When to Purchase Fertilizer: A Comparison of Fall and Spring Prices 4/27/2011 Bryce Borchers Graduate Student Department of Agricultural Economics Purdue University bborcher@purdue.edu Timothy Baker Professor Department of Agricultural Economics Purdue University baker@purdue.edu Bruce Erickson Associate Director, Center for Commercial Agriculture Department of Agricultural Economics Purdue University berickso@purdue.edu Brent Gloy Associate Professor Director, Center for Commercial Agriculture Department of Agricultural Economics Purdue University bgloy@purdue.edu ABSTRACT The recent increase in fertilizer price volatility has placed increased importance on the timing of fertilizer purchases. This study examines the common strategy of fall rather than spring purchase of fertilizer to manage price variability. Retail fertilizer price data for Indiana and resources available from the USDA are used to calculate the percentage discount to fall purchase. Considerable discounts were observed for the fertilizer products considered with anhydrous ammonia producing the largest average discount. Producers are encouraged to consider this strategy as a way to manage input prices.
$/ton Increased volatility in the price for fertilizer has been observed over the past few years. Beginning in late 2008, fertilizer prices surged to all time record highs. As an example, an Indiana retailer priced anhydrous ammonia at $1,118 per ton in October of 2008, nearly a 70% increase from 2007 levels. Other fertilizer products followed similar price spikes only to see prices tumble back down in 2009. This recent volatility has put increasing importance on the timing of fertilizer purchases. A common strategy used by producers is the purchase and application of fertilizer after harvest, as many believe fertilizers cost less in the fall than they will in the following spring. The goal of this paper is to examine this strategy and determine if it indeed results in lower fertilizer prices for producers. Several different sources of fertilizer price information will be used to carry out this analysis. These sources include historic fertilizer prices for an Indiana retailer and two data sets publically available from the United States Department of Agriculture (USDA). The results from these two analyses will be combined to fully examine the fertilizer purchase strategy. Retail fertilizer prices from 2001 to 2010 were collected from an Indiana fertilizer dealer. Monthly average prices were calculated from the data and are graphed in Figure 1 which depicts the enormity of the late 2008 price surge. Prices began retreating in early 2009, which resulted in cheaper fertilizer prices in the spring rather than in the fall for that particular growing season. Prices have begun to rise again in late 2010, similar to that of 2008. These dramatic fertilizer price changes can have substantial impacts on farm profitability and place increasing importance on the timing of fertilizer purchases. $1,400.00 Figure 1. Monthly Retail Fertilizer Prices $1,200.00 $1,000.00 $800.00 $600.00 $400.00 $200.00 Potash DAP Urea Amm. Sulf NH3 $0.00 Source: Indiana Fertilizer Retailer
Using the retail fertilizer data, the percentage change was taken from the October price for fall and the April price for spring for the 2002 2010 growing seasons. This results in a measure of discount to fall purchase and application as opposed to spring purchase. The percentage discounts for five fertilizer products are graphed in Figure 2. As stated earlier, the price drop in early 2009 resulted in cheaper fertilizer in the spring rather than fall. This is depicted in Figure 2 as large negative discounts to fall purchase. On average, positive discounts of 10% - 20% were observed for all five fertilizer products listed. Liquid fertilizer data was also available at the retail level; however it was only quoted from December to August for any given growing season. The prices quoted in December where a part of a pre-pay program that would allow for delivery of the product in the spring. The percentage change in prices from December to April was calculated for the 2002 to 2010 growing seasons. Figure 3 reports the percentage change in prices of liquid fertilizer. Much like dry fertilizer, there were considerable discounts to pre-paying for fertilizer except for the 2009 growing season. Positive returns were generally observed in the 5% 10% range. To extend the analysis beyond the available retail data, two resources publicly available from the United States Department of Agriculture (USDA) are included in this study. One resource is the Monthly Index of Prices Paid, which is available at http://quickstats.nass.usda.gov. Indices are available for potash and phosphorus, nitrogen, and general fertilizer. The indices are available dating back to 1997, and are graphed through 2010 in Figure 4. There is a clear spike in the fertilizer indices in 2008, which is similar to that of the retail fertilizer price data. Because the indices aggregate a number of fertilizer products into one price index, a common concern is whether the indices are representative of actual fertilizer prices faced by Midwest producers. To address this issue the Pearson correlation coefficient, which is a measure of how two data series move together, was calculated for each of the retail fertilizers with USDA s general fertilizer index. Also tested was the nitrogen based fertilizers (urea, ammonium sulfate, and anhydrous ammonia) with the nitrogen index, and the potash and phosphorus based fertilizers (potash and DAP) with the potash and phosphorus index. The results of these calculations are reported in Table 1. It is evident that a high correlation exists between the retail fertilizer price series and USDA s fertilizer indices. Table 1. Pearson Correlation Coefficients USDA General Fertilizer Index USDA Nitrogen Index Potash 0.922-0.930 DAP 0.975-0.974 Urea 0.977 0.979 - Ammonium Sulfate 0.909 0.910 - Anhydrous Ammonia 0.953 0.966 - USDA Potash and Phosphorus Index
40.00% 30.00% 20.00% 10.00% 0.00% -10.00% -20.00% -30.00% Figure 2. Percentage Discount to Fall Purchase, 2002-2010 59% 99% 63% 49% Capped due to extreme values -35% -47% 2002 2003 2004 2005 2006 2007 2008 2009 2010 Potash DAP Urea Amm. Sulf NH3 Source: Indiana Fertilizer Retailer 40.00% Figure 3. Percentage Discount to Fall Purchase, 2002-2010 30.00% 20.00% 10.00% 0.00% -10.00% 28-0-0 LAP 18-18-0-20.00% -30.00% 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Indiana Fertilizer Retailer
Index of Prices Paid (1990-1992) 800 Figure 4. USDA Price Index for Fertilizers 700 600 500 400 300 200 General Fertilizer Nitrogen Potash & Phosphate 100 0 Source: Monthly Index of Prices Paid, USDA. Available at http://quickstats.nass.usda.gov. The second resource available is USDA s fertilizer use and prices available at http://www.ers.usda.gov/data/fertilizeruse/. For various fertilizers, prices ($/ton) are listed for specific months since 1960. To test for a discount in prices for fall application the percentage change from fall to spring was taken for the 1967 to 1995 growing seasons. From 1996 to date, prices are only measured on an annual basis in the month of April; therefore the percentage change in price from fall to spring could only be calculated through the 1995 growing season. Figure 5 and Figure 6 report the percentage change in prices from fall to spring for the 1967 1995 growing seasons. From 1967 1987 the discount to fall application was small, with a few exceptions, and generally inconsistent from year to year. More consistent discounts from fall application were observed in the actual fertilizer price series from 2002 to 2010 for all five fertilizer products considered. A similar trend exists for anhydrous ammonia from 1988 to 1995 where discounts of 10 20% were observed. For the 1974 and 2008 growing seasons, fertilizer prices increased dramatically from fall to spring resulting in large discounts for fall application. These price movements were likely a result of increased commodity prices which increased the demand for fertilizer and put upward pressure on fertilizer prices. Only two times in the 38 years considered, 1976 and 2009, were there considerable losses, irrespective of fertilizer type, to applying in the fall. These events occurred closely after the two years of large discounts to fall application, likely a result of retreating fertilizer prices. Average percentage changes were calculated for the entire range of data and by decade, with the results reported in Table 2. For every range considered anhydrous ammonia had the largest discount to fall purchase and application. The 2000 s observed the largest discounts than any other decade for all five fertilizer products.
40.00% 30.00% 20.00% 10.00% 0.00% -10.00% -20.00% -30.00% Figure 5. Percentage Discount to Fall Purchase, 1967-1981 52% 90% 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 85% 98% Capped due to extreme values Potash DAP Urea Amm. Sulf NH3 Source: Average U.S. Farm Prices of Selected Fertilizers, USDA. Available at http://www.ers.usda.gov/data/fertilizeruse/. 40.00% 30.00% Figure 6. Percentage Discount to Fall Purchase, 1982-1995 20.00% 10.00% 0.00% -10.00% -20.00% Potash DAP Urea Amm. Sulf NH3-30.00% 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 Source: Average U.S. Farm Prices of Selected Fertilizers, USDA. Available at http://www.ers.usda.gov/data/fertilizeruse/.
Table 2. Average Percentage Change from fall to spring Potash DAP Urea Amm. Sulf NH3 Entire Range (1967-1995 & 2002-2010) 7.50% 8.19% 6.37% 5.92% 12.35% 1970's (1970-1979) 8.06% 7.91% 8.77% 9.30% 12.39% 1980's (1980-1989) 5.10% 5.45% 3.06% 2.15% 8.43% 1990's (1990-1995) 2.97% 5.14% 7.32% 2.65% 15.11% 2000's (2002-2009) 19.14% 13.53% 10.19% 11.05% 21.85% CONCLUSIONS Due to increased price variability for fertilizers, the timing of fertilizer purchases has increased importance for producers. Substantial average annual discounts were observed for all of the fertilizer products, the largest of which being anhydrous ammonia at 12.35% over the entire range of the data. The 2000 s saw the highest average discount to fall purchase than any other decade for all of the fertilizer products considered. It is worth pointing out the extreme price movements of 2008 and 2009 were not new occurrences for the fertilizer industry. On a percentage basis some of the largest fertilizer price movements occurred in the 1970 s. With recent increases in commodity prices, fertilizer price variability will likely stay at an elevated state. To manage this price variability, producers can seek price discounts by the purchase and application of fertilizers in the fall rather than in the spring. Using historic data, this strategy has proved to be successful in reducing the price paid for fertilizer products on average. These price savings have also appeared to increase over the past decade, creating more incentive for producers to purchase fertilizer products in the fall rather than waiting till the spring.
REFERENCES USDA/ERS. Average U.S. Farm Prices of Selected Fertilizers. Available at http://www.ers.usda.gov/data/fertilizeruse/. USDA/NASS. Monthly Index of Prices Paid. Available at http://quickstats.nass.usda.gov. Retail Fertilizer Price Data. Anonymous Indiana Fertilizer Retailer.