Buying crop inputs isn't as simple as it used to be. Last season, $4 corn prices motivated U.S. farmers to plant more corn, and those prices had the same impact globally. Suddenly fertilizer and fuels were in tight supply, and prices shot up.
Although the latest estimates predict that the number of U.S. corn acres could be down slightly in 2008 from last season, that decline probably won't have much of an impact on global fertilizer markets. “The productive capacity of fertilizer manufacturers has been stretched to the limits, and demand is simply outstripping production,” says Keith Swanson, manager of Dealer Risk Management Services for CHS.
Globally, the industry has gone through many changes in the last few years, he adds. “The supply chain has lengthened, with domestic production down and fertilizer now coming from places as far away as the Middle East and the Caribbean,” he says. “Supply risk is greater, price risk is greater. And while manufacturers are trying to expand their capacity, it will take years to significantly increase production.”
In the meantime, fertilizer prices are expected to stay strong and supplies tight through spring. “The number-one risk for this spring is supply risk: Will there be enough and will dealers be able to restock quick enough to meet farmer needs? Locking in fertilizer purchases sooner than later will help farmers guarantee they have product,” Swanson says.
Tight fuel supply
Experts in the petroleum industry echo that advice. “Producers need to make sure their fuel supply is secured,” says Dan Beauvais, vice president of the petroleum division of AgLand, Eaton, CO. “Price is not really a concern if you can't get the product. That was the case in some areas of the country this past fall: There were temporary shortages.”
Beauvais ties those shortages to the increase in the number of acres planted, which increased demand for fuel, but also to the rising price of crude oil. “Some folks were put off by rising prices and waited to fill, hoping prices would come down, but that doesn't look like it will happen anytime soon,” he says. “In fact, fuel for 2008 probably won't be cheaper than last year. Expect it to cost more.”
Based on the current cost of crude oil, fuel prices should be in the $4 to $5 range, Beauvais says. “Farmers should probably lock in a price for the second quarter of 2008 now, even if it's 15 to 20 cents higher than the current price,” he advises. “At least that way they can calculate their margin potential and know where they stand.”
Although still an ag-based cooperative, AgLand has grown its petroleum business in recent years by selling to more industrial and government customers north of Denver. But Beauvais says if shortages were to affect the cooperative, it would give priority to its farmer-members and retail outlets. “So far, we've always been able to maintain adequate supplies, but if just one part of the energy delivery system breaks down, say in a pipeline or at a refinery, we could see temporary shortages,” he says.
The best way to avoid supply problems is to contract for at least the majority of the farm's fuel needs, Beauvais says. “Over 75% of our producers have fuel contracts with the co-op, usually for three to six months out,” he says. “And our contracts also offer some downside protection, for a small per-gallon fee. Once they sign the contract with us, they can relax and not worry about that input, at least.”
For retailers, getting more commitments from customers means they reduce their risk, as well, and can contract for the right amount of product. “It allows us to plan and buy further into the future, which offers the potential to save everyone money in this type of volatile petroleum market that we've been in the last few years,” Beauvais says.
Outlook for spring
Expect production costs to be higher in 2008 and input supplies to be strained in some areas, says Alan Miller, ag economist at Purdue University. “Costs per acre will definitely be up this year, as much as 25 to 30%,” Miller states. “But there are other factors that are impacting those costs, besides price. Nitrogen recommendations have changed in recent years, based on a new agronomic approach, which has increased optimum rates for some fields. And more farmers are planting GMO seed each year, which costs more. And many farmers are raising their seeding rates to push corn populations and production, so that increases seed costs, as well.”
With the rapid increases in commodity prices this past year, land rents also have been affected, Miller notes. “As existing contracts expire, landlords will likely be looking to share in higher crop prices, despite the fact that input costs have also gone up significantly,” he says.
Minding your margins
It was almost easier to manage margins with $2 corn, Geiszler says. “They were thinner, but inputs were more stable and there was less risk in the marketplace at $2 corn,” he says. “Now you need to manage the costs of cash rent and all inputs, and the price swings can be significant. There can be greater potential for gain, but also the possibility of greater losses if risk management isn't implemented at both ends of expenses and income.”
Profitability is less about what something costs than about how it impacts your margins, Swanson says. “If you can lock in your fertilizer costs, and at the same time hedge it with crop sales, you can lock in your margins and know you'll be making a profit,” he explains. “That's really what farmers need to get used to doing in this kind of market situation. From a financial standpoint, farming needs to be more like manufacturing: The farmer needs to get better at locking in input costs and tracking his margins throughout the crop production process.”
Farmers need to be thinking farther out, in terms of input buying, as well. “They should really be thinking about next fall already,” Swanson adds. “The days of waiting until late summer to worry about fertilizer needs for fall are gone.”
He says there is an upside to better long-term planning. “It should provide more consistent product flow and a more reliable supply. It's better for the entire supply chain,” he says. “Locking in prices on both inputs and crops should also reduce stress for producers. And this coming season, knowing you've got the products you need could be an equally important benefit.”
Strategies for spring
The sooner you make cropping decisions, the sooner you can lock in your input needs. And with fertilizer and petroleum markets expected to stay volatile through 2008, ensuring product supply could be your biggest risk to manage.
Industry experts offer the following tips for making this season's input buys:
Take advantage of discounts for seed, fertilizer and crop protection products and talk with your cooperative or dealer to make sure you're getting the best deals they offer.
Lock in fertilizer supplies early for spring and start considering fall needs. Prices will likely continue to edge up through spring, and supplies will be tight.
Buy and book fuel deliveries ahead of time. Don't get caught with an empty or low fuel tank during the busy planting season. You might even consider buying a bigger fuel tank.
Study your production costs so that you know just where your margins lie.
Forward market your crop at the same time that you make input purchases to lock in prices and profit.
Assemble a team of experts to advise you about your input and crop production needs. Product specialists, crop consultants and your loan officer can all help you make sure you're getting the right inputs at a good price.