Despite a marked pickup in grain prices — as reduced supply amid drier production conditions in key regions was exacerbated by war-related interruptions — agricultural input costs have soared over the past year. Sharply higher international oil prices have led to record-high fuel prices, while fertiliser supply disruptions — with Russia being a key producer — resulted in unprecedented price increases. Moreover, production of some fertilisers, particularly those that are nitrogen based, depends on natural gas — further heightening price pressures. Chemicals used in agricultural pesticides have also been adversely affected by these disruptions.
This post discusses the implications of rising input costs and grain selling prices for farm profitability.
Sharply higher fuel prices
Grain farmers are intensive users of fuel, particularly diesel. Average usage over a production year easily amounts to 60 litres per hectare. At current prices, this amounts to spending R 1,529 per hectare, a 48,2 percent increase from the R 1,031 spent last season.
Source: Central Energy Fund
Notes: Reflects diesel price in November of 2021 and 2022.
Soaring fertiliser costs
Fertiliser usage is critical in ensuring sufficient grain yields, and is generally also one of the largest farming production expenses. Before the invasion of Ukraine, global fertiliser supply had already been under pressure amid Covid-19-related disruptions to global trade. With Russia alone accounting for 16 percent of global fertiliser exports, and natural gas an ingredient in nitrogen-based fertiliser production, supply pressures have escalated further this year. Prices for urea have risen 46.8 percent to R 13,348 per ton from last season, while those for calcium ammonium nitrate have increased 92.8 percent to R 10,392 per ton. The equally-weighted average price for these two fertilisers has increased 63.9 percent to R 11,870 per ton.
Source: Own calculations based on farm purchase records
Pesticides markedly more expensive too
Managing weeds, fungi, and insect pests represents another critical leg in ensuring sufficient yields, as uncontrolled weed growth competes with grain for nutrients and water, while fungi and insects pose significant risks to crop viability. Prices for herbicides, fungicides, and insecticides are also much higher than last season. The cost of a pesticide program that involves three spraying rounds on a soya bean field (i.e., burn down, pre-emergence, and post-emergence spraying) rose from R549 per hectare in the 2021-22 season to R 926 this season — a 68.8 percent increase. A comparable program for maize has increased by 41.8 percent. A farming operation that plants one-fifth of its cultivated area with soya beans, and the remainder with maize, faces a 45.8 percent increase in pesticide expenses this season.
Source: Own calculations based on farm purchase records
Seed costs increases have been more moderate
Despite the pickup in grain prices, seed costs have increased by around 5.1 percent, providing at least one input category where inflation has been moderate.
What about other input costs?
While the expenses discussed above account for a large proportion of a farming business's annual budget, the business faces a multitude of other recurring costs that represent about one-third of overall expenses. These include labour, electricity, insurance, general repairs and maintenance of implements and buildings, lubricants, and others.
It is not an easy task to determine the exact price increases for many of these categories, but they have generally been on the high side over the last year. Labour costs have increased at a premium above inflation, which peaked near 8 percent this year. The cost of electricity increased by 8 percent in 2022. Crop insurance costs per hectare have risen broadly in line with grain prices. Maintenance and repair costs have reflected international supply chain constraints, as well as a weaker currency, with double-digit inflation rates a common occurrence. And lastly, lubricant prices have increased in line with other fuels at close to 50 percent.
On the income side, grain selling prices have also risen, but mostly not enough to offset the pickup in input costs
Persistent droughts in South America, and parts of the United States — as La Niña conditions have continued — have put pressure on grain supplies this year. In addition, war-related disruptions to grain shipments through the Black Sea, as well as reduced production in Ukraine have further squeezed global grain supplies — particularly that of wheat and sunflower oil seeds. As a result, maize, soya bean, and sunflower prices are higher than a year ago; however, their extent depends on farmers' marketing strategies.
Assuming a strategy ("Strategy A") is followed where a proportion of the upcoming harvest is already marketed during the current planting season (say mid-November), the SAFEX price for a July 2023 white maize contract is around R 4,460 — 34,9 percent higher than a July 2022 contract in mid-November last year. Similarly, the comparable yellow maize contract is up 28,4 percent. The prices of May 2023 soya bean and sunflower contracts — these crops are generally harvested sooner than maize — have increased 23 and 15.3 percent, respectively. A crop distribution in which 70 percent of the cultivated area consists of white and yellow maize in equal proportions, 20 percent is soya beans, and the remaining 10 percent consists of sunflowers, would imply an average grain price of R 5,953 and a 28.3 percent increase relative to the 2021-22 season.
Source: SAFEX, www.sagis.co.za
Notes: 2021-22 and 2022-23 prices are futures prices for the respective delivery months (May for soya beans and sunflower, July for maize), as in mid-November of the specific season.
However, if a farm followed a "wait and see" strategy ("Strategy B") last year, where the harvest was sold at the prevailing SAFEX spot price in the delivery month, and plans to follow a similar strategy in the 2022-23 season, current indications are that grain selling prices would not be materially higher than last season. The situation remains the same even if the farm were to follow a strategy where it decides to already market a proportion of the expected harvest using 2023 futures. This outcome is largely a result of the highs reached during those delivery months, with prices moving largely sideways subsequently.
Source: SAFEX, www.sagis.co.za
Notes: 2021-22 prices are spot prices in the respective delivery months (May for soya beans and sunflower, July for maize), while 2022-23 are current futures prices for those delivery months.
The bottom line: profitability will suffer as farming input costs this season have increased much more than projected incomes
Assuming "other input costs" have risen by a conservative 10 percent, the overall cost increase for the average summer grain producing farm is likely to have increased by 35.5 percent from last season to the current 2022-23 season. It is still early to say with certainty what incomes will do, as grain prices may still vary significantly between now and the harvest period. However, current prices suggest that projected incomes from selling the current crop at harvest time could be somewhere between a small decline to an increase near 26 percent.
Despite these uncertainties, it is unlikely that higher incomes will be sufficient to offset the unprecedented increases in input costs this season — leaving farming profits heavily under pressure.
