Saturday, June 07, 2008

This chicken isn't playing...

Someone (Google let me down here) once said. "A chicken is just an egg's way of producing another egg". In other words, in every chain of life or production, a tendency to think of downstream links as simply tools often develops.

That's who we are becoming to our suppliers, I am beginning to suspect. A farmer is a chemical/fertilizer/seed/machinery company's way to get money from Cargill/Bunge/ADM. With skyrocketing grain prices, the impression I have from those who sell to me, is "I want some of that." even as question of "Did you earn some of that?" goes unanswered.

Fair enough. It is their right and obligation to their stakeholders to adopt the "whatever the market will bear" position. And boy, have they. (Frankly, farmers are, in their own way, doing the same thing.) Consider the formerly backwater potash industry.
It came up again in Potash Corp.'s first-quarter numbers, which broke the company's prior quarterly record by more than 50 per cent. Net income was $566 million, or $1.74 a share, up from $198 million, or 62 cents a share, in the year-earlier period. The company also hiked its full-year profit guidance by about 50 per cent.

"These conditions have us very excited for the future. This is the environment we have anticipated for two decades," Doyle said.

With a capacity expansion of almost 50 per cent expected by the end of 2012, Potash Corp. expects to seize a bigger chunk of global demand going forward, as it is the only potash producer with a significant expansion in the next few years. Other companies are also rushing to increase production capacity, but it will take years to bring it online.

That is expected to contribute to chronic under-supply in potash, which many analysts figure will keep Potash Corp. flying high well into the future. [More]
Sources tell me fertilizer companies are assuming that record profits for corn growers especially will make them perfect bagmen for grain customer/speculator extortion. The gist is farmers are looking at their spreadsheets and seeing they can pay much more for inputs and still make higher returns. Ergo: we'd be fools not to pour on the inputs with $7 corn.

Permit me to suggest other possible farmer reactions which might indicate what the market won't bear:
  • Good gravy! I'm going to scatter 3 times as much money on the ground before I get any return. While the computer says it should work out OK, I'm the dude who eats those expenses if something funny happens in the corn pit. Tell me again what the CFTC report is going to recommend.
  • There is a growing interval between when I fork out for inputs (prepaying 2009 fertilizer in Feb 2008, for example) and when the payback arrives in my bank account (summer 2010). Not only can much go wrong in that time period, I seem to be financing my suppliers - not really the business I intend to be in.
  • It is actually possible the dollar could not drop to worthless. To be fair, I don't see this happening anytime soon, but when it does the effect on grain prices and foreign inputs will be a double whammy. Fertilizer could get cheaper for me without any demand change.
  • Grid soil testing is now a relative bargain. Ditto with variable rate application. I'm getting as much of my ground as possible sampled to make sure every pound of fertilizer is needed.
  • Wait a minute. If 0-0-60 and DAP are $1000+/T, I can save more than I used to net per acre by simply applying the minimums. My soil is is pretty good shape, why not take enormous profits for a year or two instead of just huge profits? That's what not ponying up for expensive inputs looks like on my Excel model.
  • Is their any doubt input prices will be sticky?
  • If I strip-till and fertilize, maybe I could cut back on fertilizer big time. I could even be claiming to to it for humanitarian reasons to help out developing country producers.
  • While hot new hybrids may yield X% more, that could also be a phenomenon that comes about most noticeably in dry years. This ain't one of them. What if for my farm the climate turns wetter for a time - or longer - as the climate changes?
  • As everybody shifts to FipleStacked corn, I cannot help but notice the premiums for non-GMO corn are going up. Three years ago these hybrids were all the buzz and it represents a significant savings in inputs. Another dollar I can keep and yield I can live with.
  • If I can't forward price easily, I could be hung out to dry on huge input costs. And one year like that could erase several years of those modestly higher margins input suppliers are pointing out to me.
In short, despite what our suppliers think, we didn't just fall off the turnip truck. That's just the image we use to panhandle for subsidies. While massive profits may be possible by investing in every new input offering, the odds of actually receiving them can vary. I would suggest these next two years or so is the time to control expenses and bank the profits. Instead of getting into a bidding war, settling for slightly lower possible returns and significantly lower input costs is not a strategy to be despised.

Buying machinery when you have to stand in line should set off alarm bells as well. The return to good maintenance and careful operation is now higher than ever.

So my strategy is to apply inputs with a teaspoon for the next two years. Plant last year's hot numbers. Forward sell. (Sooner or later it's got to work!) Cherish the machinery. BTW, brace yourself for some eye-popping machinery price increases soon (just a guess, but I've heard it from several folks).

In short, I'm going to farm like times are hard. What suppliers seem to overlook is for producers when input prices accelerate, cutting back yields more and more "found money". To be sure this is a short term tactic, but we are all placing bets on how long grain prices can defy gravity. I won't be that much worse off if I have to return to normal rates/choices three years from now as I would be if I lavished inputs on my fields. In short, I think there is limited downside as compared to rapidly escalating risks for marching up the higher variable cost ramp.

Of course, I'll then turn around and bid too much for land, most likely. But long after I'm gone it will still be here, earning income. Inputs won't.

1 comment:

Brian said...

I enjoy your blog. The combination of spring floods, I'm downstream from you a little, and obscene fertilizer prices has me reacting much like yourself. Dry fertilizer especially will be applied with an eyedropper for the next crop year or two. Vrt would appear to pay for itself easily. It will be interesting to see how much US demand drops due to price, and if this has any effect at all on prices.