Report: Crop inputs will continue to pressure margins in 2009
Rising production costs including fertilizers, seeds, chemicals, fuel, land and equipment as well as higher labor and capital expenditures will pressure agriculture producers' bottom lines in 2009, according to Rabobank's recently published "North American Food & Agribusiness Outlook."
"With increases ranging from 28 percent to 40 percent, it is quite obvious why input costs have become a major factor when farmers are determining what to grow each year," said Rabobank Food & Agribusiness Research and Advisory Associate Erin FitzPatrick. "Fortunately farmers faced with these higher input costs have access to a growing number of resources to help in decision making and efficiency measures."
For example, global positioning systems, yield monitors and advanced irrigation systems are consolidating information and analyzing returns across the farm. Additionally, by incorporating historical information at the individual farm level, producers can plan their 2009 crop year field by field. "The profitability of each decision is really only one click away," said FitzPatrick, who wrote the Outlook's chapter "U.S. Crop Inputs: Implications of Changing Demand."
While technology helps mitigate risks and farmers more efficiently use crop inputs, "many producers are looking at the reality of a potential margin squeeze in 2009 because of higher production costs and volatile grain prices," said FitzPatrick.
"The greatest crop input price appreciation in 2008 was fertilizers. However, the historically cyclical industry is seeing prices will fall from the high levels of 2008," said FitzPatrick. Specifically, nitrogen and phosphate fertilizer prices will soften more than potash. Even with this reduction, some farmers will reduce or eliminate traditional fertilizer application rates. Additionally, this weaker demand, and a tighter money supply has resulted in reduced production by fertilizer companies.
Seeds and chemicals
Unlike fertilizers, seeds and chemicals offer a wide range of options and are continuously changing. Agrochemical companies recognize that seed choice is one of the first and more important decisions farmers make each season, and therefore have a disproportionate amount of research and development dollars allocated to developing new varieties. This allows major agrochemical companies to create a strong flow of new products to the markets. "Biotechnology continues to be the quickest adapted advancement in the U.S. agriculture industry from improving farm profitability," said FitzPatrick.
Rising fuel prices affect farmers' diesel expenses, but also have numerous indirect effects in terms of transportation, raw materials, and marketing costs. With crude prices essentially doubling in the first half of 2008, farmers were directly exposed to the increase through their diesel purchases. And, while "the price of crude oil came down significantly in the second half of 2008, what future prices will be is a topic that is hotly debated and anyone's guess," said FitzPatrick.
Farm real estate values have risen for the past 20 years, but the most sizable appreciation between 2004 and 2008. This has improved land owners' balance sheets; however, expanding operations by buying more land is much more costly. Additionally, cash rents have not kept pace with land values. "This divergence points toward stagnating growth in land values," said FitzPatrick.
The real bright spot for agriculture equipment companies has been in emerging markets. A weak U.S. dollar and earlier stages of consolidation have driven profits for equipment sales in China, India, Brazil and Russia. This trend has resulted in more manufacturing plants being established closer to these consumers. As a result, the U.S. farmer has a relatively smaller impact on the overall profitability of agriculture equipment manufacturers. "U.S. farmers faced with these higher prices and a year of lower profit will likely slow their enthusiasm for new equipment purchases in 2009," said FitzPatrick. Additionally, credit availability in countries like Brazil has hindered demand growth for big ticket items such as agriculture equipment.