Input trends and commodity prices spell tough decisions
Up and down the input supply chain, stakeholders are feeling stress. Farmers face a third year of potentially limited profits, retailers feel the squeeze of reduced product demand and several national suppliers are in some stage of a merger or acquisition. These factors create uncharted waters as you plan 2017 input purchases.
The good news is some input prices are significantly less than those seen five or six years ago.
“The hidden story is that farmers who are productive, financially solvent and prudent may be in the position to negotiate inputs lower,” says Kenneth Zuckerberg, Rabobank senior analyst for farm inputs.
Lock It In. Fertilizer prices favor farmers, says Davis Michaelsen, Pro Farmer Inputs Monitor editor.
“We’re in a very concentrated downtrend,” Michaelsen says. “On the nitrogen side, new domestic facilities are coming online. Some experts believe we could become a net exporter of nitrogen.”
Potash prices also fell through harvest. Phosphate prices carry the most upside risk, Michaelsen says. “North American producers have curtailed [phosphate] production to combat perception of low demand from end users,” he says. “That has placed a floor under prices.”
For next year’s fertilizer needs, Michaelsen recommends waiting to purchase until any fall demand evaporates. “We often see the lows come in January, which is an excellent opportunity to book for spring,” he says. “There are farmers who are thinking about also booking for the 2018 crop. They can store or defer delivery. I think that’s a good idea if they can handle it.”
The fuel market also presents an opportunity for buyers.
“For spring, you should be paying attention during that November-to-January time frame in terms of your budget and lock in a fuel price,” says Tim Danze, hedging manager for Columbia, Mo.-based MFA Oil. “We preach the value of knowing your budget so that you can take advantage of forward-contract opportunities. If the pricing fits your budget, it makes sense to tie up some diesel gallons at a fixed price.”
Attractive pricing opportunities can vanish quickly since fuel has a global market, Danze adds. For instance, the complete ramifications of Brexit and issues facing institutions such as Deutsche Bank and Wells Fargo are still playing out.
In 2016, fuel along with lower land rents gave farmers a few easy options to reduce production costs, says Dennis Stein, Michigan State University Extension educator.
“That gave us some of the cut we were looking for without having to change a whole lot on the production side,” Stein says.
For 2017, Stein thinks the pool of high bidders for land rents will continue to shrink, and overall land rents will stay soft. “I would expect $15 to $20 per acre across the board lower,” he says.
Machinery is another area in which farmers can preserve cash, Stein says. “When you talk to used machinery dealers, their inventory is high and they are moving little,” he adds. “Upgrades are starting to be delayed, and farmers are now happier with what they have.”
Tough Decisions. For many of the remaining inputs, it is time to shop around and trim where possible.
“Dollars are tight,” Stein says. “We have to strategically look at tax planning. Where do we need the farm to be at the end of the year to match our tax expectations?
“But we also have to be fluid or liquid enough to meet standards our bankers are going to look at if we need to borrow money,” Stein continues. “In many cases, farmers will have to secure operating dollars in 2017 on a borrowed basis as opposed to being able to cash-front some of those purchases.”
Many farmers have reduced expenses in the past few years. Experts say that will continue. “They are going to be delaying purchases as long as possible and reducing their input expenses,” predicts Tanner Ehmke, CoBank senior economist.
Agronomic practices such as applying micronutrients and fungicides and planting cover crops will go under the microscope, he says.
Producers will also evaluate their crop mix. “Farmers will still have the incentive to pre-book seed to get discounts before the end of the year,” Ehmke says. “But they don’t want to add more debt. To make a purchase right now, you would probably lean more toward soybeans versus corn and less wheat. We’ll likely see more farmers waiting until the last minute for their crop mix.”
Farmers should try to negotiate seed prices down, says Rabobank’s Zuckerberg. “For growers in a good financial position, now is the time to ask for better terms, better prices or both,” he says. “If a farmer is dealing with one vendor, and that vendor is getting squeezed, there may not be wiggle room. So farmers may have to look beyond traditional input partners to get what they need.”
The M&A landscape could also spell opportunities for farmers. “For many years, farmers have been in position to be price-takers,” Zuckerberg says. “One wonders if [there is] hidden opportunity to be a bit more aggressive with negotiations. Companies that are merging have to get approval, so there might be a good little PR opportunity."
Most major input categories are expected to slightly increase in 2017, USDA reports. Yet prices for products such as fertilizer and fuel are lower than those
seen five or six years ago.
Time to Forego Farming a Field?
It might not make sense to continue planting crops on marginal ground with limited revenue potential, experts say. Weigh options carefully.
More bushels are the best defense against low prices. Yet what if a field continually has below-average yields or you can’t get a land-rent reduction?
“We’re at the point where planting less could yield greater returns,” says Kenneth Zuckerberg, Rabobank senior analyst for farm inputs. “Given excess supply versus demand of grain, reducing acreage is a logical way to stabilize the market. The more you plant, the more you produce and the more pressure on prices.”
Producers should look at the production and profit potential of each field, including marginal acres, says Tanner Ehmke, CoBank senior economist.
“If you rent, maybe the best thing to do is walk away from it,” Ehmke says. “If you own the land, put it in CRP or put it in grass and rent it to someone who has cattle. Don’t let it lay completely fallow—figure out your best option.”