When to buy seed and fertilizer, even lower cost diesel fuel, has left many farmers in the South in a gridlock over what crops to plant. For many farmers wait-and-see is a necessary evil to try and protect their bottom line.
Across the region growers are waiting to see how low fuel costs will go, how much price incentive will filter into technology and seed costs and most of all when to buy fertilizer and how to plan crops against a short supply or another run-up in costs of all these crop inputs.
Volatility in input prices, commodity prices, even export prices have created a sense of near panic for some farmers, creating a wait-and-see attitude that may be particularly counter-productive in our current economic downturn.
One long-time South Carolina farmer shook his head when asked how he would deal with all the uncertainties coming in 2009. “Like I've done all of the 39 years I've been in farming — I'm going to do the best I can at growing the crops I know best.”
This may be a bit too simplistic, but clearly good advice when trying to balance the possible high cost of production inputs with potential lower commodity prices versus 2008. Efficiency may be the driving term for row crop farmers in 2009.
For corn farmers the driving force over the past few years has been ethanol. How will ethanol demand go in 2009 with gas prices at the pump less than $1.50 a gallon? Jed Lafferty, managing director of Planalytics, says, “Ethanol companies had a run of about 10 years with an average producer not showing a loss in a single 10-year period. That changed dramatically in the third and fourth quarter of 2008 and is expected to continue to experience losses in the first and second quarter of 2009.”
Lafferty continues, “There's a whole array of drivers of change in the ethanol industry, which we believe will result in a number of M&A transactions and will result in the consolidation of the ethanol industry very much like many industries in agriculture before ethanol dating back to the late 1970s and early 1980s, the poultry industry; and then the dairy industry; and then in the late 1980s and early 1990s, the swine industry.”
Energy is a compelling factor in what crops many farmers plant, even how they plant some crops. No-till and strip-tillage work better for some farmers on some land, but some crops and land simply don't support reduced-tillage.
In the South, one of the decisions farmers will make is whether to plant peanuts, and if so, how many acres. Making a decision to plant more peanuts instead of less based on projected low fuel, seed and fertilizer costs, for example, could be a gamble.
Capron, Va., farmers Cliff and Clarke Fox say 2008 was the latest they have ever waited to decide what to plant. Primarily cotton and peanut farmers, the Fox brothers have to evaluate foreign markets for cotton, input costs for both crops, negotiate a peanut contract and try to determine what their cotton might sell for — all before sitting down to decide what to plant.
Peanuts have been a good option the past two years as contract prices increased to make peanuts competitive with grain crops for acreage in the South. Increased peanut acreage and good crops, especially for Virginia type peanuts, have pushed supplies back up and have created some uncertainties in pricing.
Energy costs are intrinsically intertwined with grain prices and input costs. Companies that bought expensive energy in the spring and summer of 2008 are now facing the consequences of having high priced products in a low price market — the result is some of these companies are no longer in business.
The big name that has gone bankrupt is VeraSun — a big player in the ethanol market. VeraSun has several large plants in the major Corn Belt states and a few of these plants stopped buying corn at the end of 2008. Projections are that VeraSun and several other major players in the ethanol market will not be buying corn in the foreseeable future.
What does that mean for the fledgling ethanol industry in the South? For corn-based plants online in Georgia and planned to come online in the next few years in Georgia, Florida, North Carolina and South Carolina, it could mean better corn availability and better prices for corn.
On the other hand, ethanol profitability is always going to be at risk when oil prices are low. Southern farmers banking on a resurgence of corn prices may be taking a big gamble by increasing corn acreage in 2009.
Jim Farrell, CEO of Farmers National, which manages over 1.25 million acres of farmland in the U.S., says the cost of planting corn, combined with the risk of declining commodity prices, means more soybeans to him.
“In the Midwest on rented land it costs about $720 per acre to plant, grow, harvest and market corn. A good yield, say 180 bushels per acre at $4 per bushel, will net about $745 per acre. Push production down and/or prices down and many corn farmers will be in trouble,” Farrell says.
In the South, producing an acre of corn is significantly less, but so is the expectation of growing 180 bushels of corn on non-irrigated land. Factor in the reduced yield expectation, and the risks for growing corn are at least comparable in the Southeast to the Midwest.
N-P and K supplies are being affected more than at any time in history by increased demand from developing agricultural countries, especially India and China. With volatility in fertilizer supply and demand expected in 2009, the risk will go higher for crops that demand more of these nutrients.
Huge jumps, then declines in seed and fertilizer costs in 2008, have left many growers in a protracted wait-and-see mode, says Dave Downey, former professor of agricultural economics at Purdue University.
If we look at fertilizer for example, there's real concern in my mind that we got a lot of people saying, “Oh, fertilizer prices are really down. I think I'll wait a little longer and see what happens.” That kind of thinking may cause a lot of farmers some big problems in 2009, Downey says.
“We've got a very long supply line to get that fertilizer to people. I'm nervous that if people — very many people wait too long — we're going to have real trouble servicing people's fertilizer needs which will have greater impact upon productivity throughout next year,” Downey adds.
The short-term is right now and the 2009 crop is paramount on the minds of farmers. Making it to the long-term will be a significant challenge. However, Downey contends the long-term should be given equal emphasis when farmers plan their 2009 crop.
“I can't focus totally on the short term without taking just a little bit of a look at the long-term, which I think is much more positive and strong than the outlook for 2009,” Downey says.
“World population does continue to grow; we all know that. But what's really important is the number of people worldwide who are entering the middle class with income levels that allow them to want some of the finer things in life, including what they eat and what they wear. This middle class, worldwide, will continue to be a driving force in agriculture in the future,” Downey says.
In the South, growers are coming off a good year despite some periods of drought during the early- and mid-part of the growing season. In general, Southeastern farmers should be in good financial position to weather the wait-and-see climate that has prevented many farmers from making early cropping decisions.