Loading...Fertilizer Swaps
The Fertilizer Market
The global physical fertilizer market had an estimated annual turnover of $500 billion in 2008 with some 1 billion tonnes of raw materials and products traded annually. But this huge market is at the mercy of ever-changing fundamentals.
FIS is tapping this huge potential market with the cleared FIS Fertilizer Swap, a derivative that can be traded standalone or combined with freight or other commodities for full risk management.
FIS has successfully established the FIS fertilizer swaps platform in the Nitrogen (Urea & UAN), DAP, and Ammonia markets to serve a well-established and growing client base.
FIS has been trading swaps settled against the long-standing and robust Fertilizer Index for four years. The addition of clearing will increase trading capacity, improve operational efficiencies and facilitate optional post-trade anonymity, making the product more appealing to participants from outside the industry — particularly financial institutions.
The FIS Fertilizer Swap
The FIS Fertilizer Swap is a cash-settled paper trade settled against the Fertilizer Index, which is produced weekly and represents physical spot prices in the market. The cash-settled swap allows a buyer and a seller (counterparties) to agree on a price in the forward market for a specific fertilizer product for a specified future period.
The swap is an agreement between a buyer and seller to pay the difference between a price agreed upon today and the future price of a specific fertilizer at an agreed point of time. There is no payment until settlement date and therefore no capital outlay.
There is no delivery of physical product and the swap is settled exclusively against the Fertilizer Index price which is produced weekly and represents physical spot market prices.
The Fertilizer Index is a single reference price calculated from three weekly price ranges provided by FertilizerWEEK, FERTECON and FMB using a simple averaging technique. The highest and lowest of the six numbers are discarded, and an arithmetic average is calculated from the four remaining numbers.
Each panelist posts their price ranges every Thursday, reflecting physical business concluded (both spot and nearby forward business for shipment up to 30 days in the case of urea and ammonia, and up to 60 days in the case of DAP).
The Fertilizer Index derives an average price from spot price ranges for each product and physical cover may be booked within a price range, not necessarily at the spot average as represented by the fertilizer index.
For this reason, the spot physical price and the Fertilizer Index price may not converge and there is some basis risk and imperfect hedging. However, it should be noted that substantial physical volumes are contracted based on the Fertilizer Index formula price which allows perfect hedging.
The FIS Fertilizer swap offers a number of benefits.
Natural sellers, such as fertilizer producers can lock in margin progressively for a proportion of their length. Traders can lock in margin in a rising or falling market. Wholesalers, distributors or industrial buyers can secure forward prices for inputs to underpin downstream retail or end-user sales. End-users can secure a forward price and manage exposure to physical market volatility.
Swaps provide an opportunity to test the strength of forward prices and the depth of the market without committing product or capital. Building a swaps position in tandem with a physical book allows margins to be secured and management of exposure to extreme price changes in the physical market.
The FIS fertilizer swap leverages a well-established and a growing client base which includes some of the largest trading companies in the world.
For more information about FIS fertilizer swaps or to discuss trading opportunities, please contact ferts@freightinvestor.com.
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