Getting ahead of 2012 input costs
A report earlier this week showed fertilizer prices are on the rise. Now, one economist says that's not the only crop input that's heading higher for corn and soybean farmers in the coming year.
Between farm land costs, seed fuel and fertilizer, rising input costs put a premium on locking in profits however you can in the coming weeks and months, says Purdue University Extension ag economist Alan Miller. In general, look for double-digit increases in what it will cost to raise corn, soybeans and wheat in 2012. That's largely driven by a likely increase in corn demand in the coming year, Miller says.
"Preliminary budgets show variable costs for rotation corn increasing by 16%, soybeans by 15% and wheat by 12% as compared with our January 2011 budgets," he says. "The markets are still signaling that they want more corn in 2012, so the question is whether farmers will listen. There probably will be more corn next year."
Specifically, Miller expects corn seed prices to rise by 5% to 10% for the 2012 crop. Earlier this week, University of Illinois economist Gary Schnitkey said anhydrous ammonia prices have already surged by more than $50/ton, adding that trend's likely to keep up at least in the near term.
So, what can you do to hedge against these rising prices? Look into pricing your fertilizer for next year's crop. Though prices have moved higher since their latest low point in early July of this year, they're only moving one direct, Miller says, and you can likely save by pricing it now.
Then, look at your cash rents. "It's hard to figure out a fair amount of cash rent, especially in an environment with so much potential for quick commodity price declines and input price surges," Miller says. "We don't want to see another 2009 where grain prices dropped, costs increased and profitability disappeared. It's a challenging risk management environment for the farmers.
"Try to help landowners understand the market and the volatility," he adds. "Possibly look at flexible lease agreements instead of locking in cash rents in case inputs increase and commodity prices stay where they are at now or fall even further."
In general, Miller suggests keeping your eye on costs rather than the highest yields in the coming year; 2012 will be a year when being the low-cost producer will pay off big.
"Commodity producers need to still be working on being low-cost producers on a cost-per-bushel-produced basis," he says. "Growers need to manage the expected margin between the selling price of the corn and their costs. Try to market to lock in commodity prices and to lock in prices on purchased inputs. Lock in profit margins and don't give up marketing strategies."