Much attention has focused lately on the run-up in the production of agricultural commodities and its effect on food prices. Additionally, key crop input prices are also rising and show no sign of slowing, according to a new Rabobank report, "U.S. Crop Inputs."
"Farmers' use of key crop inputs is reaching record highs, while prices are also at record highs, which is putting the pinch on pocketbooks," said Associate Erin FitzPatrick with Rabobank's Food & Agribusiness Research and Advisory (FAR) department.
One reason for the increase in crop input usage is the economic growth in emerging markets where demand for food is driving the need for production. Additionally, the cost of inputs has increased because of higher price tags on transportation, labor, energy and raw materials as well as the weakened U.S. dollar and regulatory constraints.
During this planting season, farmers have seen a huge increase in the cost of fertilizer — in some cases as much as double. Demand has depleted reserves and strained supplies as 2007 global fertilizer consumption climbed more than 4 percent over 2006. That may seem small, but individual countries, such as China and India, have increased their fertilizer use 38 percent and 54 percent respectively, putting pressure on prices around the world.
"With demand for fertilizers expected to grow and no significant increase in short-term supplies, farmers are likely to continue paying high fertilizer prices," said FitzPatrick.
Further increases will depend on the types and amounts of crops planted.
In the United States, corn is by far the largest consumer of fertilizer — per acre and in total. Therefore, when fewer acres of corn are planted the amount of nitrogen fertilizer applied decreases.
"How the picture plays out for individual farmers will vary depending on purchase times and location," said FitzPatrick. "Additionally, while 2008 price increases are painful, there would have to be an extreme change in the current marketplace for the price tag on fertilizers to lower in 2009."
Seeds, chemicals and farming equipment have also experienced changes that are driving costs up. Globally, crops grown using genetically modified seeds have seen a 67 percent increase since commercialization in 1996, which in some cases has led to seed shortages. Additionally, the recent run-up of prices in pesticides can be attributed to a limited supply in the hands of producers.
In regard to input equipment, most key machines are sold out for the season, leaving many farmers with higher maintenance and operation costs.
"While at first glance it may seem that this equipment shortage is due to what many are calling the 'Ag Boom,' that is only part of the story," said FitzPatrick. "There has been a structural shift to fewer farms with larger acreages, which need different types of machinery."
However, larger farms do not automatically equate to economic efficiencies as all farmers and suppliers are poised to continue operating along a rising price curve well into 2009. Because of this steady increase in price, FitzPatrick advised that "while average crop farm incomes are at record highs, so too are total debt/equity levels. Farmers are identifying their costs and take profits as the market allows."