It seems a bit strange to be looking ahead to next year when there is just a month and a half until harvesters start to roll around the state, but there are a few headwinds to profitability on the radar at this early stage.
A big talking point for the last 12 months has been fertiliser and input costs, with fertiliser prices rallying strongly on the back of high production costs, driven mainly by high gas prices. Brought on by the Russian invasion of Ukraine, and the sanctions imposed because of this, we have seen gas prices soar in the EU, where they are highly reliant on gas for both energy and heating.
Last week news from some of the major fertiliser manufacturers out of Europe was that production had stopped or drastically reduced on the back of these high gas prices. Around 50% of the total European ammonia capacity is now on hold.
CRU Group, a company specialising in analysis on global fertiliser markets, has looked at this situation and have assessed that the output for ammonia could reduce by 50%, urea by 40%, nitrates by 34% and UAN by 30%. Going back to economics 101, a decrease in supply can lead to an increase in prices. It may also see demand reduce, as a lot of importers, particularly those countries that can’t afford to apply or import fertiliser, will exit or reduce their presence in the market.
On the flip side, given the increases in fertiliser pricing over the past few years, more production is coming online as investment has risen in the fertiliser manufacturing capacity of individual countries, including Australia. This is likely to add more supply to the marketplace in the coming years, but is it enough to offset the decreases in production out of Europe?
Price volatility, both for grains and inputs, has become a function of our markets over the past four years and is unlikely to go away in the short term. So, how do we manage this high price cycle?
In the end it comes back to what we can control.
We can look at one of the two levers we can pull – price risk or production risk. At this stage, all we can assume for the next 12 months is average grain production for next year. With this in mind, and given the higher-than-average prices currently seen for the 2023/24 crop, it is worth considering chipping away at forward sales this early in the pricing cycle.
From a grain perspective, with a lack of a global drought or production shock overseas, it is likely that prices will be lower from the record-breaking numbers of the past two years. Grain is a global commodity after all.
To manage this high price cycle, start by looking at cost of production. Cost of productions, across the board, have increased with fertiliser, chemical and fuel costs all rising this season, as well as access to capital through higher lease and financing costs. Typically, there is a 40% cost increase this year. Knowing cost to produce a tonne of grain is a key starting point to establish a baseline of what a profitable target may be.
Setting business grain marketing guidelines is another way to aid the decision-making progress. You will need to sit down and work out what would be best for your business as a strategic approach to profitability and managing volatility. This is done by setting sales targets at various stages of production with pricing based on certain criteria. Being pragmatic on forward sales and production predictions are key, as there is risk involved with forward sales contracts driven by production risk.
Overall, it is important to look at what works for you and your business, understanding. Look at what will make you profitable. Once decisions have been made and executed, move on to the next decision, rather than dwelling on it.