Every Input Dollar Is On the Line

November 4, 2016 07:02 AM

What more can farmers do to control costs?

Some years, keeping the ledger in the black can be difficult. As you well know, that time is now.

As relatively low commodity prices trudge along, farmers have been busy dissecting their budgets and looking at where they can slice already razor-thin margins. Is there anywhere left to look for savings?

Some analysts, such as Purdue University ag economist David Widmar, still have hope. A smart starting point might be to look at what type of buyer you are, he says. There are three basic types of buyers—those who buy based on price, relationship or performance. In other words, which of these three factors matters most when purchasing inputs, Widmar says.

“What are you looking for? What are your preferences, and how does it line up with your local retailers and the products they offer?” he asks.

It’s possible for a farmer to fall into different buyer categories, depending on the input. “For example, you might be a performance buyer for seed but a price buyer for fertilizer,” Widmar says.

And that’s OK, he adds—just know where you stand on each specific purchase. It will make input purchases incrementally easier. Every bit helps.

This year, the list price is about the same for seed and chemicals, but there are a lot of marketing dollars for discounts,” Widmar says. “That can make input pricing really complicated.”

Retail relationships are becoming increasingly important. “Have the conversations early. Share your goals, concerns and challenges,” he advises.

Part of what makes input purchases complicated is prices are constantly in flux. That means the best time to buy is constantly in motion, too, says Scott Anderson, North Dakota farmer and owner of the grain marketing business Cash Cow Farmer.

“The best time to manage each input is different, and it changes from year to year,” he says.

That creates a critical purchase conundrum—is it smarter to prepay and collect any advantages that come with it, or should you hold out and hope for lower prices down the line?

It can be a tough decision, depending on the input, Anderson admits. For example, he treats seed purchasing differently than fertilizer purchasing. When it comes to seed, Anderson wants to commit as early as he can. By early October, he’d booked 100% of his seed for the 2017 crop season.

“You can get as much as a 15% to 20% discount if you prepay really early,” he says. “It’s dramatically good. But let’s say you prepay cash and only get a 10% early order with 5% financing. You’re still getting a 5% advantage. That adds up over time.”

Anderson’s approach to chemical purchases is a little different. Prepay nets a better price, but farmers also need to factor in how likely they will actually need that input. If resistant pigweed is a perennial problem in a field, prepaying for the necessary herbicides to control it might be worth it. If other pests aren’t making consistent appearances, Anderson is less confident in a prepay play.

And then there’s fertilizer. Prices have been on the downward slide—by as much as 15% to 20% this spring.

“So if you bought fertilizer last fall, you lost a fair amount with the spring price reduction,” Anderson says.

That’s one instance where trying to outguess the market can be costly. Farmers who want to prepay for fertilizer should be consistent about doing so, he advises.

“The stakes get very high, so don’t get sloppy,” Anderson says. “Likely, you’re going to make a few bad decisions and ruin your average. Stick with one strategy and your income will be more predictable.”

Farmers need to not only consider bottom line profitability but also cash flow. “Prepay is usually a 
win-win, but given tight finances, more farmers will be thinking about cash flow this year,” he says.

Indeed, market anxiety is generally causing input sales to become more sluggish, adds Tanner Ehmke, senior economist with CoBank.

“We’ll probably see more farmers wait until the last minute to see where the market is,” he says.

Ehmke says these purchase delays have ramifications across the industry. “Farmers have a ‘delay and reduce’ strategy on inputs, especially fertility,” he says. “It makes perfect sense for the farmer but causes headaches for retailers. Farmers feel fertilizer prices will continue to go lower, so the mindset is, why buy now?”

Falling fertilizer prices have also put pressure on manufacturers. Some phosphorus manufacturers have even mothballed some of their plants in an effort to reduce supplies and raise prices, he says.

Widmar notes downward pressure has been happening for more than two years. Anhydrous ammonia prices went from around $500 per ton in early 2010 to as high as $900 per ton in early 2013. Now, they’re back down around $500, he says.

Potash prices have seen a similar trajectory. In 2010, prices were around $500 per ton, peaking in 2012 at above $600 per ton. Now they’re below the 2010 levels at nearly $300 per ton. 

“Looking to 2017, fertilizer prices have been softening considerably in recent months and could translate into another year of lower fertilizer prices for producers,” he says. “The declining prices have created the potential for another round of significant per-acre cost reductions in fertilizer expenses. At present, these fertilizer costs would be $16 per acre lower than 2016.

As for seed prices, Ehmke says seed companies haven’t changed their prices much. But some farmers have still found ways to save on those expenses, he says.

“Two things farmers are doing are either going down the technology chain or lowering their seeding rates,” he says. “Some are giving up GMO altogether and planting more conventional seed.”

The 2017 growing season will see a lot of farmers experimenting with different ways to lower input costs. That might translate to a shift to soybean acres, which is generally considered a lower input crop than corn, Ehmke says. It could also have farmers shifting marginal acres into the Conservation Reserve Program or abandoning any marginal acres they rent.

What’s more, a “last in, first out” phenomenon might play out in inputs next year, Ehmke says. That means practices such as early season fungicides in corn, micronutrient applications and even planting cover crops will receive extra scrutiny.

“A lot of the practices that came to be en vogue during the boom years are going to be put under a microscope,” Ehmke says.

Like Widmar, Ehmke urges making transparency a priority for 2017.

“Now is the time to partner with everyone who’s involved in your business—retailers, co-ops and bankers in particular,” he says. “Make sure everyone’s on the same page. It’ll just make your life easier.” 

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