Hedging effectiveness of fertilizer swaps

ABSTRACT

The fertilizer swaps market is a potential tool to protect against fertilizer price risk. The swaps evaluated here are cash settled using The Fertilizer Index. Hedge ratios and hedging effectiveness are calculated for urea and DAP diammonium phosphate (DAP)) swaps. Urea and DAP swaps perform poorly as a hedging tool over a one-week horizon. As the hedging horizon increases, the hedging effectiveness of swaps improves. The swaps are more effective in mitigating risk across ocean freight routes than across inland routes. The limited hedging effectiveness is due to high spatial basis risk in fertilizer markets.

KEYWORDS:

• Fertilizer
• hedge ratios
• hedging effectiveness
• price risk
• swaps

JEL CLASSIFICATION:

• C58
• G13
• Q13

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ In addition to FIS, CME also offers various fertilizer swaps that are settled based on prices from ICIS and Profercy. However, their trading volume is considerably lower.

² Cointegration test and ECM results available from authors upon request.

³ A higher weight is placed on Thursday. The release date of the index.

Additional information

Funding

This work was supported by the National Institute of Food and Agriculture [OKL02939];A.J. and Susan Jacques Chair;