I talked last March about prepaying fertilizer for 2009, and as you recall, took a pass on the advice of my Agrium representative.
· Nitrogen – huge market with hundreds of players – it only takes one of them to run out of space to store ammonia to prompt a selling spree – again I think this would be a short-term impact but could create some summer buying opportunities (as has been the case in most – if not call other years). (One misconception that seems to be out there is that with $100 oil – we should be scared that more price increases are coming – but today – the price of oil has virtually nothing to do with the price because of the supply/demand picture)…As I was frantically loading chemicals Sunday, my dealer said the word came down from on high the outlook is now certain that N prices (along with P & K) will definitely be jumping 30-40%. And because they remembered my concerns (and he wisely made notes) they are helping me protect that expense.
I’m worried that our growers are getting talked into prepaying fall fertilizer at historically high prices and not being given the full picture. In addition, I’m not sure I believe the claims that this is the only way to ensure supply. In my experience, proper planning and good communication between growers and retailers does a lot more to ensure supply than giving prepay money to retailers who may or may not be in good financial shape (c.f. our discussion on that subject the other day) [More]
All I have to do is come up with $110,000 or so!
Other bloggers have belatedly decided this is an issue as well, and opens up a whole new can of financial worms for producers: we are now the financiers for our suppliers.
Adam, you're on target with your worries. I've been talking with Allen Lash, a farm financial consultant in Illinois, who is voicing the same reservations. "When an input supplier asks you to prepay $100,000 to $500,000 for 2009 fertilizer or fuel, it's no different than if you were making him an unsecured loan," says Lash. You have a right to ask for the supplier's financials, but even that may not protect you. The real outcome is that bigger operators need to "insure" themselves by taking delivery if they prepay--and that means you'll need to finance more on-farm fuel and fertilizer storage or rentals. By the way, Lash says he expects more prepay demands on chemicals, too. [More]So my question is this: with historically high prices and (even though we are desperate to keep this secret) profit margins, why are we experiencing all the market power of a schoolyard lunch-money extortion victim?
Now of course, I suppose it is possible for inputs to continue their steady march until our raw material inflation looks like Zimbabwe, but what happens when prices flat out or (gasp!) even decline. Will our suppliers be able to go back to funding themselves? Is there any doubt producers will start buying at the last second?
This shift is building a resentful backlash, I think. I'm already a cranky customer. Use me now to build your financial results for your shareholders, but vendors better hope this trend doesn't turn. Because an historically bad planting season isn't all that's being seared into my memory from 2008.