Crop input prices trending lower despite weaker loonie
Crop input prices have declined by over 1% through the first three months of 2016 as compared to the same period in 2015. All this despite a lower Canadian dollar which usually pushes up the cost of crop inputs for producers. So what’s supporting these lower input costs?
Lower fertilizer and fuel prices
The overall decline in crop input prices is due to lower fertilizer and fuel prices. In 2016, fertilizer prices have declined nearly seven per cent as compared to the first three months of 2015, while diesel and gasoline prices are down 23% and 11% respectively. These declines reflect lower U.S. demand and soft commodity prices (i.e. coal, oil, and natural gas), which are all inputs for fertilizer.
Looking specifically at fertilizer prices, seasonal patterns are not as prominent in 2016, indicating weaker spring demand. However, the market may see more upward pressure on fertilizer prices in April and May as U.S. planting intentions indicate more corn to be planted in 2016.
Conversely, overall strong farm health in Canada has led to a strong demand for chemicals and seeds this side of the border. Based on Alberta Agriculture and Forestry survey, chemical and seed prices have increased over 1% in 2016 as compared to the first quarter of 2015.
Lower Canadian dollar
The decline in crop input prices stands out because the Canadian dollar was lower by nearly 10% relative to the U.S. dollar over this same time period. And when you consider the loonie was 10% lower in the first quarter this year, the total decline is actually closer to 11%. A look at individual components of crop input prices (fertilizer, chemicals, seed, and fuel) yields a number of different story lines to consider.
Even a small decline matters
While a 1% decline may appear insignificant, it’s not. Price patterns matter a great deal to profitability. Relatively free movement of products between Canada and the U.S. as well as dependence on imports result in prices of crop inputs being established first in U.S. dollars. Therefore, we also need to consider the impact of the exchange rate between Canada/U.S. dollars.
Overall crop input prices are softer in 2016 as compared to 2015 which will be supportive of margins for Canadian producers.