I have seen some curiously disingenuous justifications for the barrage of input cost increases now being aimed at producers - especially corn farmers. I recently received an impressively glossy and doubtless expensive sales packet from Beck's Seed outlining how research costs, increased demand, new technology, yadda yadda were making price increases "necessary".
The implication was clear - we just have to raise prices.
Unsurprisingly, the fertilizer industry is singing from the same public relations hymnal.
High prices of natural gas have curtailed ammonia production, reducing the supply and increasing the cost of nitrogen fertilizer. The Caribbean is a potential source for increased imports, but with increasing dependency on imported nitrogen comes a chance for a volatile supply and a volatile price. [More]While I agree there is a relationship to supplier input costs (research, natural gas) and farm input (seed, fertilizer) prices, it is minor compared to pricing power.
Input prices are going up because suppliers can raise prices and increase their profits secure in the knowledge that farmers can afford to and will pay higher prices, and hence demand will not drop. The pricing power also is strengthened by virtual monopolies or at least oligopolies in these industries.
I do not mean to imply gouging or unfair practices, just a sense of embarrassment that our suppliers think we will swallow these transparently misleading excuses when the same companies are reassuring investors how wide their margins are.
"Agrium's record second-quarter earnings were due to excellent results from all three of our strategic business units," said Wilson. "Results from our retail operations reflect the synergies we captured from our 2006 Royster-Clark acquisition, as well as the strong agricultural fundamentals."
The company said wholesale operations had its best-ever quarter, with record or near record margins across all product lines. Advanced technologies results doubled on the strength of sales of "environmentally smart nitrogen," combined with recent growth initiatives. [More]
I mean, how dumb do they think we are?
(Don't actually want to know the answer to that one)
Input prices will skyrocket up until a) competitive pressure forces companies to shrink margins to compete for market share (watch the Monsanto/Syngenta/Pioneer strategies in 2008 and beyond) or b) corn becomes less profitable than soybeans/wheat/cotton/retirement.It is easy to get your BVD's in a bind when you have little leverage in the market, but farmers need to remember this is exactly the mindset - price as high as the market will bear - we have for our own marketing plans. Just because you know your production costs doesn't mean that is where you sell - you shoot for as much profit as possible.
The doubled gross margins "out-of-the-field" that I am seeing today will undoubtedly be invested first in inputs (variable costs) and residually in land (rent/purchase). All the players know this and with few choices (something poultry growers are loudly pointing out) customers pay until they can't.
Better order seed and NH3 today.
And hold for $4.50.