The price of inputs isn39t falling  except for energy and fertilizer  which will force farmers to think about how they buy for 2017

The price of inputs isn't falling - except for energy and fertilizer - which will force farmers to think about how they buy for 2017.

Market analysts eye 2017 ag trends

Farmers will remain under stress going into 2017, but low costs for energy and ferti-lizer will continue to be bright spots.

As farmers look toward 2017 they're facing pressures not seen since the mid-1980s. While no one is warning of the deep challenges from that era, next year will not be easy for many producers. We offer a look at the challenges, and opportunities, ahead.

“All of the commodities are facing depressed prices,” says John Newton, director of market intelligence for American Farm Bureau. “That’s put a lot of pressure on ag incomes; USDA estimates that net farm income has declined by some $50 billion since 2013.

“You take that money out of rural America, and what does that mean? It means fewer jobs. It means people are buying less machinery. Farmers across the country are having to eat into their equity. We’ve seen farm debt increase substantially in recent years, and they’re having to finance cash flow constraints. So it’s a very challenging environment.”

Brett Wong, a vice president and senior research analyst at Piper Jaffray, agrees that grain prices are setting up farmers for another tough year across row crops.

With energy prices down substantially and fertilizer down, too, the input side of the equation has decreased but not as fast as commodity prices. Land prices - and rents - haven’t fallen significantly, either. These factors are shaping some key trends for 2017.

“You look across the landscape and it’s about finding efficiencies,” Newton says. “Whether or not that’s making better use of your equipment or changing your resource allocation -- using less fertilizer, using less herbicides, whatever the case may be – we’re really evaluating the farm balance sheet, the cost of production and finding ways to gain efficiency to deal with this lower price commodity environment.”

The difficult environment will lead to caution around what farmers should invest in but also brings opportunity, especially for those using a disciplined marketing approach, Wong says.

“You want to make sure that you have the most efficient opportunities or tools to drive down costs and to be the most effective in your ability to produce,” he says.

Machinery sales slowing

Farm incomes, at their lowest levels in nearly a decade, are projected to stay down in 2017. As a result, the industry isn’t moving as much farm equipment as in recent years, Farm Bureau's Newton says.

Brian Hoops, president and senior market analyst of Midwest Market Solutions, sees the slowdown on new equipment purchases likely continuing in 2017.

“Used equipment likely will get reused or refabricated so they can use it again for another year,” Hoops says, adding that farmers will look to replace parts rather than an entire machine.

The inventory of used equipment has been working down, but following a significant up cycle from the early 2000s with a peak in 2012-13, there’s still a lot of used inventory. That will likely take a couple of years to work down as sellers cut prices to move equipment off lots and auction older equipment at discount, Wong says.

With pricing pressure on used equipment due to elevated inventories and not as much value for the trade-in, there’s more out-of-pocket expense for the farmer, which leads to less machinery buying, he says.

And though there are beneficial tax policies, farmers don’t have much to write off, Wong adds.

“In 2015, farmers had (Section) 179 tax benefits so they could go out and buy new machinery and there were tax benefits associated with that, so a lot of folks did,” Newton says.

Some who bought in 2015 are wondering whether they need to liquidate those assets to help cash flow. And some are thinking, “’Let’s maintain. Let’s improve existing machinery as opposed to go out and make new capital purchases,’” Newton says.

Andrew Swenson, a North Dakota State University extension farm management specialist, says crop farmers there have drastically reduced machinery expenditures in a trend expected to continue in 2017.

“What we’re seeing is farmers just getting by with what they have,” Swenson says. Many had pulled forward purchases to try to minimize tax liability by taking advantage of Section 179 and writing off the whole purchase in one year, he says.

“They’ve already used up all their depreciation at once using 179. In a sense, you could say they’re living off their current inventory of machinery.  They’re not buying other equipment simply because they’re really in a cash flow crunch right now and can’t afford the expenditure,” Swenson says.

“It’s the same way on the repair side; the trend is probably where guys would maybe bring stuff in to get general maintenance, but they’re trying to do as much as they can just to avoid the cost.”

In Minnesota, machinery purchases by crop farms in 2015, the latest statistics available, were less than half of what they were two years earlier. That’s according to FINBIN data, says William Lazarus, University of Minnesota professor and extension economist.  (Farms are considered “crop farms” if at least 70% of gross receipts are from crop sales.)

Machinery purchases averaged $48,127 per farm in 2015, compared to $67,473 in 2014 and $117,525 in 2013.

One indication that squeezed farmers are doing more maintenance themselves: repairs were down slightly in 2015, at $39,710, compared to the five-year average of $43,778.

Next-generation precision ag

Analysts say farmers will keep opting for precision ag equipment, particularly variable rate control. But price is a challenge; a new high-speed planter is expensive. The option to retrofit comes from other players including Precision Planting, or Ag Leader and analysts continue to hear big demand for those products.

For variable-rate spraying products, Wong says, expect more adoption even though it’s less impactful, with a longer return, when the price of the fertilizer or the crop chemistry is lower.

The category of autonomous tractors and combines is interesting but acceptance is still a ways off, he says. Some farmers moving to no-till equipment are embracing new technology in blades and more.

The next step in product categories is software, which bring a lot of value but still need work in terms of full functionality. Interested farmers are trying out free offerings, but Wong wonders whether they will buy once companies begin charging.

A challenge: data privacy and ownership.

“Companies are saying all the right things in terms of making sure the data are owned by the farmers,” Wong says, “but I think farmers still are hesitant to trust that that is the case.”

Protecting your crops

Trends in crop protection involve both risk management and chemistry.

“In all of the farmers who I’ve talked to, on the risk management side of the equation, crop insurance continues to be the number one tool that farmers use across the country,” Newton says.

“In addition to crop insurance, commodity support program payments are anticipated to be higher next year due to the continued decline in crop prices, even in the face of records yields across the country. The government support programs have provided some assistance to farmers, but when you talk about $50 billion coming out of ag income over the last four or five years, $5 billion in Title One support payments doesn’t necessarily make a farmer whole. There’s still a lot of risk out there. And it’s a challenging environment as we go into 2017.”

Weeds, especially the herbicide resistant kind, continue to be a problem. Wong predicts more shifts to generic products because of the price point but no slowdown in herbicide demand given how difficult weed management has become.

Farmers will see new herbicide products due to technologies. And expect a full launch of Monsanto's Roundup Ready 2 Xtend soybeans, Wong says.  With regulatory approval expected for over-the-top application [of dicamba], farmers should be able to better control weeds using dicamba with glyphosate, he says.

Wong predicts light demand for insecticides and fungicides.

Good news in fertilizer trends

Fertilizer costs are down, riding on the back of cheaper energy prices, Newton says.

“We see ammonia [coming] down from where it was in 2008 at $880 a ton to $650 a ton in 2015,” he says. “Phosphate’s down from $860 to $500 a ton. Potash is down from $580 to $414 -- a very substantial decrease. The implied fertilizer costs on corn has come down from nearly $200 an acre to $133 an acre, based on the Illinois crop budget.”

Wong predicts corn farmers will apply about the same amount of nitrogen and will stick with maintenance levels for the more discretionary fertilizers P and K.

“Just like the other input categories, there’s probably still some downward pressure to price for the fertilizers,” Wong says. “We’re seeing a seasonal lift just recently as retailers restock their inventory but again, there are global supply and demand issues for all of the nutrient categories that I think will continue to pressure pricing.”

Another bright spot: energy

Lower fuel costs have provided some relief, and the cheaper energy prices ripple through the ag economy with substantial effect, Newton says.

But, he noted, rising oil prices would be a leading indicator for when ag incomes may recover.

“Once the global economy improves and oil prices improve, that’s a sign that we should start to see some improvement – and sustained improvement – in commodity prices,” Newton says.

Wong predicts biodiesel and ethanol consumption will continue slight incremental growth. But for ethanol, there’s not much more we can put into the system without building more plants. “We are running near full steady state capacity with a total installed capacity of 15.6 billion gallons a year,” he says.

Three ethanol facilities under construction will produce another 162 million gallons a year, according to the Renewable Fuels Association.

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