Balancing the Equation on Farm Input Prices

It is post wheat harvest for me. This means it’s the time of year where usually I can relax a little bit more with spring crops in the rear-view mirror, but at the same time with thoughts of 2023 just around the corner. When you see your wheat stubble it begs the question what you are going to do with it going forward. Invariably, in this part of the world that comes down to what type of fertility are you looking at for the future and possibly even going two years out from now. It’s that thought that is making my agricultural economic mind a bit nervous. We all know what fertilizer prices have done over the last year.

It is such a long and winding road analyzing prices of just about anything.  At times it is difficult to determine why the price of a commodity is higher than usual, sometimes it is not and sometimes it’s in between. This past year we all saw the prices of fertilizer and especially nitrogen fertilizer rising to the stratosphere. With prices beyond our expectations there was a lot of grumbling, but we paid the bill. In Canada those federal tariffs on fertilizer were incredibly unfair and added to the costs. The reality is it’s now time to think about 2023 and 2024 for some of my fertility needs, so what do I do?  Do I hold my nose and continue to pay these high prices for fertilizer?

Everything in my soul says no. The problem is my soul doesn’t know anything about agricultural economics and I’m not going to get emotional now. Clearly though, just looking out over the commodity space you can see that there have been cracks in demand from the heady days earlier this spring when almost all commodities were at elevated premiums to where they are now. A few months ago, I asked the question when will commodity demand crack? I think we found out; it was about the time I started asking questions.

Fertilizer prices have fallen as have oil prices, as have fuel prices.  Of course, what has also fallen are grain prices.  This has been happening over the last couple of months as non-commercial interests in the grain market have exited. This has been followed by even commercial interests becoming more confident in a big supply this fall. Nobody really likes to see grain prices go down if you are a farmer but the situation that I have just described is a pretty classic situation pointing toward lower prices for our farm inputs going into 2023 and 2024.

It all sounds so normal, but will it happen that way? I’m not so sure. As farmers we are all aware whether you produce grain or livestock that a commodity is a commodity is a commodity. In other words, a bushel of soybeans produced in Paraguay is indistinguishable from a bushel of soybeans produced in Ontario or in the United States or in Argentina. Typically, this can mean that prices are very volatile on a global basis, and we have seen that over the last two months. It is the nature of agricultural markets. However, in many ways it is so different then the nature of the farm input market. In these markets there is much more control on maintaining prices one sided against the farmer.

The fertilizer market is a good example of this, but the fuel market might be an even better example at the consumer level. We have seen the price of oil drop over the last few weeks from about $117 per barrel to $96 per barrel today.  At the same time, we have seen the price of gasoline in Dresden Ontario go from $2.12 a litre to $1.83 cents a litre today.  We all know that the oil market is being buffeted by Russia, but the amount of oil that is pumped out of the ground is tightly controlled by OPEC and other countries. The Russia thing was just a grenade thrown in the middle of the market.  At the moment it’s getting a bit messier, and the price of oil has been retreating, but the price of gasoline and diesel fuel is still very high.

Refining this oil is where some of these profits are made and it makes people grumble. According to a recent article written by Heather Scofield in the Globe and Mail, Canada’s refiner margins are 113% over what they were pre pandemic. At the same time these refiners are charging $0.53 per litre margin to turn oil into a liter of gasoline compared to $0.25 just three years ago.   Remember, this is a capitalistic world, and these refiners are doing this because they can.  The demand is so strong for some of these products especially in the retail energy sector.  In 2022 it’s a profit machine on steroids.

We all know farmers are the opposite of that, price takers in a market controlled to a large extent by big agricultural economic conglomerates.  We all know that, and it is fair, but problems arise when we buy our farm inputs in a pricing environment that is coming off a winner take all mentality. Simply put, going into 2023 and possibly into 2024, these farm input prices need to come down especially if grain prices continue to decrease.

The problem for farmers is, that is not necessarily going to happen but at the same time we will be facing decisions on fertility management in the next few weeks and months for next year and the year after.  This surely will be challenging.  There is lots of unfairness on the road to balancing this equation.  Sometimes our agricultural economics can be miserable.  Needless to say, now as before and in the future, that’s what it’s always about. As we look ahead, let’s all try to get it right.