input prices: where are they now and where are they going? paul d. mitchell agricultural and applied...
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Input Prices: Input Prices: Where Are They Now and Where Are They Now and Where Are They Going?Where Are They Going?
Paul D. MitchellPaul D. Mitchell Agricultural and Applied EconomicsAgricultural and Applied Economics
University of Wisconsin-MadisonUniversity of Wisconsin-Madison
Soil Fertility Management Strategies Soil Fertility Management Strategies WorkshopWorkshop
November 18, 2008November 18, 2008Stevens Point, WIStevens Point, WI
Goal TodayGoal Today
Overview of Input (and Output) PricesOverview of Input (and Output) Prices Where they are now and where they are Where they are now and where they are
goinggoing Strategies for dealing with input and Strategies for dealing with input and
output price uncertainty and general output price uncertainty and general economic uncertaintyeconomic uncertainty
Where are fertilizer prices Where are fertilizer prices going?going?
Fall 2008Fall 2008 N prices should be about same to only a N prices should be about same to only a
little higher: Anhydrous will be $750-$800 a little higher: Anhydrous will be $750-$800 a tonton
P prices: DAP will be $950-$1000 a tonP prices: DAP will be $950-$1000 a ton K prices: Potash will be around $600 a tonK prices: Potash will be around $600 a ton
Long termLong term Supply-side factors will catch up as new Supply-side factors will catch up as new
production comes on line and put some production comes on line and put some downward pressure on pricesdownward pressure on prices
Exchange rates? Energy prices?Exchange rates? Energy prices?
Slide from February Slide from February 20082008
Fertilizer prices are still high, Fertilizer prices are still high, but showing signs of slowingbut showing signs of slowing
FertilizerFertilizer Jan Jan 20072007aa
Jan Jan 20082008aa
Feb Feb 20082008bb
Aug Aug 20082008cc
Nov Nov 20082008aa
UreaUrea 410410 505505 500500 815815 ------
AnhydrousAnhydrous 515515 775775 715715 10951095 11601160
32% N Solution32% N Solution 270270 405405 405405 535535 560560
Ammonium Ammonium SulfateSulfate
210210 240240 325325 510510 500500
DAPDAP 335335 580580 625625 11851185 11501150
PotashPotash 255255 420420 515515 820820 820820
aaLandmark Coop Landmark Coop bbFrontier FS Coop Frontier FS Coop ccInformal Survey Informal Survey AverageAverage
0
200
400
600
800
1000
1200
Jan-07 Apr-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08
Prc
ie (
$/to
n)
Urea
Anhydrous
32% N/UAN
0
200
400
600
800
1000
1200
Jan-07 Apr-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08
Pri
ce (
$/to
n)
Ammonium Sulfate
DAP
Potash
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
0
100
200
300
400
500
600
700
800
Jan-06 Apr-06 Jul-06 Oct-06 Feb-07 May-07 Aug-07 Dec-07 Mar-08 Jun-08 Sep-08 Jan-09
Pri
ce I
nd
ex (
1992
= 1
00)
N
P & K
200
250
300
350
400
450
500
550
600
650
700
Jan-08 Feb-08 Mar-08 Apr-08 Jun-08 Jul-08 Aug-08 Oct-08 Nov-08
Pri
ce I
nd
ex (
1992
= 1
00)
N
P & K
FertilizeFertilizer Pricesr Prices
0
20
40
60
80
100
120
140
160
180
Jan-06 Apr-06 Jul-06 Oct-06 Feb-07 May-07 Aug-07 Dec-07 Mar-08 Jun-08 Sep-08 Jan-09
Pri
ce I
nd
ex (
1992
= 1
00)
Herbicides
Insecticides
Fungicides
100
110
120
130
140
150
160
170
180
Jan-08 Feb-08 Mar-08 Apr-08 Jun-08 Jul-08 Aug-08 Oct-08 Nov-08
Pri
ce I
nd
ex (
1992
= 1
00)
Herbicides
Insecticides
Fungicides
PesticidPesticide Pricese Prices
0
50
100
150
200
250
300
350
400
450
500
Jan-06 Apr-06 Jul-06 Oct-06 Feb-07 May-07 Aug-07 Dec-07 Mar-08 Jun-08 Sep-08 Jan-09
Pri
ce I
nd
ex (
1992
= 1
00)
Diesel
LP
100
150
200
250
300
350
400
450
500
Jan-08 Feb-08 Mar-08 Apr-08 Jun-08 Jul-08 Aug-08 Oct-08 Nov-08
Pri
ce I
nd
ex (
1992
= 1
00)
Diesel
LP
Fuel Fuel PricesPrices
Fertilizer PricesFertilizer Prices Urea: Has lower to go yet, most popular N Urea: Has lower to go yet, most popular N
fertilizer in world, world demand falling off, fertilizer in world, world demand falling off, not clear how far it has to gonot clear how far it has to go
Other types of N: Some price decrease Other types of N: Some price decrease maymay occur, but not much, could just as well keep occur, but not much, could just as well keep climbing, but not as fastclimbing, but not as fast
Potash and Phosphate: some downward Potash and Phosphate: some downward pressure on prices as world demand falls, pressure on prices as world demand falls, not clear how far it has to gonot clear how far it has to go
A lot depends on how bad the financial crisis A lot depends on how bad the financial crisis and recession becomes around the worldand recession becomes around the world
Chemical and Energy PricesChemical and Energy Prices Chemicals higher than last year (10%-20%)Chemicals higher than last year (10%-20%)
Downward pressure as demand falls offDownward pressure as demand falls off Diesel: higher than last year, but fallingDiesel: higher than last year, but falling
Aug 2008: 53% higher than in 2007Aug 2008: 53% higher than in 2007 Oct 2008: 21% higher than in 2007Oct 2008: 21% higher than in 2007
LP was higher than last year, now lowerLP was higher than last year, now lower Aug 2008: 28% higher than in 2007Aug 2008: 28% higher than in 2007 Oct 2007: 31% Oct 2007: 31% lowerlower than in 2007 than in 2007
A lot depends on how bad the financial crisis A lot depends on how bad the financial crisis and recession becomes around the worldand recession becomes around the world
What’s Going on with Output What’s Going on with Output Prices?Prices?
Grain prices have decreased and become Grain prices have decreased and become more volatilemore 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 will Dollar stronger, so export demand will
declinedecline Livestock prices falling, so less grain demandLivestock prices falling, so less grain demand World demand uncertainty increased with the World demand uncertainty increased with the
financial crisis/recessionfinancial crisis/recession
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
Jan-07 Apr-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08
Pri
ce (
$/b
u)
Wheat
Corn
Soybeans
Monthly Average Grain Prices Monthly Average Grain Prices (USDA)(USDA)
ContractContract PeakPeak PricePrice** CurrentCurrent DecreaseDecrease
Dec. CornDec. Corn JuneJune 7.997.99 3.863.86 -52%-52%
Nov. Nov. SoybeansSoybeans
JulyJuly 16.3716.37 9.229.22**** -44%-44%
Dec. WheatDec. Wheat MarchMarch 12.7512.75 5.345.34 -58%-58%*Darrel Good (U of IL) ** USDA-RMA price for RA*Darrel Good (U of IL) ** USDA-RMA price for RA
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
0
50
100
150
200
250
Jan-06 Apr-06 Jul-06 Oct-06 Feb-07 May-07 Aug-07 Dec-07 Mar-08 Jun-08 Sep-08 Jan-09
Prc
ie I
nd
ex (
1992
= 1
00)
Vegetables
Potatoes
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
0.00
5.00
10.00
15.00
20.00
25.00
30.00
7/28/2007 11/5/2007 2/13/2008 5/23/2008 8/31/2008 12/9/2008
Pri
ce (
$/50
lb
s)
Norkotah 70s
Norkotah 5x10lbs
Round Red Bs
Potato PricesPotato Prices Prices following “standard” post harvest Prices following “standard” post harvest
patternspatterns How low will Russets go before increasing?How low will Russets go before increasing?
Retail demand for fresh potatoes will fall with Retail demand for fresh potatoes will fall with lower consumer demand if income fallslower consumer demand if income falls Hseih et al. (2008) Hseih et al. (2008) For a 1% decrease in consumer incomeFor a 1% decrease in consumer income
3%-5% drop in Russet demand3%-5% drop in Russet demand 2%-4% drop in white demand2%-4% drop in white demand 1.5%-2.5% drop in red demand1.5%-2.5% drop in red demand Small drop in frozen/refrigerated potato demandSmall drop in frozen/refrigerated potato demand 2.5%-4.% 2.5%-4.% increaseincrease in dehydrated potato demand in dehydrated potato demand
Global Financial Global Financial Crisis/RecessionCrisis/Recession
Where are input and output prices Where are input and output prices going?going?
A lot depends on the severity of the global A lot depends on the severity of the global financial crisis and recessionfinancial crisis and recession Reduced consumer demand here and abroadReduced consumer demand here and abroad
Lower food and energy pricesLower food and energy prices Strong dollar reduces foreign demand forStrong dollar reduces foreign demand for
US grains/meat/vegetablesUS grains/meat/vegetables Ag inputs such as fertilizer and chemicalsAg inputs such as fertilizer and chemicals
Tightening of credit for agriculture in nations with Tightening of credit for agriculture in nations with large ag sectors reduces demand for ag inputslarge ag sectors reduces demand for ag inputs
China, India, Brazil, ArgentinaChina, India, Brazil, Argentina
Global Financial Global Financial Crisis/RecessionCrisis/Recession
G20 met in DC last Friday and Saturday G20 met in DC last Friday and Saturday to coordinate on crisis responseto coordinate on crisis response
ArgentinaArgentina GermanyGermany RussiaRussia
AustraliaAustralia Great BritainGreat Britain South AfricaSouth Africa
BrazilBrazil IndiaIndia Saudi ArabiaSaudi Arabia
CanadaCanada IndonesiaIndonesia South KoreaSouth Korea
ChinaChina ItalyItaly TurkeyTurkey
European European UnionUnion
JapanJapan United United StatesStates
FranceFrance MexicoMexico
CountryCountry
GDP GDP GrowtGrowt
hh
InflatioInflatio
nn
UnemploUnemploy-menty-ment
Stock Stock Market Market DeclineDecline
Interest Interest RateRate
BrazilBrazil 5.2%5.2% 5.7%5.7% 7.7%7.7% -44.2%-44.2% 13.8%13.8%
ChinaChina 9.7%9.7% 6.4%6.4% 4.0%4.0% -64.9%-64.9% 6.7%6.7%
Germany*Germany* 1.9%1.9% 2.9%2.9% 7.4%7.4% -41.1%-41.1% 3.3%3.3%
Great Great Britain*Britain*
1.0%1.0% 3.8%3.8% 5.4%5.4% -34.2%-34.2% 3.0%3.0%
IndiaIndia 7.9%7.9% 7.9%7.9% 7.8%7.8% -51.5%-51.5% 7.5%7.5%
Japan*Japan* 0.7%0.7% 1.9%1.9% 4.1%4.1% -42.5%-42.5% 0.3%0.3%
RussiaRussia 7.0%7.0% 14.0%14.0% 5.9%5.9% -65.5%-65.5% 11.0%11.0%
Saudi Saudi ArabiaArabia
5.9%5.9% 11.5%11.5% 13.0%13.0% -50.5%-50.5% 4.0%4.0%
South AfricaSouth Africa 3.8%3.8% 11.8%11.8% 23.2%23.2% -30.6%-30.6% 12.0%12.0%
United United StatesStates
1.6%1.6% 4.2%4.2% 5.6%5.6% -33.1%-33.1% 1.0%1.0%
Source: CNN web pageSource: CNN web page
*Officially in recession (Great Britain *Officially in recession (Great Britain “likely”)“likely”)
Current data on some G20 Current data on some G20 nationsnations
Main PointMain Point
Looks like recession in some nations, with Looks like recession in some nations, with a slow down in rapidly growing economiesa slow down in rapidly growing economies
Implies reduced demand for ag inputs Implies reduced demand for ag inputs and outputs and thus prices for bothand outputs and thus prices for both How will this affect your margins?How will this affect your margins?
Where are input and output prices going?Where are input and output prices going? I don’t know!I don’t know!
Will crisis affect agriculture?Will crisis affect agriculture? Crisis was largely financial in originCrisis was largely financial in origin
Sub-prime lending and credit default swapsSub-prime lending and credit default swaps Liquidity dried up so good companies Liquidity dried up so good companies
cannot get operating capitalcannot get operating capital $700 billion bailout to help make credit $700 billion bailout to help make credit
availableavailable Now worry about recessionNow worry about recession
Reduced consumer demand, less production Reduced consumer demand, less production needed, increased unemployment, etc.needed, increased unemployment, etc.
How will this affect agriculture?How will this affect agriculture? Mostly recession worries, not credit Mostly recession worries, not credit
problemproblem
Crisis and Ag Credit SystemCrisis and Ag Credit System
Ag credit system is good shapeAg credit system is good shape Mostly not involved in problematic financial Mostly not involved in problematic financial
deals, plenty of liquidity availabledeals, plenty of liquidity available Banks will be under more scrutiny Banks will be under more scrutiny
(FDIC)(FDIC) Regulators will be looking at lending more Regulators will be looking at lending more You may be asked for more details, better You may be asked for more details, better
evidence of your credit worthinessevidence of your credit worthiness Solid/conservative budgets; clear info on costs, Solid/conservative budgets; clear info on costs,
yields, marketing, insurance; Business Planyields, marketing, insurance; Business Plan Communicate with your lender(s)Communicate with your lender(s)
Strategies for dealing with all Strategies for dealing with all thisthis
market and margin uncertaintymarket and margin uncertainty Plan for the Worst and Hope for the BestPlan for the Worst and Hope for the Best
PrayPray Hunker down and wait out the stormHunker down and wait out the storm Take on risks, but do so wiselyTake on risks, but do so wisely
Trying to out guess the market is futileTrying to out guess the market is futile Luck is going to be an important factor for Luck is going to be an important factor for
input and output pricesinput and output prices Focus on the things you can control and get Focus on the things you can control and get
control of the things you cancontrol of the things you can
Strategies for this uncertain Strategies for this uncertain marketmarket
Develop realistic (conservative) enterprise Develop realistic (conservative) enterprise budgets to identify budgets to identify youryour break even prices, break even prices, then build a written marketing plan to achieve then build a written marketing plan to achieve your goalsyour goals Build your own or use those availableBuild your own or use those available
Variable inputs are easyVariable inputs are easy Various methods exist for machineryVarious methods exist for machinery Overhead costs are up to you to allocateOverhead costs are up to you to allocate I can give you places to startI can give you places to start www.aae.wisc.edu/mitchell/extension.htmwww.aae.wisc.edu/mitchell/extension.htm
Strategies for this uncertain Strategies for this uncertain marketmarket
Lock in inputs soon (if you haven’t already) Lock in inputs soon (if you haven’t already) so you know so you know youryour input costs for building input costs for building your budgets & marketing plansyour budgets & marketing plans Make sure your costs make sense for your Make sure your costs make sense for your
expected revenuesexpected revenues Shop around, buy different types of inputs from Shop around, buy different types of inputs from
different dealers, are there cheaper alternatives? different dealers, are there cheaper alternatives? Maybe wait on fertilizers and fuel to possibly Maybe wait on fertilizers and fuel to possibly
save, but can you live with the uncertainty and save, but can you live with the uncertainty and delay?delay?
Gives you control of an uncertain factor, really no Gives you control of an uncertain factor, really no other way to hedge or insure against input price other way to hedge or insure against input price risksrisks
Strategies for this uncertain Strategies for this uncertain marketmarket
Use of current (high) revenues/profitsUse of current (high) revenues/profits Build liquidity/cash reserves (current Build liquidity/cash reserves (current
ratio)ratio) Improves your ability to survive bad luckImproves your ability to survive bad luck FDIC insured to $250,000 to end of 2009FDIC insured to $250,000 to end of 2009
Pay down debt (especially short-term)Pay down debt (especially short-term) Refinance debts to fixed ratesRefinance debts to fixed rates Pay for 2009 input costs this yearPay for 2009 input costs this year Don’t forget about income taxesDon’t forget about income taxes
Strategies for this uncertain Strategies for this uncertain marketmarket
Use of current (high) revenues/profitsUse of current (high) revenues/profits Think carefully before buying machinery or Think carefully before buying machinery or
land or improving/expanding facilitiesland or improving/expanding facilities Be sure investments generate return for Be sure investments generate return for
businessbusiness Will be strapped with a cost for several years, Will be strapped with a cost for several years,
which will affect future cash flowswhich will affect future cash flows If we have a bad recession, may slow If we have a bad recession, may slow
(reverse?) trends in land values and machinery (reverse?) trends in land values and machinery costs, making waiting prudentcosts, making waiting prudent
If you buy it/expand, can you survive a string of If you buy it/expand, can you survive a string of bad luck and a few years of thin/negative bad luck and a few years of thin/negative margins?margins?
Strategies for this uncertain Strategies for this uncertain marketmarket
Land rental rates this yearLand rental rates this year Because of the extreme uncertainty, consider Because of the extreme uncertainty, consider
using variable rental rates or share rentsusing variable rental rates or share rents
Share input costs and output gainsShare input costs and output gains Careful on rules for commodity program Careful on rules for commodity program
paymentspayments U of IL Farm DOC: useful pubs on variable rentsU of IL Farm DOC: useful pubs on variable rents
If must use a fixed rate, set final rate in Mar/Apr: If must use a fixed rate, set final rate in Mar/Apr: Output prices clearer, inputs purchased, Output prices clearer, inputs purchased,
insurance guarantees setinsurance guarantees set Alternative: ask to allow renegotiation in Alternative: ask to allow renegotiation in
Mar/AprMar/Apr
Act. Yld Act. PriceBase rent
Base Yld Base Price
Strategies for this uncertain Strategies for this uncertain marketmarket
Use federal risk management programsUse federal risk management programs Help survive catastrophes or bad yearsHelp survive catastrophes or bad years Allow more aggressive marketing based on Allow more aggressive marketing based on
crop insurance guaranteescrop insurance guarantees Crop insuranceCrop insurance
Generally prudent, at least catastrophic Generally prudent, at least catastrophic coveragecoverage
Biotech Yield Endorsement (BYE) for corn nowBiotech Yield Endorsement (BYE) for corn now ACRE new alternative commodity programACRE new alternative commodity program SURE new disaster programSURE new disaster program
Strategies for this uncertain Strategies for this uncertain marketmarket
Judicious Input UseJudicious Input Use Use soil tests, nutrient crediting and Use soil tests, nutrient crediting and
recommended rates to control costsrecommended rates to control costs Properly calibrate application equipment or Properly calibrate application equipment or
know which applicators doknow which applicators do Scout for pests/diseases before losses occurScout for pests/diseases before losses occur Scout weeds, use right herbicides for the Scout weeds, use right herbicides for the
weeds you have and control when they are weeds you have and control when they are smallsmall
Are there cheaper alternatives?Are there cheaper alternatives? UW Extension can help, just ask!UW Extension can help, just ask!
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