to take time to examine the product in question and the nature of the market we operate in.
Nitrogen fertiliser, arguably the most significant innovation in modern agriculture, is one of the most important crop inputs; underpinning yield and quality. It remains extremely good value for money, with a return on investment of between £3 to £4 for every £1 invested in nitrogen fertiliser
However, nitrogen remains one of the most variable costs for growers with prices often moving in a wide band across a season. These volatile movements create risk and can have an impact on gross margins. They make profitability and cost of production difficult to predict and manage.
As with grain markets the key word for fertiliser is volatility and the key factors influencing fertiliser volatility are:
- Raw material cost
The principal raw material in nitrogen fertiliser is natural gas which is converted to ammonia. This is then turned into either urea, or ammonium nitrate. Natural gas prices can fluctuate and also vary around the world.
A significant amount of UK fertiliser is imported and currency fluctuations can play a huge part in determining price, even for product manufactured here. Currency affects the relative competitiveness of imported product and the price UK manufacturers pay for raw materials.
- Supply and demand
As with any traded commodity one of the key factors determining the market is supply and demand. Triggers here are the commissioning of new fertiliser plants which tend to take at least five years from announcement to production. Demand from other major agricultural markets around the world such as Brazil, India and China will also affect this.
All of these outside factors have contributed to the volatility we have seen over the last 10 years. Additionally, none of them are predicted to reduce their impact on our market. In fact, with uncertainty around Brexit, some could cause even more turbulence in years to come.
Managing the risk
In the UK, the fertiliser ordering period tends to start in May or June with a campaign by fertiliser manufacturers/importers who offer farmers a discounted price to encourage them to book product and have it delivered early. With the benefit of hindsight market prices in previous seasons demonstrate that this can frequently be a good commercial farm decision as the price often steadily increases from June through to December. However, as always in markets, there are no guarantees. Manufacturers frequently cite the unpredictability outlined above along with a warning that prices can change at any time.
The graphs below highlight that no two years are ever the same and that indeed in some years, such as 2015, fertiliser prices have fallen during the important June to December window.
What can we do to mitigate risk?
As with grain markets having a plan is important but unlike grain markets there is no easily accessible futures market for fertiliser that we can use to hedge a position. To protect against 'putting all your eggs in one basket' or crossing your fingers and taking a guess, have a plan and spread your risk.
For example, a sensible plan might be to split purchasing into a third pre-harvest, a third Oct-Dec and the final third in spring. Or, you might attempt to watch the market and decide on a price target and buy if and when that is achieved; which isn't guaranteed of course!
At Frontier we have developed a risk management tool to help plan with greater confidence. 'Flexi N' gives a market averaged price for the period from the start of the campaign (May/June) through to the end of December. It can be used to purchase Nitram, DoubleTop or SingleTop fertilisers. We use our significant buying power to spread purchasing over the full period and this enables us to smooth out potential rises and falls of the market for growers. The performance of this tool is illustrated in the graphs below by the dotted line which as you can see has protected farmers who used it from large increases in years where the price steadily rises but also allowed them to benefit in a year where the market falls, as in 2015.
Savings can be considerable; a farmer buying 200 tonnes of Nitram this season for November using Flexi N paid £235/tonne compared to £290+/tonne for spot price in November. A saving of £55/tonne which equates to £11,000 of risk-managed cash on this purchase despite the lack of futures market to hedge against!