Managing Farm Input Costs

Douglas Faller

Co-General Manager Agricultural Producers Association

of Saskatchewan (APAS) Crop Production Week/January 16, 2014

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Some Opening Thoughts   This is intended to be practical BUT:

  There are no magic bullets   Some of this may be old news

 Audience ideas and experience are welcome  Some of this is from a broader, policy point

of view

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Look for Efficiencies

 Soil Testing   Nutrient volume and type   Determine ROI, especially on minor nutrients

 Variable Rate Application?  Crop Choices/Rotations

  N replacement   Disease control

 Determine ROI for fungicides/pesticides  Variety Choice

  Protein   Disease control

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Commercial Relationships

 Shop Around  Volume Buying

  Individual   Jointly?

 Cross Bundling Inputs   Know competitive prices

 Bundling Inputs with Production Marketing   Understand the limitations/potential costs

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Market Intelligence

  Input Price Surveys (to follow)   Internet Forecasts - Google “Urea News”:

ICIS; CRU; DTN/Progressive Farmer; Stonegate Agricom; Fertecon

  ‘Farm Industry News’ (Nov.) forecast:   lower 2014 U. S. fertilizer prices: ammonia 42

cents/lb.; phosphate 50 cents/lb.   U. S. chemical prices up 1%

  ‘Farm Futures’ (Jan. 14) USDA Reports:   Gulf Urea up $45 since Xmas to $374; UAN up

$12.50 to $262.50; phosphate moved higher 5

Input Price Surveys

  Local: Fertilizer Buddy – Larry Weber  Ontario – Ridgetown College, U of Guelph

  May, June, October   Compare ON to U.S.

 Alberta Farm Input Price Survey  USDA  Global (online): IndexMundi

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Alberta Input Price Survey  www.agric.gov.ab.ca/app21/farminputprices  Alberta Agriculture and Rural Development   Prices gathered through Alberta Federation

of Agriculture (formerly Wild Rose)   25 ‘monitors’ gather prices from retail outlets  Since 1976  Monthly   Fairly wide range of inputs  Growing Forward (Federal) Funding

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SK Farm Input Price Survey (FIPS)

 Started April 2000 / Ended October 2002  Replaced previous survey of retail outlets

in the 1980s  Occasioned by Provincial Ag Ministers’

meetings

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FIPS Purposes

  Provide timely input price information to farmers assist their production planning.

 Stimulate awareness of the value of comparison shopping.

 Replace discontinued sources of input price information and provide reliable data for program analysis and forecasting.

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FIPS Notes

  Funding partnership with AAFC  Administered by ADD Boards   230 data suppliers recruited by ADD   Farmers paid to supply data  Grain and livestock inputs   237 products  Data supplied monthly (or continuously)   Individual data kept confidential  Data suppliers kept anonymous

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Methodological Firsts

  Input price data supplied directly from farmers’ invoices rather than retail outlets   More accurately reflect market conditions

  Internet as the primary tool collection and dissemination of information   Ease of submitting data, anonymity   No data entry: save $s, limit data entry errors

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Communication of FIPS Results  Online to farmers via interactive SK map

  Available at three levels: Crop District; south/central/north; province wide.

  Info timely, one month old or less.

 Distributed to Rural Service Centres  Some reports mailed to farmers  Distributed to media monthly  Monthly radio interviews

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A New SK Survey?

 APAS asked M of Ag unsuccessfully for funding partnership for CAAP grant

  FNA application to ACS for CAAP funding to do a survey was turned down

  FNA competitiveness study (current)   Analyzing competitive position of Canadian

farmers vs. international competitors   Input costs a key parameter   Results expected soon

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Some Questions

 Are surveys worth doing in today’s market?  Do producers want this information?  Would producers prefer NOT to share the

information?  Would producers participate in a survey?  What strategies to control input prices do

producers in the audience have to share?

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Market Consolidation

 Ongoing consolidation   Glencore takeover of Viterra   Agrium purchase of farm input distribution

 Competition Bureau   APAS identified info sources and experts, and

provided analysis   APAS organized a Mossbank meeting (March)

 Agrium agreed to divest 7 retail stores  Agrium divests 9 NH3 business, supplies

NH3 to for 4 yrs. not above its own prices 16

Learnings from Bureau Process

  Interruptions in supply occur – seeding halted waiting for fertilizer to arrive

 Consolidation will reduce number of competitive suppliers

  Just in time supply already a problem, will increase with fewer suppliers

 Availability just as important as price  Question: Availability at what price?

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Input Inventory Management

  Fertilizer Storage Capacity  Diesel Fuel Storage Capacity   Fall Purchase

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Cost Price Squeeze

  Producers have no control over prices on either side of production.

  Input manufacturers/suppliers are able to extract excessive rent when grain prices go up.

  “When farmers are making a lot more money, input suppliers all want to see their fair share of the profits.”   (AARD Analyst, WP Nov 3/11)

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Virginia Tech Study  Analyzed the relationship between corn and

nitrogen prices Jan. 2007 – Oct. 2010  Used USDA monthly prices  Showed a nearly perfect positive

correlation between the price of corn at a given time and the price of nitrogen two months later

  “… there is a high probability that if corn prices are trending upward, nitrogen prices will start to move up two months later”

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Urea production cost based on Yara cash cost calculator - USD/mt gr urea US Gulf ex works AB Urea costs based on price survey by AFA and AARD

Nitrogen Supply

  Is there a lack of N production capacity – so bigger supply should bring lower prices?

  Talk of more N capacity (WP April 12)  Vertical Integration?

  From the bottom up, i.e. by producers   FNA nitrogen production initiative - ProjectN

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Some Other Costs

  Foreign Exchange   Hedging   I think a couple of service providers exist

  Interest Rates   Don’t assume low rates long term   Build flexibility into business plan to absorb

interest rate increases

 Marketing Payment Protection   Check new CGC payables insurance   Trade credit insurance?

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Government Policy – Generics

  PRMA run by Health Canada  Generic registration in U.S. is 5-6 mos. vs.

18-24 mos. Canada, which extends patent protection here to multinational brands

 Arbitration is too expensive   Thus, 15% of Can. market is generic vs.

50% in U.S. and likely to decline  Banvel/Refine/Axial/Folicur/Tilt/Select cost

$113M more in Canada (FNA estimate)  Want lower input prices? Talk to your MP!

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Peak Phosphate?

  “We may be able to substitute nuclear power for coal, and plastics for wood, and yeast for meat, and friendliness for isolation — but for phosphorus there is neither substitute nor replacement”. Isaac Asimov, 1974

 “Our dwindling supply of phosphorus … threatens to disrupt food security across the planet during the coming century. This is the gravest natural resource shortage you've never heard of.” Foreign Policy magazine, 2011 26

Key Questions about Peak P  Debate over how long rock phosphate will

last   Cordell/White (Australia) see supply declining

sharply in next 50 years   Some, especially phosphate producers suggest

two or three centuries availability

 But, extraction costs will continue to rise   Price of DAP is rising (chart to follow)  Rock phosphate supply concentrated in

Morocco/Western Sahara 27

Dana Cordell/Stuart White 2011

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www.stonegateagricom.com/s/PhosphatePrices.aspricom 29

Remaining Global Phosphate Rock Reserves (2010, International Fertilizer Development Center (IFDC))

NOTE:  30

Geopolitical Responses   In 2004 the United States signed a Free

Trade Agreement with Morocco.

  In 2008 China imposed a 135% tariff on export of phosphate, largely eliminating exports.

 Canada?

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Be open to other production/business models  Crops that supply nutrients or pest control  Crops with lower input demand   Lower volume crops   Integrated pest management  Mixed farming  Organic

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Review

  Look for efficiencies in input use  Shop around   Look for volume and bundling discounts  Gather market information

  Price forecasts   Input price surveys

 Manage input inventories   Plan for potential impacts of a wide range

of input costs 33

Review  Buy together  Vertical integration   Look for generics  Get policy makers working for you  Consider alternate production systems  Consider other business models

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Discussion   Thank you!

  Ideas and comments are welcome.

  306-789-7774-3   dfaller@apas.ca

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