Farmers feel some relief from high input prices

Media Release January 7, 2009

Farmers feel some relief from high input prices – industry report

International prices for key inputs such as fertiliser have fallen recently and, although domestic prices are taking time to follow, there will be some relief for New Zealand farmers as input prices are set to remain below historical highs during 2009, according to a recently-released industry report.

The Global Focus report Farm inputs – the key to productivity, by specialist agribusiness lender Rabobank, says that the international market has seen US dollar prices for major inputs such as fertilisers fall by between 60 per cent and 75 per cent since their record highs in mid-2008.

However, according to the report’s author Rabobank analyst Adam Tomlinson a sharp reversal of the New Zealand exchange rate against the US dollar in late 2008 effectively offset a large portion of declining international prices, tempering the benefits felt by New Zealand farmers.

The report says it is expected that relatively low global stocks of the major grains and oilseeds will see prices for these commodities remain at higher than historical average levels for the next few seasons, although it remains unlikely that there will be a return of the 2008 commodity price highs in the near future.

“The strong prices for major grains and oilseeds will result in a large area planted to crops throughout 2009, maintaining reasonable demand for farm inputs and keeping input prices at relatively high levels, albeit well below recent record prices,” Mr Tomlinson says.

“International prices for fertilisers are expected to remain low for the next few years in view of increased fertiliser production capacity at lower price levels flowing through to the supply chain.”

Agrochemical prices are also predicted to drop from record highs in line with wider commodity prices, although demand in 2009 remains unclear due to the uncertainty in the global economy.

New Zealand farm input costs

New Zealand’s heavy reliance on the importation of farm inputs made clear its exposure to world markets and exchange rates in 2008.

“Many importing countries, including New Zealand, participated in forward purchases to safeguard domestic fertiliser inventories. For recent lower international fertiliser prices to flow through to domestic prices, high price inventories must be shifted,” the report says.

The sharp reversal in the New Zealand exchange rate against the US dollar in late 2008 offset some of the gains from declining world farm input prices which are traded in US dollars.

“However since May 2008 ocean shipping freight costs have fallen dramatically with new capacity coming on line, lower bunker fuel costs and lower trade volumes. This will help ensure manufactured farm input prices are lower in 2009 than in 2008,” the report says.

New Zealand farmers have also had to focus on cost efficiency and sustainability due to rapidly-rising farm input prices and environmental restrictions, the report says.

“As a result of this, New Zealand farmers are increasing paddock testing for soil nutrients and better managing their livestock manure and reducing wastage of nutrient resources,” Mr Tomlinson says.

Agrochemicals – changing farming techniques

Agrochemical market prices are predicted to drop from record highs, in line with wider commodity prices.

“Although the demand for agrochemicals in 2009 remains unclear due to the uncertainty in the global economy, especially in the emerging regions like Latin America, it is expected that world demand for agrochemicals will be lower in 2009 compared to 2007 and 2008,” the report says.

“Farmers will probably reduce their requirements for agrochemicals through the selection of crop rotations that are less reliant on the use of expensive agrochemicals and place an increasing reliance on genetically modified crops in order to sustain reasonable margins,” Mr Tomlinson says.

The report says that this will depend on seasonal conditions, pest outbreaks and improvements in technology to ration chemical applications.

Fertiliser outlook

According to the Rabobank report, the outlook for world fertiliser prices is significantly influenced by the current global economic downturn and the fall in the broader commodity prices for agriculture, energy and international freight.

These factors have resulted in reduced fertiliser demand in the short term and consequently lowering prices, it says.

The earlier period of higher fertiliser prices saw suppliers increase capacity by ramping up processing facilities and constructing new processing plants.

“The International Fertilizer Industry Association mid-2008 forecasts indicated global fertiliser consumption is expected to expand by 14.8 per cent from 2007/08 to 2012/13,” Mr Tomlinson says.

“Therefore, it is anticipated that fertiliser prices will remain above long-term average levels, but will be placed under downward pressure from the increased fertiliser production capacity over the next couple of years.”

Conclusion

International prices for manufactured farm inputs are expected to be significantly lower in 2009 than in 2008 with the fallout of the global financial crisis impacting all commodity markets.

However, the need to replenish global food stocks and supply the biofuel industry will continue to drive farmers to grow major grains and oilseeds and to increase productivity in 2009/10.

“Although there will be a need for major importing countries of farm inputs to

overcome high-priced inventories from earlier purchases and manage exchange rate volatility, it is expected that prices farmers pay for fertiliser, agrochemicals and fuel will be considerably lower in 2009,” the Rabobank report concludes.

Rabobank New Zealand is a part of the international Rabobank Group, the world’s leading specialist in food and agribusiness banking. Rabobank has over 110 years’ experience providing customised banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank has a AAA credit rating and is rated one of the world’s safest bank by Global Finance magazine. Rabobank operates in 43 countries, servicing the needs of more than nine million clients worldwide through a network of more than 1500 offices and branches. Rabobank is one of New Zealand’s leading rural lenders and a significant provider of business and corporate banking and financial services to the country’s food and agribusiness sector. The bank has 29 branches throughout New Zealand.

ENDS

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