Think like a manufacturer to buy at the right time
Most best-in-class producers are familiar with precision agriculture in a variety of forms, including sub-inch planting and targeted fertilizer application. With harvest underway, producers should now turn their attention to another type of accuracy to save on inputs: precision purchasing.
“I’m one of those tight-fisted farmers,” says Fred Yoder, a no-till corn, soybean and wheat farmer who operates near Plain City, Ohio. “I get a kick out of seeing just how cheaply I can produce a crop. Fertilizer is my biggest cost other than seed.”
Become A Manufacturer. Price trends suggest producers might save money by taking the purchasing approach of a manufacturer, explains Keith Swanson, manager of crop nutrient dealer risk management services for CHS Hedging, a wholly-owned subsidiary of farmer-owned cooperative CHS Inc.
“They are essentially a manufacturer of a product that’s sold and used in other manufacturing ways,” Swanson says. “Like a manufacturer, they might want to think about trying to manage the margin more, selling their output at a time when they know they can lock in their input at a favorable margin.”
Farmers should be aware that since commodity prices collapsed a few years ago, to a degree, fertilizer dealers in particular have operated on a just-in-time delivery approach, he says. Retailers don’t want to carry excess inventory they won’t be able to sell, meaning farmers and dealers are sometimes forced to scramble for supplies at the last minute.
“Anywhere from 10% to 25% of supply that’s needed during the application season isn’t located or positioned where the growers need it in the spring,” Swanson says.
To play it safe, he advises farmers to consider making fertilizer purchases sooner rather than later. Those who will apply product post-harvest should already be making plans with retailers, whereas producers who will make spring applications should time purchases after harvest and in early winter to avoid a last-minute crunch.
That’s true more because of logistical challenges in getting inputs to market closer to the season than because of any potential for price reductions. What’s more, lower North Dakota oil production has led to more rail cars available to transport ag products.
At the same time, farmers clearly need to think about cost and global supply situations to make the best input purchase decision possible.
“Everything’s in transition here,” said Gregg Ibendahl, an ag economist at Kansas State University, in a late summer interview after China’s stock market plunge. “The world economy is going haywire, and that affects everything else. The farm economy is looking a little on the downside, too. I would say [fertilizer prices are] probably steady to maybe slightly down for some things. I don’t think we’re looking at any big increase in anything coming up in the next year.”
Comprehensive Buying Strategy. In addition to making targeted purchasing decisions, Yoder thinks precision technology is critical to maximizing spending on inputs.
“You’re not necessarily cornered into always putting it on early,” Yoder says of fertilizer. “Most times, early purchase is going to be your best bargain, but not always. We saw that with potassium. In some areas this year, the later it went on, the better the deal.”
Yoder has begun feeding nutrients year-round to his corn and soybeans. He sees that type of application becoming more common in states such as Ohio, where regulators are cracking down on management of nutrients such as nitrogen and phosphorus to protect Lake Erie waters. Producers can improve their financial position by looking at inputs with a holistic view of pricing, application and timing. “Don’t take your eye off the input emphasis,” Yoder says. “You’ve got to strike when it’s time to strike.”
Input Watch: Trends to Follow in Fertilizer and Fuel
The information below represent key inputs best-in-class producers should monitor as harvest continues. Although global supplies and transportation access can change at any time, experts say a knowledge of trends provides perspective.
This summer in the eastern Corn Belt, prices for anhydrous ammonia ran about $100 per short ton higher than prices in the western Belt, says Davis Michaelsen, editor of the Pro Farmer Inputs Monitor.
“The question is: Can supplies rebuild in time for fall applications for prices to come down?” Michaelsen says. “I’ve got to say no.”
Evaluate nitrogen prices to find deals, adds Gregg Ibendahl, an ag economist at Kansas State University. For example, UAN28 costs are lower than a year ago.
Talk with suppliers now about locking in diesel through fall 2016, says Tony Headrick, an energy market analyst at CHS Hedging. That’s because of several factors, including maintenance planned this fall at oil refineries and the decline in domestic crude oil production.
Refinery upgrades are essential to continue production year-round, yet this year is somewhat different because facilities in Oklahoma, Kansas, Minnesota and Illinois will be affected amid harvest.
Meanwhile, domestic oil production has fallen, suggesting tighter supplies and the potential for higher fuel prices heading into next year.
Crops coming out of the eastern Corn Belt could be wetter than in the recent past, requiring more propane for drying, says Davis Michaelsen, editor of the Pro Farmer Inputs Monitor. Prices should rise seasonally, but strong supplies have led to market stability.
“If propane tanks are not full, now is a good time in terms of price to fill those tanks in anticipation of crop-drying needs and even winter needs,” adds Tony Headrick, an energy market analyst at CHS Hedging. “From the crop-drying perspective, we’re not expecting to see anything wildly out of the ordinary.”
Input costs for DAP manufacturers have been high recently, which contributed to steadily higher phosphate prices this past winter, says Davis Michaelsen, editor of the Pro Farmer Inputs Monitor. Recently, those prices have fallen as input pressure eases at production facilities.
“The whole phosphate segment is doing a better job of reflecting wholesale prices,” he says. There is also weaker global demand for DAP in countries such as India and Brazil, where credit problems have led to a currency decline against the dollar.
Local prices for DAP tend to shift, though national prices have trended lower than those seen over the past three to five years, says Gregg Ibendahl, an ag economist at Kansas State University. “I see DAP prices probably coming back down,” he says.
In a reversal of the price equation for anhydrous, potash prices remain relatively stable because most of the product comes from nearby Canada, says Davis Michaelsen, editor of the Pro Farmer Inputs Monitor. That said, prices in the western Corn Belt are higher than those to the east. That’s because sandier western soils require heavier applications of potash.
Compared to prices a year ago, potash is between $30 and $40 per ton lower, adds Gregg Ibendahl, an ag economist at Kansas State University. That’s pretty even keel compared to a year ago.
The uncertain price outlook surrounding urea is driven by China, which manufactures the lion’s share of global supplies. Prices over the past two and a half years have been on almost a constant downward trajectory, says Davis Michaelsen, editor of the Pro Farmer Inputs Monitor. Yet expect values to stabilize if China gets product to market in spite of economic challenges. A price dip is possible around the first of the year.