Not to over-simplify the situation, but the ag retail marketplace really had an easy time in 2007. For the most part, retailers were able to sit back (metaphorically speaking, of course), watch their grower-customers plant 12 million more acres of corn than anybody expected, and step up to the plate with products and services that catered to this market segment. In almost every case, the result was a home run in terms of profits.
“Our sales have increased a lot in 2007,” says Kathy Sims, president for Sims Fertilizer & Chemical Co., Osborne, KS. “I feel that there are two important reasons for that — one, we had much better rainfall and two, the higher prices growers are receiving for commodities. Growers are more optimistic than they have been for the past several years.”
Even with this all-around good fortune on the farm, corn was by far the biggest story in 2007. According to USDA October crop production statistics, the nation’s corn harvest was projected to be 13.3 billion bushels, up an incredible 26% from the 2006 total. This makes 2007 the largest corn production year on record since 1933. Average yields also increased, up 5.6 bushels per acre to 154.7 bushels, but slightly behind the 2004 average of 160.4 bushels per acre.
Virtually all market analysts credit the rapid growth of the ethanol industry for spurring this demand for corn, with more than 17% (2.28 billion bushels) of the total corn crop being utilized by this marketplace. “Ethanol production has tripled from 2001 to 2006,” says Mark Lambert, communications director for the Illinois Corn Growers Association. “Next year, we will use 3.8 billion bushels to make ethanol. By 2008, we could be making 9 billion gallons.”
All Inputs On Deck
By the same token, crop input sales went along for the ride. According to preliminary data collected in CropLife’s® annual CropLife 100 survey of ag retailers, all three major input categories — fertilizer, crop protection, and seed — recorded healthy sales increases in 2007. While strong sales growth for fertilizer and seed has been the norm for many years, crop protection products were off $800 million in 2006. In 2007, this category looks like it will experience a net sales gain of $100 million.
With all this positive buzz surrounding ethanol and corn, it’s somewhat surprising to hear much of the news coming out of the marketplace in recent months. Back in May, market forecasters were speculating that corn acreage would need to increase by 5 million to 6 million acres in 2008 to keep up with ethanol growth. However, by the late summer, these same forecasters were revising their corn acreage estimates downward to around 87 million acres. In addition, corn prices have fallen to just above $3 per bushel from as high as $4 per bushel earlier this year.
What gives? In a word, the ethanol industry seems to be suffering from oversupply. As ethanol plants have churned out more and more of the alternative fuel, end-user demand hasn’t kept up. Today, there are numerous ethanol plants that have been shut down and others on the drawing board have been put on hold as supplies have expanded. “Much of the movement toward ethanol was driven by the gasoline industry as producers were replacing MTBE (methyl tertiary butyl ether) as an additive in their products,” says Dr. Nicholas Kalaitzandonakes, director of economics management of agrobiotechnology center for the University of Missouri – Columbia. “This rapidly drove up ethanol prices in 2006.”
A more pressing problem for ethanol growth is the lack of a transportation infrastructure to move it. According to a study conducted by Downstream Alternatives Inc., 85% of the nation’s 400 to 500 gasoline terminals that blend ethanol are not equipped to handle the 100-car unit trains needed to move larger volumes of ethanol.
Still, ethanol demand can rebound. Iowa State University researchers forecast that the saturation point for ethanol just as a blending ingredient is 13 billion to 14 billion gallons, meaning this market segment alone could sustain overall growth through 2011. Also, in mid-October, oil prices hit a record high of $87 per barrel as worldwide production declined. In fact, some analysts predicted that $100 per barrel oil could become a reality by the end of 2007. Most studies say that any oil price over $70 per barrel makes ethanol a more profitable alternative.
According to Sano Shimoda, president and founder of BioScience Securities, Inc., retailers are poised to reap the benefits of biofuels, even as the market pulls back some from its exceptional performance of late 2006 and early 2007. “Biofuels are accelerating structural changes in agribusiness,” says Shimoda. “High corn prices and the drive to maximize yield are accelerating growers’ adoption of technology such as triple-stacked biotech seed and precision farming. Also, higher crop prices, especially corn, combined with a focus on maximizing yield, has incentivized growers to increase the use of all inputs to maximize net returns per acre as well as reinventing farming practices such as the use of fungicides on corn.”
This will open the door for ag retailers, he adds, that adopt a more “providing integrated solutions” approach to their grower-customers. “Ag retailers will have to shift from only offering products to growers to building partnerships or relationships with them,” says Shimoda. “This will probably lead to many Midwestern dealers consolidating. But this offers tremendous opportunity for those retailers ahead of the curve.”