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Hedging Urea for Forestry Applications in the US South

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This article introduces hedging with futures contracts as a risk management strategy in forestry. It tests and indicates the feasibility of using newly available urea futures contracts traded on the Chicago Mercantile Exchange to hedge urea, the most common nitrogen fertilizer used in forest management. A significant direct price movement relationship exists between urea cash prices and urea futures. In detailing how to implement this hedge, net realized urea prices are calculated for two fertilization seasons for the US South in 2004 and 2005. Both hedges reduce the gap between expected costs and actual out-of-pocket costs relative to unhedged urea purchases. These results suggest that urea futures contracts can effectively reduce price risk, defined as unexpected price changes, for forestry applications. The newness of the urea futures contract, which began trading in May 2004, limits the ability to assess the long-term impacts on the SD of net realized cash costs for urea over longer time frames.

Keywords: Fertilization; futures contracts; risk management

Document Type: Research Article

Affiliations: Forisk Consulting, Augusta, GA 30904.

Publication date: August 1, 2006

More about this publication?
  • Each regional journal of applied forestry focuses on research, practice, and techniques targeted to foresters and allied professionals in specific regions of the United States and Canada. The Southern Journal of Applied Forestry covers an area from Virginia and Kentucky south to as far west as Oklahoma and east Texas.
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