If you read Eric Sfiligoj’s column in this issue first — and I don’t blame you if you did — then you know we’ve been pondering the industry’s prosects for the year ahead. Especially after we spent three interesting days at the Ag Retailers Association (ARA) Conference.
The big topic there was risk management, which couldn’t be more on target with the realities of what’s going on in the market now. Prices for inputs are sky high. No one’s quite sure what growers are going to plant next year — there doesn’t seem to be a bad decision any way you go, but still, everyone wants to make the best decision.
Anyway, I decided that I was going to sit down through a daunting, fact-filled session on fertilizer risk management on the afternoon of the second day. I was absolutely bound and determined to understand the content and know more about the subject than when I walked in.
Let me tell you, it hurt my head. Really, really badly. I was introduced to the concept of swaps — basically a futures market for hedging large, pre-season fertilizer purchases to help reduce the risk of buying at a price that ends up crashing between the time it’s bought and the time it’s sold. Not so hard, eh?
But understanding the specifics of how it actually works is a different story. By the time the February “Fertilizer Focus” issue comes out, I will be fully equipped to lay out the whole concept of swaps. But I’m not there yet.
And I’m not crazy, either. I was concerned that I still didn’t have a full grasp on swaps even after the marathon session, so I asked a retailer I know well who sat through it what he thought.
“Yeah,” he said, looking down, “but it’s not something we’ve tried. We have some concerns about the process. But we’ll keep looking at it. It’s not at all like grain futures, which we’re very familiar with. It’s more complex.”
OK, so I got some validation. So after the show, I called someone who I know is doing swaps. He started into a general explanation, then stammered a bit and said: “I’m really destroying this explanation. If I had you here in my office and I could show you on a whiteboard, I could make it crystal clear.”
It’s a small comfort that I’m not quite as stupid as I thought I was. However, it’s a bit unsettling to me that fertilizer, which has been the most profitable aspect of retailing for years (as evidenced by no less than our CropLife 100 Retailers survey data), is less and less of a sure profit thing. Virtually everyone recognizes that the price risk for fertilizer now lies squarely on the shoulders of the distribution channel.
It’s not exactly fair, but it’s a reality we’re going to have to live with for the foreseeable future. The market is global now, and demand and supply will shift in myriad ways, some we will see coming and some that will hit us like a freight train. As hard and complicated as it might be, retailers need to fully understand the risk they face, and be as proactive as possible in staving it off.
Of course, there is one important way to reduce risk that we can all understand, and that Bruce Vernon of Mid-Kansas Co-op noted during his presentation at the ARA Conference: “Sell your fertilizer to growers.” Nothing’s more fundamental than that. But I think it’s clear that retailers will need to be open to other creative ways to manage risk. No one can afford to make a big mistake in today’s uncertain ag economy.
