Customer Support: Supply, Demand, Fair Pricing

September 7, 2016 09:26 AM
 
 

Two weeks ago, I talked about why cash rents were a hot topic as grain prices drop.

Doug Northrup of Letcher, South Dakota, the original questioner thinks I didn’t answer the right question:

“The high oil cost was the ‘reason fertilizer and etc. were high; oil has dropped in large amounts but the price for fertilizer, seed, etc. has not. Find out why no price drop has occurred in the big companies, we do NOT have enough competition out there for a FAIR price for fertilizer, seed, etc.” 

As I mentioned before, cash rents are the focus because other input costs have shown strong pricing power, just as Doug indicated in his email. When prices go up, sellers point to their costs, such as the price of oil as the reason, but that’s largely public relations.

In a relatively unregulated market, all sellers, including farmers, charge not according to their costs, but as much as the market will bear. As long as farmers keep buying seed and fertilizer, no supplier has any reason to lower prices, regardless of costs, like oil. The point is to maximize profit.

Doug is right that fewer suppliers and remarkably uniform industry pricing contribute powerfully to the ability of vendors to avoid cutting back prices. However, it’s virtually impossible to say what a “fair” price is for any product. 

We let the actions of willing buyers and sellers decide. Nonetheless, there are some ominous signs that our entire value chain from land owners to retailers is facing an unprecedented cost problem at every level. 

Consider an article published from BHP Billiton, the gigantic mining company that was over half done with a $2.6 billion potash mining expansion when it cut bait. BHP lost a staggering $6.7 billion last year and needs about $400 per ton to just break even on potash. Current prices are less than $200. 

With $3 corn or less, $400 is more than most growers can pay. The same situation is replicated across agriculture from machinery to seed. All of us have much higher breakeven costs than just a few years ago. 

The big commodity boom not only generated  a lot of profit for everyone in agriculture, it encouraged investments that are now  have to be paid off. This means prices will not come down easily or smoothly. It also means until supply and demand for commodities gets closer together, the red ink will spread out to cover virtually all of the businesses in agriculture. 

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