Farm input price relief under pressure - report

Media Release January 8, 2009 1

Farm input price relief under pressure as global supply chain adjusts – industry report

An increase in short-term demand could result in a spike in fertiliser prices in 2010 according to a recently released Rabobank report.

With many manufacturers and distributors running on low inventory stocks, any sharp increase in demand could result in a logistical bottleneck pushing prices higher in the short-term.

Report author Rabobank analyst Adam Tomlinson says that while strengthening agricultural commodity prices may increase short-term demand and drive up farm input prices as the supply chain adjusts, he does not expect prices to reach anywhere near the highs of mid-2008.

“In New Zealand, the demand for manufactured farm inputs is largely dominated by the dairy sector and fertiliser is a key farm input,” he says.

“Following the slump in dairy prices from the fall-out of the global financial crisis, fertiliser consumption in New Zealand fell considerably. In 2009/10 annual fertiliser consumption in New Zealand is estimated to be 25 per cent below 2007/08 levels when New Zealand dairy farmer’ confidence was at much higher levels.

“Lower demand levels globally have meant that prices for manufactured farm inputs have remained subdued throughout 2009. The rapid fall of international farm input prices in late 2008 resulted in many manufacturers and distributors of farm inputs being caught with large stocks of highly priced inventory and production capacities in excess of existing demand.

“In response to this, manufacturers of farm inputs have wound back production and run down inventories which could potentially have a marked impact on prices if we see a large rise in seasonal farm input demand.”

Finding an equilibrium post GFC

The report says that the impact of the global financial crisis on demand for agricultural commodities was such that prices slumped from their highs of mid-2008. Around the world farmers deferred farm input purchases as sharp falls in commodity prices squeezed returns.

This had a direct impact on farm input manufacturers and distributors with the result being that many are now operating at lower capacity. With agricultural commodity prices looking to remain above 10 year averages, there is a risk that a spike in demand for farm inputs may occur, causing the price for farm inputs to push higher due to logistical constraints. However a repeat of the 2008 farm input price spikes when capacity utilisation nearly reached 100 per cent is not expected.

Energy markets to set price floor

While it is unlikely farm input prices will reach the highs of 2008 they will continue to be impacted by any rise in agricultural commodity prices and changes in seasonal demand, the report says.

“However, during short-term disruptions in demand for farm inputs, energy markets will play a large role in determining the farm input price floor,” Mr Tomlinson says.

“Electricity, petroleum and natural gas prices influence the costs for farm inputs in two ways. Firstly, the cost of raw inputs, such as natural gas or petroleum for nitrogenous fertilisers and agrochemicals, secondly, the cost of manufacturing and distributing raw inputs such as phosphate rock and sulphur, that are heavily reliant on energy driven extraction and conversion processes.”

However, the report highlights the fact that while the base costs can be assessed the geographical diversity for the production of most farm inputs means there is never a consistent model for gauging the cost of manufacturing farm inputs.

Price outlook for 2010

Farm input prices have stabilised at similar levels to 2006/07 and Rabobank expects that most farm inputs will remain above the pre-2006 average levels in the short-to-medium-term. Mr Tomlinson says that the upward pressure placed on international prices will come from productivity needs to meet increasing demand for agricultural products as the broader global economy recovers.

“An expectation of higher dairy prices in 2010 will push farm input demand above 2009 levels, albeit still well below the historic high levels of the mid-2000s,” he says.

Among the other factors that will place upward pressure on farm input prices will be the higher average cost levels for energy and raw materials, and the increasing costs for managing environment issues such as carbon pollution.

“Although most farm input prices will trade in a moderately higher trading range compared to the historic average, the response towards higher farm input prices in New Zealand will likely see an increasing focus on using farm inputs more efficiently,” he says.

Rabobank New Zealand is a part of the international Rabobank Group, the world’s leading specialist in food and agribusiness banking. Rabobank has more than 110 years’ experience providing customised banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank is structured as a cooperative and has a AAA credit rating from Moody’s and Standard & Poor's. Rabobank operates in 46 countries, servicing the needs of more than nine million clients worldwide through a network of more than 1600 offices and branches. Rabobank New Zealand is one of the country's leading rural lenders and a significant provider of business and corporate Media Release January 8, 2009 3

banking and financial services to the New Zealand food and agribusiness sector. The bank has 30 branches throughout New Zealand.

ENDS

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