Range of factors impacts input buying
Your average story on farmer input buying usually starts with a discussion of “buy low.” Yet these days the purchases you make on the farm are far more complicated.
There may be ways to lay off risk for key inputs, including timely buying of fuel and fertilizer, and taking advantage of advance-purchase programs to save money on seed, crop protection and other products.
And even after what many have classified as the worst drought since the 1930s, 2012 will have you looking at buying inputs for 2013 in order to invest in the future profit of you farm business.
The challenge for buying is that there are no simple solutions for getting the best deal. “There’s always talk of taking advantage of seasonality,” says Kevin Dhuyvetter, agricultural economist, Kansas State University. “But market forces are hard to predict, and most seasonality looks best in hindsight.”
• Input buying in a volatile market requires strategic thinking.
• Consider the potential for on-farm input storage.
• A range of factors can impact input prices.
In work he’s looked at in the past, Dhuyvetter says the seasonality is clear for a specific season, yet projecting that same pattern forward is hard to do. For example, there are times when buying fertilizer early pays, while in other years, the exact opposite is true. What’s a buyer to do?
Dhuyvetter says it’s important to look at the “cost of loyalty” in working with suppliers. “I’m not bashing loyalty because supplier relationships are important, but it’s also important for a buyer to at least check around for pricing inputs,” he notes.
Also, look into buying with others, in an effort to get some kind of volume discount on inputs. “That’s harder than it sounds and doesn’t always work because everybody needs to be on the same page with regard to product, timing, etc.,” says Dhuyvetter, who points to the buying clubs that can be popular in some areas.
“More likely, at some point, if it makes sense, growers may consider some kind of storage,” he adds.
The on-farm storage decision for fertilizer and fuel isn’t an easy one. He says he’s looked at the idea in the past and the costs were about breakeven, but that was before the rising volatility in the input markets.
If you’re considering storage to help manage costs, consider not only capital costs, but also regulatory issues in your area and the supply picture.
Perhaps the biggest hedge a buyer can make when deciding on input purchases is looking at a simultaneous transaction of selling grain.
For example, if the fertilizer you buy has a cost that requires a grain sale (with all other costs figured) at a price of $5.50 per bushel, pricing some corn at that level to cover those inputs makes sense. The challenge is knowing all the details. You need an expected yield to plug into the equation.
But when actual yield deviates from expectations, as in 2012, all the math changes. Rising grain market volatility requires different input risk management strategies going forward.
Yet that rising volatility also increases the likelihood that you can price the crop at a profitable level for the input investment sometime in the season. “We don’t always make that full transaction happen.”
And with today’s higher risk, not laying off that risk can put you “out of the game,” he says.
One thing Dhuyvetter says will be difficult for farmers after 2012’s drought will be 2013’s investment. It may be tempting to trim inputs to shave costs.
“At the price of corn today, you can’t afford not to fertilize and push for the best yield on every acre,” Dhuyvetter says. “There may be some other investments worth trimming, but if you’re expecting a specific per-acre return, you need to invest in it.”
While he recognizes that rising input prices require a lot of cash outlay, he stresses that producers should base decisions on the expected profitability of inputs and not on cash flow.