Hedging Urea for Forestry Applications in the US South

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 usedin 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 thegap 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, whichbegan 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. South. J. Appl. For. 30(3):142–146.