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Fuel prices only one piece of farm input puzzle

February 10, 2015 – Lower fuel costs as a result of falling oil prices are getting a lot of attention these days. But producers also need to keep an eye on the cost of other agriculture inputs, according to J.P. Gervais, chief agricultural economist for Farm Credit Canada (FCC).

“The squeaky wheel tends to get most of the attention, but falling oil prices are only one piece of the farm input puzzle,” Gervais said. “Producers need to pay attention to the full spectrum of input costs in order to make wise business decisions.”

There will certainly be some benefits to agriculture as a result of depressed oil price, according to Gervais, but he cautions there is a lag time between falling energy prices and a reduction in the price of farm inputs.“What I think matters are the secondary impacts,” he said. “Depressed oil prices put pressure on the Canadian dollar, which makes our exports more competitive. Canadian agriculture relies heavily on exports.”

So what’s the outlook for various farm inputs?

Fuel
Gervais said fuel prices – especially for gasoline – have come down with the reduction in oil prices, but the price of diesel fuel tends to remain resilient during winter months when demand for different fuels eats into the supply available for the diesel market.“An overall increase in the demand for diesel has been supported by improvements in the U.S. economy and an increase in number of diesel vehicles on the road,” Gervais added.

Fertilizer
Farm fertilizer costs also don’t necessarily go down with the price of oil, since natural gas is the main input in fertilizer production. Lower oil prices, however, mean lower costs for extraction, distribution and transport of fertilizers.“The good news is natural gas prices have declined dramatically from peak levels and this, combined with lower corn prices and increasing world fertilizer production, should put downward pressure on fertilizer prices,” Gervais said.

Land
Lower commodity prices should begin to slow the rate of increase in farmland values throughout the country over the past decade, with few exceptions, according to Gervais. “Low interest rates and strong crop receipts have been the two driving factors behind the recent increases in the value of farmland,” Gervais said. “Grain and oilseed prices are no longer at record-high levels. But futures prices suggest decent profit margins. Lower interest rates will also help support farmland values.”

Equipment    
Strong equipment sales over the past few years have built up inventories across the country, which may translate into a buying opportunity for used equipment, according to Gervais.

“Overall, we shouldn’t see any significant increase in equipment prices, since lower crop prices have reduced the demand for large tractors and combines/harvesters,” he said. “With equipment dealers carrying a large volume of inventory, producers may see some good deals on new or used equipment.

”By sharing agriculture economic knowledge and forecasts, FCC provides solid insights and expertise to help those in the business of agriculture achieve their goals. For more information and analysis, read the latest FCC Ag Economist blog post at www.fcc.ca/AgEconomist.

FCC is Canada’s leading agriculture lender, with a healthy portfolio of $27.3 billion and 21 consecutive years of portfolio growth.

For more information, visit www.fcc.ca