Are farm input prices better now or should you wait to make a purchase?
Answering that question presents quite a challenge. Historically, farms that prioritize purchasing inputs early, on average lower total input costs. But this past year revealed better input prices were realized in the spring. As input prices continue to fall, largely driven by lower prices in commodity markets, last year’s strategy may still be a viable option. To decide which approach is right for your farm requires thinking strategically about your buying options.
Understanding market conditions
Understanding market conditions is essential when buying farm inputs. Markets are influenced by a number of different factors, such as supply chains and commodity prices. Recent improvements in supply chains and product availability certainly favor purchases now. Especially when purchases are compared to recent production years.
Declines in commodity market prices have also driven demand for lower input costs. But as market prices decline, concerns of eroding farm profits may increase further demand for lowering costs. If demand is strong enough, it may make waiting to buy a better option.
Long-term commodity projections lean towards lower prices unless production estimates significantly change. A significant change is often brought on by global or domestic events. These events can include global trade, wars, or poor weather, such as drought. Many parts of the country experienced drought in the early summer months. But it remains unclear how drought conditions will impact commodity prices.
When uncertainty exists in the markets, other options to assist decision-making should be explored. One such option is to compare differences between current and historical prices. For fertilizer purchases, a crop to fertilizer price ratio helps consider short-term profits compared to product use. The fertilizer nutrient price ($/lb.) is divided by the crop price. Crop prices are then adjusted to a per pound value. For example, corn prices are divided by 56, while soybeans are divided by 60. A higher price ratio indicates a more expensive fertilizer
The opposite was true for 2023 when purchases were better in Spring compared to Fall (ratio of 6.67 versus 8.07). With a ratio of 5.60, at current corn prices, nitrogen prices now are no more costly than they were in 2021. For producers with large nitrogen needs, now may be a time to consider at least some of their fertilizer purchases.
A similar ratio can be used for the consideration of soybean and potassium needs. For more information on crop to fertilizer price ratios.
Identifying needs and maximizing cash
Each year you develop a crop plan that identifies what you will grow. While crop plans are not a new concept for most farms, they are an important part of maximizing your use of available cash. Cash is often limited to working capital or loan funds. Since they are used for numerous purchases throughout the year, efficient use of these dollars is important.
To find which options are best for your farm, start with your soil. Soil sampling is critically important to reducing fertilizer costs. You need to know what you’ve got to work with before considering any other decisions. Seed selection and pesticide use are also impacted by your soil and its overall health.
Source: msu.edu
Photo Credit: gettyimages-prostock-studio
Categories: Michigan, Business