2014 State Of The Industry: Agricultural Concerns Creep In
As any sports team coach can attest to, the problem with winning streaks is they eventually come to an end. Some market insiders in the agricultural community are wondering if 2014 might be that kind of a year.
And let’s face it, ag retailers and their grower-customers have been virtually giddy the past few years. Since the beginning of the Great Recession in mid-2008 and subsequent halt in fertilizer sales for the remainder of that year, agricultural fortunes have positively boomed. In fact, according to statistics compiled in the annual CropLife 100 survey of the nation’s top ag retail organizations, ag retailer revenues increased from just under $19 billion in 2009 to more than $24 billion by the end of 2012 — an increase of 28%. Each of the four sales tracked in the CropLife 100 — fertilizer, crop protection products, seed and custom application — now tops the $1 billion mark (from a high of more than $15 billion for fertilizer to a low of just over $1 billion for custom application).
This winning streak continued in 2013, but at a much slower pace than in previous years. For 2013, the nation’s leading ag retailers recorded sales in the $29 billion range. This represented only a 4% increase from 2012 and might have reflected something of a delayed market reaction to two consecutive challenging weather years for grower-customers (drought in 2012 and too much rain in 2013).
The New Year
As agriculture enters 2014, there are plenty of triumphs to celebrate. Despite an uneven weather year for much of the country, the nation’s corn harvest during the fall of 2013 came in at more than 14 billion bushels. Likewise, ag retailers are anticipating lots of sales activity in the seed and crop protection product categories as new varieties and cropping systems gain approval from regulators.
However, 2014 seems to have more question marks hanging over it than the previous three years combined as they began. For one thing, agriculture’s strong harvest in 2013 has depressed commodity prices as the year starts off, with some market watchers reporting an overall 20% to 40% decline from 2012. For example, from a high of more than $7 per bushel for corn, the commodity price has fallen into the $4 per bushel range. As many analysts have pointed out, $4 corn is likely “the new reality” for grower-customers and will undoubtedly affect the way they not only buy but apply crop inputs to their fields.
This is already showing up in some areas, say ag retailers. “Right now, I would say 2014 will be a flat year for us because anhydrous ammonia sales are lagging due to the late 2013 harvest and grower-customers reading about how prices will go down,” says Tom Fullenkamp, CEO for Golden Furrow Fertilizer Inc., Eldon, IA. “However, phosphate and potash sales look to be up, but corn-on-corn will be the key to this happening. Right now, I believe more soybean plantings are being planned by the average grower.”
Frank Schumacher, agronomy division manager for Mountain View Cooperative, Inc., Black Eagle, MT, agrees. “An increase in the seeding of malt barley in our area will reduce the amount of nitrogen applied and reduce volumes,” says Schumacher. “Fertilizer margins are expected to shrink with lower cost of fertilizer and the lower commodity prices, so profits are likely to follow.”
What might make this situation even worse for ag retailers in 2014 could come from the proposed changes to the nation’s ethanol policy. For the past several years, the federal mandate on using ethanol blends in gasoline has kept the demand for corn (and by extension, commodity prices) high. In fact, most industry insiders say that approximately 40% of the nation’s corn harvest the past few years has ultimately ended up being used to produce ethanol.
But this could all change in 2014. Because demand for gasoline is falling, gasoline producers say they have reached a 10% “saturation point” where it becomes hard for them to blend more ethanol into their product. As a result, the EPA is reducing the amount of corn ethanol for 2014 to approximately 13 billion gallons, down more than 1 billion gallons from the amount originally envisioned under a 2007 law to support renewable fuel use.
According to many market analysts, this ethanol reduction could prove devastating for agriculture in 2014. “Most of the demand for corn in the U.S. the past few years has been driven by the ethanol market,” said Rich Pottorff, chief economist for Doane Advisory Services, speaking at the 2013 The Fertilizer Institute Outlook conference. “Without this, corn demand over this period would have probably dropped.”
Retailers are concerned about a variety of issues leading into 2014, but most are out of their direct control. For example, crop protection manufacturers are continuing to tweak their “just-in-time” approach to crop protection manufacturing and delivery, which creates an ongoing threat of product shortages if retailers do not manage product inventory with great care.
And the globalization of supply and demand dynamics in crop protection makes management even more challenging. Last year when the European Union placed restrictions on some crop protection products, inventory of alternative products was shipped there from the U.S., diminishing the availability of some key products in the states.
Domestically, the still-unsolved Farm Bill debate, and regulatory repercussions that are likely to result from the West Fertilizer plant explosion are still in the offing. And a downturn could serve to spur consolidation and merging among retailers and growers.
As a rule, it generally takes a full 12-month cycle for a downturn to be felt in the distribution channel, so retailers are much more concerned in general about the 2015 season than the one in front of us. Still, unlike the past three or four seasons, what happens to critical metrics like crop prices and land values in 2014 seems destined to set the tone for retail business for the next two to three years.