Risk Management in Fertilizer Markets: How One Supplier Manages Price, Logistics, and Execution
The global commodity fertilizer markets are dynamic, political, and volatile — and it’s been especially wild this year, write ADM’s Ben Adam and Jake Niederer at CropLife. The entire fertilizer system has felt a significant supply strain due to the increased grain and oilseed production and inconsistent global imports, including lost imports during the pandemic, and government intervention into normal trade flows. These factors and more have contributed to hefty price increases and other business risks that come with procuring, selling, and delivering fertilizer.
One reason that our team at ADM Fertilizer has been successful, even during market fluctuations, is because of how we manage and respond to various risks. In our business, we work to manage risks, so that dealers and producers alike can achieve their crop production and yield goals each year.
Price Risk
The perfect storm of low fertilizer inventories, combined with high domestic and global demand, drives up commodity prices, which is the predicament we’re in right now. Market jumps cause producers to look more closely at how they can tighten their operating budgets, with fertilizer accounting for roughly a third of those costs. Due to the uncertainty, producers often delay and end up buying fertilizer at the last minute, which can create volatility for dealers who have staged product for the local markets.
At ADM, we offer a customized approach to buying nutrients in bulk that can save time and money, especially during the busiest seasons. This approach allows dealers to manage how much risk they can take on, instead of having a fixed long position or exposure to securing product. Our price point can be managed through making financial swaps, leveraging our geography, and working creatively with key partners to position tons for the market at the right time.
Sometimes great risk management plans fail, and they don’t quite come together. Today’s market is no exception. While the average retail prices for Potash are in the high $400s, recently tipping $500, replacement Potash is trading closer to $600 for farmers in the Midwest. When the industry norm is to sell behind replacement, profit margins can start to close, making risk management even more critical.
At ADM, our global footprint has allowed us to learn and stay in front of key factors that will drive the grain and fertilizer markets. It is a necessity to be connected to the primary drivers in this market and have intel from these regions. We do this by leveraging our distribution partners who share information about global markets and political climates that can create wild volatility and uncertainty.
In addition, we are able to utilize many different commodity merchandising techniques to manage flat price risk. We utilize and engage in a variety of other non-fertilizer commodity markets as part of our hedging strategy. We tap into ADM’s global commodity trading platform and synergies in other commodity markets across regions. In combination, these opportunities help make ADM Fertilizer’s risk management strategies unique in the industry and help us offer dealers competitive pricing mechanisms to manage price risk.
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