input prices: long term trends and short term realities paul d. mitchell agricultural and applied...

Input Prices: Input Prices: Long Term Trends andLong Term Trends andShort Term RealitiesShort Term Realities

Paul D. MitchellPaul D. Mitchell Agricultural and Applied EconomicsAgricultural and Applied Economics

University of Wisconsin-MadisonUniversity of Wisconsin-Madison

UWEX and WPVGA Annual Growers UWEX and WPVGA Annual Growers ConferenceConference

February 3, 2009February 3, 2009Stevens Point, WIStevens Point, WI

Goal TodayGoal Today

Overview of Input and Output PricesOverview of Input and Output Prices Where they are now (short-term)Where they are now (short-term) Where they are going (long-term)Where they are going (long-term)

Fertilizer prices are still highFertilizer prices are still high

FertilizerFertilizer Jan Jan 20072007

aa

Jan Jan 20082008

aa

Feb Feb 20082008

bb

Aug Aug 20082008cc

Nov Nov 20082008aa

Feb Feb 20092009aa

UreaUrea 410410 505505 500500 815815 ------ 585585

AnhydrousAnhydrous 515515 775775 715715 10951095 11601160 985985

32% N Solution32% N Solution 270270 405405 405405 535535 560560 395395

Ammonium Ammonium SulfateSulfate

210210 240240 325325 510510 500500 300300

DAPDAP 335335 580580 625625 11851185 11501150 795795

PotashPotash 255255 420420 515515 820820 820820 795795

aaLandmark Coop Landmark Coop bbFrontier FS Coop Frontier FS Coop ccInformal Survey Informal Survey AverageAverage

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Jan-07 Apr-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09

Pri

ce (

$/to

n)

Ammonium Sulfate

DAP

Potash

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400

600

800

1000

1200

Jan-07 Apr-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09

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Urea

Anhydrous

32% N/UAN

Higher than last year, Higher than last year, but not as high as this summerbut not as high as this summerFertilizerFertilizer Jan Jan

20082008SummSummer Maxer Max

Feb Feb 20092009

%% from from 20082008

%% from from MaxMax

UreaUrea 505505 935935 585585 16%16% -37%-37%

AnhydrousAnhydrous 775775 12351235 985985 27%27% -20%-20%

32% N Solution32% N Solution 405405 535535 395395 -2%-2% -26%-26%

Ammonium Ammonium SulfateSulfate

240240 539539 300300 25%25% -44%-44%

DAPDAP 580580 12441244 795795 37%37% -36%-36%

PotashPotash 420420 930930 795795 89%89% -15%-15%

10-34-010-34-0 13851385 988988 -29%-29%

Price IndexesPrice Indexes

USDA NASS publishes monthly price indexes USDA NASS publishes monthly price indexes for many ag outputs and inputsfor many ag outputs and inputs

http://usda.mannlib.cornell.edu/MannUsda/http://usda.mannlib.cornell.edu/MannUsda/viewDocumentInfo.do?documentID=1002 viewDocumentInfo.do?documentID=1002

National average price for the many items in National average price for the many items in a category, weighted by sales volumesa category, weighted by sales volumes

Many categories not reported hereMany categories not reported here Normalized so 1990-1992 Average = 100Normalized so 1990-1992 Average = 100

FertilizeFertilizer Pricesr Prices

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550

600

650

700

Jan-08 Feb-08 Mar-08 Apr-08 Jun-08 Jul-08 Aug-08 Oct-08 Nov-08 Dec-08 Feb-09

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ce I

nd

ex (

1992

= 1

00)

N

P & K

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100

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600

700

Jan-06 Apr-06 Jul-06 Oct-06 Feb-07 May-07 Aug-07 Dec-07 Mar-08 Jun-08 Sep-08 Jan-09

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ex (

1992

= 1

00)

N

P & K

Short-Term Fertilizer PricesShort-Term Fertilizer Prices Don’t expect prices to go much lowerDon’t expect prices to go much lower

Companies believe they are priced about Companies believe they are priced about right for world demand and grain markets right for world demand and grain markets

Supply going to be the issueSupply going to be the issue Pre-purchased/contracted are in good shapePre-purchased/contracted are in good shape Poor fall application window, lots of waitingPoor fall application window, lots of waiting Warehouses full, no slack in systemWarehouses full, no slack in system Companies not holding excesses anymoreCompanies not holding excesses anymore Decide what you want and get it ordered Decide what you want and get it ordered

asap asap If waiting to buy, could be serious troubleIf waiting to buy, could be serious trouble

ChemicChemical al PricesPrices

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ex (

1992

= 1

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Herbicides

Insecticides

Fungicides

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1992

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Herbicides

Insecticides

Fungicides

Short-Term Chemical PricesShort-Term Chemical Prices

Chemicals higher than last year (~15%)Chemicals higher than last year (~15%) Fairly flat since summerFairly flat since summer

Supply also going to be the issueSupply also going to be the issue Pre-purchased/contracted are in good shapePre-purchased/contracted are in good shape Lots of waiting by farmers, companies not Lots of waiting by farmers, companies not

overstocking or over producingoverstocking or over producing If acres shift to soybeans, shortages will occurIf acres shift to soybeans, shortages will occur If wait too long, get “shotgun” of chemicals, If wait too long, get “shotgun” of chemicals,

not your specific needs, and cost morenot your specific needs, and cost more Decide what you want and get it ordered asapDecide what you want and get it ordered asap

Fuel Fuel PricesPrices

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1992

= 1

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Diesel

LP

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1992

= 1

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Diesel

LP

Short-Term Energy PricesShort-Term Energy Prices

Diesel: Prices about same as 2 years agoDiesel: Prices about same as 2 years ago Jan 2009: 30% lower than in Jan 2008Jan 2009: 30% lower than in Jan 2008 Jan 2009: 4% lower than in Jan 2007Jan 2009: 4% lower than in Jan 2007

LP: Prices lower than have been for LP: Prices lower than have been for awhileawhile Jan 2009: 49% lower than in Jan 2008Jan 2009: 49% lower than in Jan 2008 Jan 2009: 20% lower than in Jan 2007Jan 2009: 20% lower than in Jan 2007

Both may have lower to goBoth may have lower to go

Long-Term Input PricesLong-Term Input Prices

Depends on interrelated factorsDepends on interrelated factors World demand for meat/grainWorld demand for meat/grain Energy pricesEnergy prices Exchange ratesExchange rates All three depend significantly on how All three depend significantly on how

bad the global meltdown is/becomes bad the global meltdown is/becomes and how long it lastsand how long it lasts

Global Input DemandGlobal Input Demand China, India, Brazil: major drivers of China, India, Brazil: major drivers of

increased demand that increased increased demand that increased prices, but demand slowed now with prices, but demand slowed now with meltdownmeltdown Export driven economies hit hardExport driven economies hit hard

Less money for meat/grain demandLess money for meat/grain demand Farmers have less access to credit than in Farmers have less access to credit than in

USUS Exchange rates further increasing input Exchange rates further increasing input

prices and prices of imported meat/grainprices and prices of imported meat/grain

Energy and Exchange RatesEnergy and Exchange Rates

Energy Prices: Transportation and N PricesEnergy Prices: Transportation and N Prices Driven by global demand, so how bad will the Driven by global demand, so how bad will the

global meltdown be and when will it end?global meltdown be and when will it end? New natural gas plants around world on line, New natural gas plants around world on line,

U.S. seen as place to soak up excess supplyU.S. seen as place to soak up excess supply Expect some downward pressure on N pricesExpect some downward pressure on N prices

Exchange rates: dollar strengthening, so Exchange rates: dollar strengthening, so increase costs of inputs and imports for increase costs of inputs and imports for other nations other nations

Long Term:Long Term:What to Expect from SuppliersWhat to Expect from Suppliers

Shift in willingness to hold excess supplyShift in willingness to hold excess supply More formality in pre-pricing/contractingMore formality in pre-pricing/contracting Will expect growers to be very specific on Will expect growers to be very specific on

needs in advance and take what orderneeds in advance and take what order Plan ahead & place your orders, don’t wait Plan ahead & place your orders, don’t wait

and expect them to have what you wantand expect them to have what you want Want to push some of the input price risk on Want to push some of the input price risk on

to farmersto farmers

Land RentsLand Rents

Landlords may be playing catch upLandlords may be playing catch up With input and output price uncertainty, With input and output price uncertainty,

margin risk larger than beforemargin risk larger than before Flexible Cash Leases more popularFlexible Cash Leases more popular

FSA changed the rules, so don’t need to FSA changed the rules, so don’t need to share govt. payments as in years pastshare govt. payments as in years past

Check with FSA to be sure your lease Check with FSA to be sure your lease qualifies as not needing to share paymentsqualifies as not needing to share payments

Flexible Cash LeasesFlexible Cash Leases

Formula: Formula:

Set max rent and/or min rent to share Set max rent and/or min rent to share upside and/or downside riskupside and/or downside risk

Examples: Google “Flexible Cash Examples: Google “Flexible Cash Lease”Lease”

Contact me, I’ve sent links/examplesContact me, I’ve sent links/examples If must use fixed rent, set final rate in If must use fixed rent, set final rate in

Mar/Apr or ask to renegotiate thenMar/Apr or ask to renegotiate then Input and output prices more clear by Input and output prices more clear by

thenthen

Act. Yld Act. PriceBase rent

Base Yld Base Price

Credit: Another InputCredit: Another Input

Banks are getting tighter on creditBanks are getting tighter on credit Anecdotes only, no dataAnecdotes only, no data Farmers going to bank to ask for Farmers going to bank to ask for

operating credit to buy inputsoperating credit to buy inputs ““Sell 80 acres and come back in”Sell 80 acres and come back in” ““Won't lend you the money if you pay Won't lend you the money if you pay

that rental rate”that rental rate” Talk to your banker!!!Talk to your banker!!!

What’s Going on with Output What’s Going on with Output Prices?Prices?

Grain prices have decreased and Grain prices have decreased and become more volatilebecome more volatile Ethanol/biodiesel prices falling as crude oil Ethanol/biodiesel prices falling as crude oil

and diesel prices declineand diesel prices decline Dollar stronger, so export demand declinedDollar stronger, so export demand declined Livestock prices falling, so less grain Livestock prices falling, so less grain

demanddemand World demand uncertainty increased with World demand uncertainty increased with

the financial crisis/recessionthe financial crisis/recession

USDA Monthly Average Prices Received by USDA Monthly Average Prices Received by FarmersFarmers

CBOT CBOT ContractContract

PeakPeak PricePrice** CurrentCurrent DecreaseDecrease

Dec. CornDec. Corn JuneJune 7.997.99 4.164.16 -48%-48%

Nov. Nov. SoybeansSoybeans

JulyJuly 16.3716.37 9.259.25 -43%-43%

Dec. WheatDec. Wheat MarchMarch 12.7512.75 6.336.33 -50%-50%Source: *Darrel Good (U of Source: *Darrel Good (U of IL)IL)

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Jan-07 Apr-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08

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Wheat

Corn

Soybeans

Grain PricesGrain Prices

Soybean futures prices fell less and Soybean futures prices fell less and have been climbing relative to corn have been climbing relative to corn and wheatand wheat

Will there be a significant acreage shift Will there be a significant acreage shift to soybeans in 2009?to soybeans in 2009?

Acreage shift to soybeans will affect Acreage shift to soybeans will affect short term fertilizer and chemical input short term fertilizer and chemical input availability and prices to some extentavailability and prices to some extent

What about Potatoes and What about Potatoes and Vegetables?Vegetables?

USDA-NASS national monthly price USDA-NASS national monthly price index for prices received by farmersindex for prices received by farmers

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Vegetables

Potatoes

Same Data Regression FitSame Data Regression Fit

Average annual increase over the last 3 yearsAverage annual increase over the last 3 years

Vegetables = 5.4%, Potatoes = 13.8%, > Vegetables = 5.4%, Potatoes = 13.8%, > InflationInflation

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Vegetables

Potatoes

Veg Fit

Pot Fit

USDA-AMS weekly average USDA-AMS weekly average prices received at terminal prices received at terminal

markets for Central Wisconsin markets for Central Wisconsin fresh potatoesfresh potatoes

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7/28/2007 11/5/2007 2/13/2008 5/23/2008 8/31/2008 12/9/2008

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Norkotah 70s

Norkotah 5x10lbs

Round Red Bs

Fresh Potato PricesFresh Potato Prices Round Red B’s have followed the Round Red B’s have followed the

“standard” post-harvest trend“standard” post-harvest trend Russets: Have not seen the post-Russets: Have not seen the post-

harvest price increase that had last harvest price increase that had last yearyear When will they bottom out?When will they bottom out?

Retail demand for fresh potatoes Retail demand for fresh potatoes falling with lower consumer incomefalling with lower consumer income

Summary: Short TermSummary: Short Term Input prices are about where they are Input prices are about where they are

going to be in short termgoing to be in short term Availability the big issue now, not priceAvailability the big issue now, not price

Some farmers are not going to get what Some farmers are not going to get what they want when they want itthey want when they want it

Don’t wait, or you may be one of theseDon’t wait, or you may be one of these Soybean acres will have important effect on Soybean acres will have important effect on

chemical and fertilizer availabilitychemical and fertilizer availability Rents: flex cash leases or renegotiateRents: flex cash leases or renegotiate Stay in communication with your bankerStay in communication with your banker

Summary: Long TermSummary: Long Term It all depends on how bad it gets around the It all depends on how bad it gets around the

world and when it endsworld and when it ends Expect changes from suppliers: less willing Expect changes from suppliers: less willing

to carry stock and more pre-planning on to carry stock and more pre-planning on your partyour part

My opinion: We will have a few years of My opinion: We will have a few years of lower input prices, but eventually the global lower input prices, but eventually the global economy will start to roll againeconomy will start to roll again Input and output prices will increase againInput and output prices will increase again Use the next few years to prepareUse the next few years to prepare Increase energy and input use efficiencyIncrease energy and input use efficiency

Questions?Questions?

Paul D. MitchellPaul D. Mitchell

UW-Madison Ag & Applied EconomicsUW-Madison Ag & Applied Economics

Office: (608) 265-6514Office: (608) 265-6514

Cell: (608) 320-1162Cell: (608) 320-1162

Email: [email protected]: [email protected]

Extension Web Page:Extension Web Page:

www.aae.wisc.edu/mitchell/extension.htmwww.aae.wisc.edu/mitchell/extension.htm

input prices: long term trends and short term realities paul d. mitchell agricultural and applied...

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