After the dramatic volatility experienced over the last 7 years to 8 years in prices for agricultural commodities and inputs, the current outlook may be suggesting some stability. With few exceptions, there is little in the fundamental supply and demand conditions across the board to suggest 2016 will be much different than 2015.
Of course, that’s not very good news. Producer profit margins are extremely tight, and most analysts expect them to remain that way in 2016 and for the next few years. The current market situation indeed has some discussing whether the industry is headed toward a 1980s-type crisis.
At a minimum, there is a younger segment of producers who have never seen market conditions characterized by 2015 and the outlook for the next 3 years to 4 years. Generating profits and maintaining cash flow will be a challenge that requires an intense management of crop input needs and very efficient use of input dollars.
Lower crop prices create a very meager demand for fertilizers, chemicals, and other ag inputs. With no major supply disruptions, this played out in 2015 with fertilizer prices falling roughly 10 percent from the previous year.
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CONTINUED DOWNWARD PRESSURE
Should we expect more of the same for 2016? Several factors point to continued downward pressure. Nothing in the commodity price outlook would suggest crop fertilizer demand will be anything but steady to weak. Supply inventories have not been pressured in the last year, and increased global supply capacity has come online for all three fertilizer components.
Fertilizer prices could edge slightly lower for 2016, but don’t expect another 10 percent reduction. While new supply capacity is available, major fertilizer suppliers would rather slow production and sit on some inventory than push excess supplies into a weak low margin market.
A big unknown in the market is the potential impact of new safety regulations on the storage of anhydrous ammonia. Anhydrous retailers have previously been exempt, but the new requirements could lead to significant facility investment or the decision to eliminate the product in some markets. Either would push prices higher.
BOTTOM FOR FUEL PRICES?
Fuel prices have also provided some cost of production relief recently, and we saw continued declines this fall, but analysts suggest we may have found the bottom of the price decline. Absent a global political disruption in the oil market, most expect stable to only slight increases in fuel costs for 2016.
Other input chemicals and seed costs appear to continue on a slight trend increase. Overall, cost of production is expected to be mostly flat relative to 2015, but those levels are still high enough to create a very challenging profit margin squeeze on most budgets.
When it comes to pricing inputs, a tempting strategy in this market is to simply wait. But keep in mind that price improvements, if they occur, will be minimal at best, while non-market impacts (politics, regulation, warring nations, etc.) can run prices up quickly.
Purchasing when you can pencil out a profit still makes sense. A more important strategy in this thin margin environment is to focus on efficient input use. Due diligence on soil fertility testing, closely monitoring crop needs, and targeting production costs to the highest return per dollar will be time well spent.
Unfortunately, the answer to “How tight can you tighten your belt?” may determine which producers will be able to navigate the difficult times ahead.