Kernel Cost Analysis

July 25, 2014 09:29 PM
Kernel Cost Analysis

Commodity and seed prices move unevenly—what gives? 

Seed is rightly regarded as one of—if not the most—important purchases a farmer can make. Paying several hundred dollars for a bag of corn tends to grab your attention, especially when corn is paying less than $5 per bushel.

Some farmers, such as Steve Ford who raises cotton, corn and wheat near Decatur, Ala., join a buyer’s service that seeks out the best price from a half-dozen different wholesalers. But that only gets you so far, he says.

"As an individual, you can’t push prices around too much," he says.

Then there’s the matter of sorting out the trait cost, Ford says. In cotton, the trait is billed separately, so he knows exactly what the seed companies have charged for it.

For corn, however, figuring out that dollar amount is a lot trickier. Tom Burrus, president of Burrus Hybrids, says farmers are actually paying for four things when they purchase seed: the base genetics, the seed treatment package, the trait package and the production cost. This also means that seed prices don’t follow lockstep with commodity prices as they once did.

"When you had all conventional products, the commodity price had a pretty big impact on seed price," Burrus says. "But today the price of germplasm has gone up dramatically. That technology cost is not affected by commodity prices."

Supply, demand and flexibility. The basic economics of supply and demand go a long way in driving seed prices, explains Joe Merschman, president of Merschman Seeds. For starters, the demand for seed corn production did not favor low prices this year.

"If you recall, the two previous years were not great seed corn production years, so demand for acres was full production this past year," he says. "Not a good environment to ask for a price decrease."

At the same time, prices could soften next year, Merschman says. Spring 2014 saw a lower demand for seed corn acres, due to larger carryover inventories, and lower contract production costs, due to lower commodity prices.

Merschman also recognizes that seed companies compete for farmer business, so poorly priced hybrids don’t have long-term survival.

"The value of the product has to compete in the market," he says.

Flexibility has been the operative word the past few years because of a dynamic commodity market, says Drew Porter, North American product marketing director for DuPont Pioneer. Because of that, Pioneer watches seed prices closely, waiting to lock them in until summer. This lets the company go to market in September with confidence.

"Growers view their seed purchase as a central investment in their income opportunity for the upcoming year, and to that degree I think seed purchases aren’t necessarily viewed as a commodity purchase but rather as a driver of their revenue upside," Porter says.

Traits drive cost. Traits are the real driver of seed cost, says Jeff Neu, Monsanto Company communications manager. On average, one biotech crop product, such as a corn hybrid with herbicide tolerance and insect protection traits, costs $125 million to $150 million before a single bag is sold.

It takes an average of 13.1 years from the time a product idea is formed to the time it is commercially launched, according to a 2011 survey of Crop Life International member companies. Registration and regulatory compliance alone require an average of 5.5 years, up from 3.7 years before 2002.

Monsanto invests heavily in research and development in part because farmers have requested it, Neu adds. Farmers are also asking for more top-performing germplasms and trait choices across broad geographies. 

To meet those expectations, Monsanto prices seed based on historical commodity price bands. "It is not our practice to chase annual commodity fluctuations," he says. "Pricing within a range of commodity-price assumptions allows us to address volatility and offer the consistency our customers want."

At Syngenta, of the $1.37 billion the company spent in 2013, a significant investment went to developing traits and genetics, says Pat Steiner, Syngenta corn portfolio head. The process of validating a new hybrid for corn seed in particular is extensive because of the corn crop’s sensitivity to its surrounding environment. 

"The different soil types [and] different climates that we test it on require us to test it in several different parts of the world simultaneously," Steiner explains.

Testing generally occurs in three or four parts of the world. Syngenta spends between five and seven years testing hybrids before they enter the market and more than 10 years before introducing a new trait. 

Although Steiner doesn’t foresee dramatic changes in seed prices in the near future, he encourages farmers to investigate which new crop technologies might yield benefits. 

"Cash rents have become a bigger input cost for farmers, fertilizer certainly varies with time [and] seed certainly has become more expensive with time," Steiner says. "It’s really important that farmers maximize their return to fit the needs of their farm."

On his farm, Ford recognizes the cost that goes into developing a new trait. He just wants traits to be priced fairly, especially ones that lose value when resistance strikes.
FJ 032 F14275 b 1

Source: Journal of Agricultural and Resource Economics

"Charge us what the technology is really worth," he says.

Be a Savvy Shopper

Shopping for seed can sometimes make farmers feel like they are buying a new car, says Terry Kastens, a financial manager and past ag economist at Kansas State University. That’s because seed companies load many new hybrids with extra options, and that can make you feel like you’ve bought more than you really need.

To be fair, it would be extremely inefficient for companies to develop every combination of traits in every single hybrid.

Kastens’ best advice is to shop around. "We still see a big variation in seed prices," he says. "You have a lot of options. Go find the best deal."


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