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Input Prices: Input Prices: Where Are They Now and Where Are They Now and Where Are They Going? Where Are They Going? Paul D. Mitchell Paul D. Mitchell Agricultural and Applied Economics Agricultural and Applied Economics University of Wisconsin-Madison University of Wisconsin-Madison Soil Fertility Management Strategies Soil Fertility Management Strategies Workshop Workshop November 18, 2008 November 18, 2008 Stevens Point, WI Stevens Point, WI

Input Prices: Where Are They Now and Where Are They Going?

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Input Prices: Where Are They Now and Where Are They Going?. Paul D. Mitchell Agricultural and Applied Economics University of Wisconsin-Madison Soil Fertility Management Strategies Workshop November 18, 2008 Stevens Point, WI. Goal Today. Overview of Input (and Output) Prices - PowerPoint PPT Presentation

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Page 1: Input Prices:  Where Are They Now and  Where Are They Going?

Input Prices: Input Prices: Where Are They Now and Where Are They Now and Where Are They Going?Where Are They Going?

Paul D. MitchellPaul D. Mitchell Agricultural and Applied EconomicsAgricultural and Applied Economics

University of Wisconsin-MadisonUniversity of Wisconsin-Madison

Soil Fertility Management Strategies Soil Fertility Management Strategies WorkshopWorkshop

November 18, 2008November 18, 2008Stevens Point, WIStevens Point, WI

Page 2: Input Prices:  Where Are They Now and  Where Are They Going?

Goal TodayGoal Today

Overview of Input (and Output) PricesOverview of Input (and Output) Prices Where they are now and where they are Where they are now and where they are

goinggoing Strategies for dealing with input and Strategies for dealing with input and

output price uncertainty and general output price uncertainty and general economic uncertaintyeconomic uncertainty

Page 3: Input Prices:  Where Are They Now and  Where Are They Going?

Where are fertilizer prices Where are fertilizer prices going?going?

Fall 2008Fall 2008 N prices should be about same to only a N prices should be about same to only a

little higher: Anhydrous will be $750-$800 a little higher: Anhydrous will be $750-$800 a tonton

P prices: DAP will be $950-$1000 a tonP prices: DAP will be $950-$1000 a ton K prices: Potash will be around $600 a tonK prices: Potash will be around $600 a ton

Long termLong term Supply-side factors will catch up as new Supply-side factors will catch up as new

production comes on line and put some production comes on line and put some downward pressure on pricesdownward pressure on prices

Exchange rates? Energy prices?Exchange rates? Energy prices?

Slide from February Slide from February 20082008

Page 4: Input Prices:  Where Are They Now and  Where Are They Going?

Fertilizer prices are still high, Fertilizer prices are still high, but showing signs of slowingbut showing signs of slowing

FertilizerFertilizer Jan Jan 20072007aa

Jan Jan 20082008aa

Feb Feb 20082008bb

Aug Aug 20082008cc

Nov Nov 20082008aa

UreaUrea 410410 505505 500500 815815 ------

AnhydrousAnhydrous 515515 775775 715715 10951095 11601160

32% N Solution32% N Solution 270270 405405 405405 535535 560560

Ammonium Ammonium SulfateSulfate

210210 240240 325325 510510 500500

DAPDAP 335335 580580 625625 11851185 11501150

PotashPotash 255255 420420 515515 820820 820820

aaLandmark Coop Landmark Coop bbFrontier FS Coop Frontier FS Coop ccInformal Survey Informal Survey AverageAverage

Page 5: Input Prices:  Where Are They Now and  Where Are They Going?

0

200

400

600

800

1000

1200

Jan-07 Apr-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08

Prc

ie (

$/to

n)

Urea

Anhydrous

32% N/UAN

0

200

400

600

800

1000

1200

Jan-07 Apr-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08

Pri

ce (

$/to

n)

Ammonium Sulfate

DAP

Potash

Page 6: Input Prices:  Where Are They Now and  Where Are They Going?

Price IndexesPrice Indexes

USDA NASS publishes monthly price indexes USDA NASS publishes monthly price indexes for many ag outputs and inputsfor many ag outputs and inputs

http://usda.mannlib.cornell.edu/MannUsda/http://usda.mannlib.cornell.edu/MannUsda/viewDocumentInfo.do?documentID=1002 viewDocumentInfo.do?documentID=1002

National average price for the many items in National average price for the many items in a category, weighted by sales volumesa category, weighted by sales volumes

Many categories not reported hereMany categories not reported here Normalized so 1990-1992 Average = 100Normalized so 1990-1992 Average = 100

Page 7: Input Prices:  Where Are They Now and  Where Are They Going?

0

100

200

300

400

500

600

700

800

Jan-06 Apr-06 Jul-06 Oct-06 Feb-07 May-07 Aug-07 Dec-07 Mar-08 Jun-08 Sep-08 Jan-09

Pri

ce I

nd

ex (

1992

= 1

00)

N

P & K

200

250

300

350

400

450

500

550

600

650

700

Jan-08 Feb-08 Mar-08 Apr-08 Jun-08 Jul-08 Aug-08 Oct-08 Nov-08

Pri

ce I

nd

ex (

1992

= 1

00)

N

P & K

FertilizeFertilizer Pricesr Prices

Page 8: Input Prices:  Where Are They Now and  Where Are They Going?

0

20

40

60

80

100

120

140

160

180

Jan-06 Apr-06 Jul-06 Oct-06 Feb-07 May-07 Aug-07 Dec-07 Mar-08 Jun-08 Sep-08 Jan-09

Pri

ce I

nd

ex (

1992

= 1

00)

Herbicides

Insecticides

Fungicides

100

110

120

130

140

150

160

170

180

Jan-08 Feb-08 Mar-08 Apr-08 Jun-08 Jul-08 Aug-08 Oct-08 Nov-08

Pri

ce I

nd

ex (

1992

= 1

00)

Herbicides

Insecticides

Fungicides

PesticidPesticide Pricese Prices

Page 9: Input Prices:  Where Are They Now and  Where Are They Going?

0

50

100

150

200

250

300

350

400

450

500

Jan-06 Apr-06 Jul-06 Oct-06 Feb-07 May-07 Aug-07 Dec-07 Mar-08 Jun-08 Sep-08 Jan-09

Pri

ce I

nd

ex (

1992

= 1

00)

Diesel

LP

100

150

200

250

300

350

400

450

500

Jan-08 Feb-08 Mar-08 Apr-08 Jun-08 Jul-08 Aug-08 Oct-08 Nov-08

Pri

ce I

nd

ex (

1992

= 1

00)

Diesel

LP

Fuel Fuel PricesPrices

Page 10: Input Prices:  Where Are They Now and  Where Are They Going?

Fertilizer PricesFertilizer Prices Urea: Has lower to go yet, most popular N Urea: Has lower to go yet, most popular N

fertilizer in world, world demand falling off, fertilizer in world, world demand falling off, not clear how far it has to gonot clear how far it has to go

Other types of N: Some price decrease Other types of N: Some price decrease maymay occur, but not much, could just as well keep occur, but not much, could just as well keep climbing, but not as fastclimbing, but not as fast

Potash and Phosphate: some downward Potash and Phosphate: some downward pressure on prices as world demand falls, pressure on prices as world demand falls, not clear how far it has to gonot clear how far it has to go

A lot depends on how bad the financial crisis A lot depends on how bad the financial crisis and recession becomes around the worldand recession becomes around the world

Page 11: Input Prices:  Where Are They Now and  Where Are They Going?

Chemical and Energy PricesChemical and Energy Prices Chemicals higher than last year (10%-20%)Chemicals higher than last year (10%-20%)

Downward pressure as demand falls offDownward pressure as demand falls off Diesel: higher than last year, but fallingDiesel: higher than last year, but falling

Aug 2008: 53% higher than in 2007Aug 2008: 53% higher than in 2007 Oct 2008: 21% higher than in 2007Oct 2008: 21% higher than in 2007

LP was higher than last year, now lowerLP was higher than last year, now lower Aug 2008: 28% higher than in 2007Aug 2008: 28% higher than in 2007 Oct 2007: 31% Oct 2007: 31% lowerlower than in 2007 than in 2007

A lot depends on how bad the financial crisis A lot depends on how bad the financial crisis and recession becomes around the worldand recession becomes around the world

Page 12: Input Prices:  Where Are They Now and  Where Are They Going?

What’s Going on with Output What’s Going on with Output Prices?Prices?

Grain prices have decreased and become Grain prices have decreased and become more volatilemore volatile Ethanol/biodiesel prices falling as crude oil Ethanol/biodiesel prices falling as crude oil

and diesel prices declineand diesel prices decline Dollar stronger, so export demand will Dollar stronger, so export demand will

declinedecline Livestock prices falling, so less grain demandLivestock prices falling, so less grain demand World demand uncertainty increased with the World demand uncertainty increased with the

financial crisis/recessionfinancial crisis/recession

Page 13: Input Prices:  Where Are They Now and  Where Are They Going?

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

Jan-07 Apr-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08

Pri

ce (

$/b

u)

Wheat

Corn

Soybeans

Monthly Average Grain Prices Monthly Average Grain Prices (USDA)(USDA)

ContractContract PeakPeak PricePrice** CurrentCurrent DecreaseDecrease

Dec. CornDec. Corn JuneJune 7.997.99 3.863.86 -52%-52%

Nov. Nov. SoybeansSoybeans

JulyJuly 16.3716.37 9.229.22**** -44%-44%

Dec. WheatDec. Wheat MarchMarch 12.7512.75 5.345.34 -58%-58%*Darrel Good (U of IL) ** USDA-RMA price for RA*Darrel Good (U of IL) ** USDA-RMA price for RA

Page 14: Input Prices:  Where Are They Now and  Where Are They Going?

What about Potatoes and What about Potatoes and Vegetables?Vegetables?

USDA-NASS National monthly price USDA-NASS National monthly price index for prices received by farmersindex for prices received by farmers

0

50

100

150

200

250

Jan-06 Apr-06 Jul-06 Oct-06 Feb-07 May-07 Aug-07 Dec-07 Mar-08 Jun-08 Sep-08 Jan-09

Prc

ie I

nd

ex (

1992

= 1

00)

Vegetables

Potatoes

Page 15: Input Prices:  Where Are They Now and  Where Are They Going?

USDA-AMS weekly average USDA-AMS weekly average prices received at terminal prices received at terminal

markets for Central Wisconsin markets for Central Wisconsin fresh potatoesfresh potatoes

0.00

5.00

10.00

15.00

20.00

25.00

30.00

7/28/2007 11/5/2007 2/13/2008 5/23/2008 8/31/2008 12/9/2008

Pri

ce (

$/50

lb

s)

Norkotah 70s

Norkotah 5x10lbs

Round Red Bs

Page 16: Input Prices:  Where Are They Now and  Where Are They Going?

Potato PricesPotato Prices Prices following “standard” post harvest Prices following “standard” post harvest

patternspatterns How low will Russets go before increasing?How low will Russets go before increasing?

Retail demand for fresh potatoes will fall with Retail demand for fresh potatoes will fall with lower consumer demand if income fallslower consumer demand if income falls Hseih et al. (2008) Hseih et al. (2008) For a 1% decrease in consumer incomeFor a 1% decrease in consumer income

3%-5% drop in Russet demand3%-5% drop in Russet demand 2%-4% drop in white demand2%-4% drop in white demand 1.5%-2.5% drop in red demand1.5%-2.5% drop in red demand Small drop in frozen/refrigerated potato demandSmall drop in frozen/refrigerated potato demand 2.5%-4.% 2.5%-4.% increaseincrease in dehydrated potato demand in dehydrated potato demand

Page 17: Input Prices:  Where Are They Now and  Where Are They Going?

Global Financial Global Financial Crisis/RecessionCrisis/Recession

Where are input and output prices Where are input and output prices going?going?

A lot depends on the severity of the global A lot depends on the severity of the global financial crisis and recessionfinancial crisis and recession Reduced consumer demand here and abroadReduced consumer demand here and abroad

Lower food and energy pricesLower food and energy prices Strong dollar reduces foreign demand forStrong dollar reduces foreign demand for

US grains/meat/vegetablesUS grains/meat/vegetables Ag inputs such as fertilizer and chemicalsAg inputs such as fertilizer and chemicals

Tightening of credit for agriculture in nations with Tightening of credit for agriculture in nations with large ag sectors reduces demand for ag inputslarge ag sectors reduces demand for ag inputs

China, India, Brazil, ArgentinaChina, India, Brazil, Argentina

Page 18: Input Prices:  Where Are They Now and  Where Are They Going?

Global Financial Global Financial Crisis/RecessionCrisis/Recession

G20 met in DC last Friday and Saturday G20 met in DC last Friday and Saturday to coordinate on crisis responseto coordinate on crisis response

ArgentinaArgentina GermanyGermany RussiaRussia

AustraliaAustralia Great BritainGreat Britain South AfricaSouth Africa

BrazilBrazil IndiaIndia Saudi ArabiaSaudi Arabia

CanadaCanada IndonesiaIndonesia South KoreaSouth Korea

ChinaChina ItalyItaly TurkeyTurkey

European European UnionUnion

JapanJapan United United StatesStates

FranceFrance MexicoMexico

Page 19: Input Prices:  Where Are They Now and  Where Are They Going?

CountryCountry

GDP GDP GrowtGrowt

hh

InflatioInflatio

nn

UnemploUnemploy-menty-ment

Stock Stock Market Market DeclineDecline

Interest Interest RateRate

BrazilBrazil 5.2%5.2% 5.7%5.7% 7.7%7.7% -44.2%-44.2% 13.8%13.8%

ChinaChina 9.7%9.7% 6.4%6.4% 4.0%4.0% -64.9%-64.9% 6.7%6.7%

Germany*Germany* 1.9%1.9% 2.9%2.9% 7.4%7.4% -41.1%-41.1% 3.3%3.3%

Great Great Britain*Britain*

1.0%1.0% 3.8%3.8% 5.4%5.4% -34.2%-34.2% 3.0%3.0%

IndiaIndia 7.9%7.9% 7.9%7.9% 7.8%7.8% -51.5%-51.5% 7.5%7.5%

Japan*Japan* 0.7%0.7% 1.9%1.9% 4.1%4.1% -42.5%-42.5% 0.3%0.3%

RussiaRussia 7.0%7.0% 14.0%14.0% 5.9%5.9% -65.5%-65.5% 11.0%11.0%

Saudi Saudi ArabiaArabia

5.9%5.9% 11.5%11.5% 13.0%13.0% -50.5%-50.5% 4.0%4.0%

South AfricaSouth Africa 3.8%3.8% 11.8%11.8% 23.2%23.2% -30.6%-30.6% 12.0%12.0%

United United StatesStates

1.6%1.6% 4.2%4.2% 5.6%5.6% -33.1%-33.1% 1.0%1.0%

Source: CNN web pageSource: CNN web page

*Officially in recession (Great Britain *Officially in recession (Great Britain “likely”)“likely”)

Current data on some G20 Current data on some G20 nationsnations

Page 20: Input Prices:  Where Are They Now and  Where Are They Going?

Main PointMain Point

Looks like recession in some nations, with Looks like recession in some nations, with a slow down in rapidly growing economiesa slow down in rapidly growing economies

Implies reduced demand for ag inputs Implies reduced demand for ag inputs and outputs and thus prices for bothand outputs and thus prices for both How will this affect your margins?How will this affect your margins?

Where are input and output prices going?Where are input and output prices going? I don’t know!I don’t know!

Page 21: Input Prices:  Where Are They Now and  Where Are They Going?

Will crisis affect agriculture?Will crisis affect agriculture? Crisis was largely financial in originCrisis was largely financial in origin

Sub-prime lending and credit default swapsSub-prime lending and credit default swaps Liquidity dried up so good companies Liquidity dried up so good companies

cannot get operating capitalcannot get operating capital $700 billion bailout to help make credit $700 billion bailout to help make credit

availableavailable Now worry about recessionNow worry about recession

Reduced consumer demand, less production Reduced consumer demand, less production needed, increased unemployment, etc.needed, increased unemployment, etc.

How will this affect agriculture?How will this affect agriculture? Mostly recession worries, not credit Mostly recession worries, not credit

problemproblem

Page 22: Input Prices:  Where Are They Now and  Where Are They Going?

Crisis and Ag Credit SystemCrisis and Ag Credit System

Ag credit system is good shapeAg credit system is good shape Mostly not involved in problematic financial Mostly not involved in problematic financial

deals, plenty of liquidity availabledeals, plenty of liquidity available Banks will be under more scrutiny Banks will be under more scrutiny

(FDIC)(FDIC) Regulators will be looking at lending more Regulators will be looking at lending more You may be asked for more details, better You may be asked for more details, better

evidence of your credit worthinessevidence of your credit worthiness Solid/conservative budgets; clear info on costs, Solid/conservative budgets; clear info on costs,

yields, marketing, insurance; Business Planyields, marketing, insurance; Business Plan Communicate with your lender(s)Communicate with your lender(s)

Page 23: Input Prices:  Where Are They Now and  Where Are They Going?

Questions?Questions?

Page 24: Input Prices:  Where Are They Now and  Where Are They Going?

Strategies for dealing with all Strategies for dealing with all thisthis

market and margin uncertaintymarket and margin uncertainty Plan for the Worst and Hope for the BestPlan for the Worst and Hope for the Best

PrayPray Hunker down and wait out the stormHunker down and wait out the storm Take on risks, but do so wiselyTake on risks, but do so wisely

Trying to out guess the market is futileTrying to out guess the market is futile Luck is going to be an important factor for Luck is going to be an important factor for

input and output pricesinput and output prices Focus on the things you can control and get Focus on the things you can control and get

control of the things you cancontrol of the things you can

Page 25: Input Prices:  Where Are They Now and  Where Are They Going?

Strategies for this uncertain Strategies for this uncertain marketmarket

Develop realistic (conservative) enterprise Develop realistic (conservative) enterprise budgets to identify budgets to identify youryour break even prices, break even prices, then build a written marketing plan to achieve then build a written marketing plan to achieve your goalsyour goals Build your own or use those availableBuild your own or use those available

Variable inputs are easyVariable inputs are easy Various methods exist for machineryVarious methods exist for machinery Overhead costs are up to you to allocateOverhead costs are up to you to allocate I can give you places to startI can give you places to start www.aae.wisc.edu/mitchell/extension.htmwww.aae.wisc.edu/mitchell/extension.htm

Page 26: Input Prices:  Where Are They Now and  Where Are They Going?

Strategies for this uncertain Strategies for this uncertain marketmarket

Lock in inputs soon (if you haven’t already) Lock in inputs soon (if you haven’t already) so you know so you know youryour input costs for building input costs for building your budgets & marketing plansyour budgets & marketing plans Make sure your costs make sense for your Make sure your costs make sense for your

expected revenuesexpected revenues Shop around, buy different types of inputs from Shop around, buy different types of inputs from

different dealers, are there cheaper alternatives? different dealers, are there cheaper alternatives? Maybe wait on fertilizers and fuel to possibly Maybe wait on fertilizers and fuel to possibly

save, but can you live with the uncertainty and save, but can you live with the uncertainty and delay?delay?

Gives you control of an uncertain factor, really no Gives you control of an uncertain factor, really no other way to hedge or insure against input price other way to hedge or insure against input price risksrisks

Page 27: Input Prices:  Where Are They Now and  Where Are They Going?

Strategies for this uncertain Strategies for this uncertain marketmarket

Use of current (high) revenues/profitsUse of current (high) revenues/profits Build liquidity/cash reserves (current Build liquidity/cash reserves (current

ratio)ratio) Improves your ability to survive bad luckImproves your ability to survive bad luck FDIC insured to $250,000 to end of 2009FDIC insured to $250,000 to end of 2009

Pay down debt (especially short-term)Pay down debt (especially short-term) Refinance debts to fixed ratesRefinance debts to fixed rates Pay for 2009 input costs this yearPay for 2009 input costs this year Don’t forget about income taxesDon’t forget about income taxes

Page 28: Input Prices:  Where Are They Now and  Where Are They Going?

Strategies for this uncertain Strategies for this uncertain marketmarket

Use of current (high) revenues/profitsUse of current (high) revenues/profits Think carefully before buying machinery or Think carefully before buying machinery or

land or improving/expanding facilitiesland or improving/expanding facilities Be sure investments generate return for Be sure investments generate return for

businessbusiness Will be strapped with a cost for several years, Will be strapped with a cost for several years,

which will affect future cash flowswhich will affect future cash flows If we have a bad recession, may slow If we have a bad recession, may slow

(reverse?) trends in land values and machinery (reverse?) trends in land values and machinery costs, making waiting prudentcosts, making waiting prudent

If you buy it/expand, can you survive a string of If you buy it/expand, can you survive a string of bad luck and a few years of thin/negative bad luck and a few years of thin/negative margins?margins?

Page 29: Input Prices:  Where Are They Now and  Where Are They Going?

Strategies for this uncertain Strategies for this uncertain marketmarket

Land rental rates this yearLand rental rates this year Because of the extreme uncertainty, consider Because of the extreme uncertainty, consider

using variable rental rates or share rentsusing variable rental rates or share rents

Share input costs and output gainsShare input costs and output gains Careful on rules for commodity program Careful on rules for commodity program

paymentspayments U of IL Farm DOC: useful pubs on variable rentsU of IL Farm DOC: useful pubs on variable rents

If must use a fixed rate, set final rate in Mar/Apr: If must use a fixed rate, set final rate in Mar/Apr: Output prices clearer, inputs purchased, Output prices clearer, inputs purchased,

insurance guarantees setinsurance guarantees set Alternative: ask to allow renegotiation in Alternative: ask to allow renegotiation in

Mar/AprMar/Apr

Act. Yld Act. PriceBase rent

Base Yld Base Price

Page 30: Input Prices:  Where Are They Now and  Where Are They Going?

Strategies for this uncertain Strategies for this uncertain marketmarket

Use federal risk management programsUse federal risk management programs Help survive catastrophes or bad yearsHelp survive catastrophes or bad years Allow more aggressive marketing based on Allow more aggressive marketing based on

crop insurance guaranteescrop insurance guarantees Crop insuranceCrop insurance

Generally prudent, at least catastrophic Generally prudent, at least catastrophic coveragecoverage

Biotech Yield Endorsement (BYE) for corn nowBiotech Yield Endorsement (BYE) for corn now ACRE new alternative commodity programACRE new alternative commodity program SURE new disaster programSURE new disaster program

Page 31: Input Prices:  Where Are They Now and  Where Are They Going?

Strategies for this uncertain Strategies for this uncertain marketmarket

Judicious Input UseJudicious Input Use Use soil tests, nutrient crediting and Use soil tests, nutrient crediting and

recommended rates to control costsrecommended rates to control costs Properly calibrate application equipment or Properly calibrate application equipment or

know which applicators doknow which applicators do Scout for pests/diseases before losses occurScout for pests/diseases before losses occur Scout weeds, use right herbicides for the Scout weeds, use right herbicides for the

weeds you have and control when they are weeds you have and control when they are smallsmall

Are there cheaper alternatives?Are there cheaper alternatives? UW Extension can help, just ask!UW Extension can help, just ask!

Page 32: Input Prices:  Where Are They Now and  Where Are They Going?

Questions?Questions?

Paul D. MitchellPaul D. Mitchell

UW-Madison Ag & Applied EconomicsUW-Madison Ag & Applied Economics

Office: (608) 265-6514Office: (608) 265-6514

Cell: (608) 320-1162Cell: (608) 320-1162

Email: [email protected]: [email protected]

Extension Web Page:Extension Web Page:

www.aae.wisc.edu/mitchell/extension.htmwww.aae.wisc.edu/mitchell/extension.htm