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Inputs Outlook - 1
Wednesday, January 28, 2015 8:50AM CST

By Russ Quinn
DTN Staff Reporter
and
Linda Smith
Progressive Farmer Contributing Editor

OMAHA (DTN) -- Farmers examining their crop input costs for 2015 will see a mixed bag. While fuel costs could be significantly lower for the upcoming growing season thanks to large supplies, ag chemical costs could see slight increases in price.

CHEMICALS

Crop-protection chemicals represent a relatively small portion of operating costs: 8% for corn, 16% for soybeans and 13.5% for cotton. So the 2% increase USDA forecasts for 2015 won't break the bank. But with growing concerns about herbicide-resistant weeds and certain insects getting harder to control, producers are looking at changing their chemical programs.

Last year's 2.8% increase in pesticide expenditures was caused by a 1.07% increase in price and a 1.73% bump in quantity purchased, USDA economist Mitch Morehart explained. No new active ingredient chemistries are expected to launch in 2015. That means any increase this year is also likely to be driven by more applications or purchases of combination products.

With lower corn prices, crop-protection purchases won't escape the scalpel on some farms. Fungicides already took a hit in 2014, said DTN Contributing Agronomist Dan Davidson.

"The cost to fly them on is $20 to $30 per acre, and with corn under $4, it's hard to gain much of a return. The risk/return relationship doesn't change the decision process but slides the result to the side of not doing it."

Some growers were able to get a substantial discount on fungicide application in 2014 because aerial applicators did not want to have stockpiled chemicals in warehouses, Davidson said. They knew the price of corn might dissuade some farmers from using fungicides.

Buying varieties with strong disease resistance, followed by rigorous scouting programs, are the keys to weighing the need for fungicides, said Matt Hutcheson, a crop adviser with Seed Consultants, Inc., headquartered in Washington Court House, Ohio. "Growers should take several factors into account, including varietal resistance, stage of crop growth and severity of disease pressure. Scouting will be a critical part of making sound management decisions."

The main factor driving chemical use, however, is the growing necessity for multiple herbicide applications. One Illinois farmer declared: "You are better off cutting fertilizer than chemicals."

Hutcheson agreed. "In my opinion, this is not an area where farmers should cut back."

One way to save on pesticides may be to shop for deals on excess supplies, and also look for products coming off patents since they generally are sold at lower prices.

FUELS

Increased crude oil production in the U.S. has led to an oversupplied world market and sharp decline in oil prices in 2014, with the sell-off continuing into 2015.

Commercial crude supply trended above the five-year average throughout 2014, and began 2015 at a 7% surplus compared with January 2014, according to Brian Milne, DTN/The Progressive Farmer energy editor. Production surged to a 29-year high in January over 9.1 million barrels per day (bpd) and is still climbing.

The bear market continues for crude oil, with crude prices down more than 50% from their June 2014 highs, with New York Mercantile Exchange West Texas Intermediate crude futures, the U.S. benchmark, sliding below $50 bbl in January for the first time since the Great Recession, he said.

Milne said growing crude production has pushed refiners to run at higher processing rates, with gasoline and diesel output reaching record highs several times in 2014. Refinery utilization averaged 90% of capacity in 2014 compared with 88% for 2013 and a five-year average at 86%.

The higher output has sharply cut imports of crude and products, with the U.S. now a net exporter of oil products. In 2014, U.S. crude imports averaged 15% lower than the five-year average at 7.4 million bpd, while oil product exports averaged more than 2.5 million bpd, 25% greater than in 2010 when the trend accelerated, he said.

Milne said gasoline stocks closely hugged the five-year average through most of 2014 until December when supply began to outpace demand, beginning 2015 nearly 5% above supply held during the comparable year-ago period. Supply is expected to widen a year-on-year surplus in early 2015.

For distillates, which include diesel and heating oil, inventory moved to a year-over-year surplus in the fourth quarter 2014 after holding below the year-ago total for all but a handful of weeks during the previous three quarters, he said. Similar to gasoline, distillate supply is expected to widen its overhang against 2014 inventory totals, beginning 2015 with a nearly 13% surplus.

Climbing production of both crude oil and natural gas has also had a major effect on the propane market. Propane is a byproduct of both hydrocarbons. Propane output reached record highs in 2014 and is still growing and has now outpaced demand, with inventory beginning 2015 at more than 30 million bbl, or nearly 80% above January 2014 when supply was constrained.

The bulked-up inventory joined by the selloff in crude futures have pressed spot propane values lower, and are expected to continue to weigh on values through the early half of 2015, he said.

U.S. propane production rose above 1.5 million bpd for the first time in the second quarter 2014, with output ending the year above 1.6 million bpd. This compares with a 1.0 million to 1.1 million bpd output rate in 2011.

Milne explained propane exports expanded sharply since the second half of 2013, as new capacity to export the product came online. They rose from just above 200,000 bpd in June 2013 to more than 500,000 bpd in ending 2014.

Stiff demand for propane in the fourth quarter is why many farmers, such as Levi Taylor, pre-purchase propane. Taylor, who farms with his family in Ypsilanti, N.D., has increased propane storage capacity to about 4,000 gallons last year so he can take advantage when propane prices are lower.

Building propane storage is somewhat common now in his region of the Northern Plains after last winter. Propane prices skyrocketed to nearly $5 per gallon in late January 2014, and it was in short supply. Taylor said he knows several larger farmers who added 30,000 gallons of propane storage as well as propane retailers who expanded storage.

"With the additional storage, it's clear we have bulletproofed ourselves, so to speak," he stressed.

Taylor didn't forward-purchase any propane beyond what he needed to fill his storage facility. He paid $1.50 per gallon in August. Propane prices sat at $1.65 per gallon in early October.

Taylor noted area propane retailers are offering some "forward-pricing solutions." However, the problem he sees with them is no one can guarantee supply, a fact that makes farmers extremely nervous.

FERTILIZERS

The 2015 outlook for fertilizers was discussed in great depth in the Global Fertilizer Outlook series which can be found at http://www.dtn.com/… on DTN.

Russ Quinn can be reached at russ.quinn@dtn.com

(ES/AG/CZ)


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