This winter is going to be a little different than the last four or five, as producers sharpen their pencils to calculate how to make a profit. Some will not be capable of doing so no matter how sharp the pencil. Others will have a very profitable year.
Everyone knows profit margin is going to be squeezed significantly as corn and soybean prices have dropped below the cost of production and input costs have been slow to come down. That happens in every cycle turn, and this one’s not going to be any different.
When the profit squeeze comes, there are three fundamental categories producers look at in order to turn their financial picture around. They include:
- Controlling costs.
- Increasing yields.
- Improving marketing results.
Having been in this business now for 40 years, the best returns normally come from the third point — improving marketing results. However, I am also well aware that for most producers, the most attention will be paid to controlling costs and increasing yields, and the least attention will be paid to increasing marketing knowledge and improving marketing results. Right or wrong, that’s a fact of farming life.
A vast majority of the winter meetings producers are going to attend will concentrate on increasing yields. As we have many times joked in the dairy industry, if milk prices are profitable, milk producers expand. If milk prices are unprofitable, they still expand. If the weekly milk check is down, the need is to produce more milk to get the check back up. As we all know, this further compounds the problem.
But unfortunately, that is exactly what’s going to happen this time around in the grain cycle. Prices are low because carryover supplies are large. So what will many people do? They will try to increase production, which increases carryover supplies, which keeps prices low for a longer period of time. That’s why bottoms in grain markets are long and flat. Many times, the injury is self-inflicted.
Input prices will eventually come down. Corn prices lead nitrogen prices — not the other way around.
In this cycle, nitrogen prices are softening and following corn prices, but at a much slower rate than most producers would like.
Here is what I think could well happen.
Many in the supply side of agricultural inputs believe that year-end purchases of inputs by producers will be down 25 percent to 30 percent from last year. Since the majority are on a cash accounting system and incomes this year are down, not as many producers will need the tax write-off to purchase seed, fertilizer and chemicals early.
On the other hand, assuming producers concentrate on increasing yields, suppliers of inputs know that nitrogen is going to be needed in order to do so, and demand is still going to be strong for fertilizer. But once again, much of the concentration on production this winter will focus on more economical placements of fertilizer application, chemicals, etc., which should result in some softening of fertilizer demand.
Once the first of the year rolls around, my anticipation is that the decline in fertilizer prices will be engineered by which wholesaler is the first to “sneeze.” If input sales are indeed down for the last quarter of 2015, in order to get volume up, some supplier is going to start to cut prices to increase market share. Once one supplier lowers its prices, others will have to follow.
So the bottom line: It will probably pay to be less aggressive purchasing early on your inputs this year than it has in the past. Dragging your feet this time around could well pay off.
Contact Richard Brock at [email protected]