Don’t Be Suprised
By their nature, surprises can be wonderfully pleasant. They also can be terribly unpleasant. It’s rare when both states involve the same surprise, but it seems like this is the case this year.
Looking forward to the 2007 season, there was plenty of excitement among ag retailers that this would be a very profitable year. Thanks to the growth of ethanol, commodity prices were up and early speculation had growers upping their corn acreage substantially to cash in. In a conference I attended in late November, one market watcher predicted corn acreage in 2007 would come in just under 80 million acres.
During the winter months, retailers planned accordingly for this increase, ordering more seed, stocking more nitrogen-based fertilizer, and upping their inventories of corn crop protection products.
Still, there was a fair amount of caution among dealers to not order too many more crop inputs, just in case the early acreage projections didn’t pan out. I wrote a column in early 2007 applauding this sense of caution, pointing out that sure things rarely happen in life and agriculture.
Then the pleasant surprise occurred. In early February, corn acreage projections suddenly shot forward to 85 million acres. One month later, this number had increased again, to more than 90 million acres — the highest total for corn acreage since the end of World War II.
The first time most retailers looked at these final acreage projections, I’m certain more than a few of them saw dollar signs — added corn yields leading to more money being spent on crop inputs and custom application work. Furthermore, some analysts predicted that grower-customers would require a minimum of 6% more nitrogen-based fertilizers to keep their crops fed.
Then, the reality of an extra 12 million acres of corn being planted in 2007 set in. Parts of the industry were apparently caught totally unprepared for such a large uptick in demand for corn-related inputs and equipment. Many producers said that their supplies of corn seed were in “sold out or near sold out” positions back in March. Urea supplies stayed extremely tight. Some equipment manufacturers reported selling their entire 2007 production capacity by the end of January. Other dealers said that some customers were looking to purchase new equipment for 2007 as late as mid April.
This all fell into the unpleasant surprise category. According to field reports, numerous retailers have spent the entire 2007 season simply “trying to keep up,” with little thought given to any future needs.
However, although it may seem early, now is the time for retailers to begin thinking along these lines. Yes, 2007 was a surprise, but 2008 shouldn’t be. Corn acreage will remain strong, if for no other reason than EPA in April mandated that refiners use at least 7.5 billion of renewable fuel in their gasoline by 2012. This is an increase of 3 billion gallons our 2006. Also, by the end of this year, 4.02% of the fuel sold to U.S. drivers will need to be renewable — equivalent to 4.7 billion gallons, up 1% from the 2006 total.
The bottom line is simple — ethanol is still expanding, and our industry needs to prepare for continued growth. Surprises are too unpredictable. The surest way to be profitable is by doing some old-fashioned planning ahead.