Research
Tightening the corn belt: How US farmers adjust input spending when commodity prices fall
As the US farm economy transitions from a period of historically strong balance sheets to a period of negative margins, the 2012/13 commodity market downturn offers useful lessons in how row crop growers will navigate lower agri commodity prices. We outline the unique pricing dynamics of machinery, fertilizers, seeds, crop protection, and land, and consider how farmers will adjust their spending on these key inputs.
History repeats itself, not least in agricultural cycles. As the US farm economy transitions from a period of historically strong balance sheets to a period of negative margins, the 2012/13 commodity market downturn offer useful lessons in how row crop growers will navigate lower agri commodity prices today.
In this paper, we explore how expenditures for major input categories – machinery, fertilizer, seed, crop protection, and land – are influenced by declining farm profitability. Clear patterns emerge that provide useful insights into the demand elasticity and input producers’ pricing power in these categories. Taking the analysis a step further, we explore the degree to which declining expenditures are borne by growers, in the form of lower volumes purchased, or by input suppliers, in the form of lower prices. For some categories, like machinery, the relationships are predictable, with farm profitability clearly in the driver’s seat. For others, the cycle of farm profitability must be viewed against the backdrop of category-specific dynamics related to energy prices, geopolitics, intellectual property, and agronomic considerations.
While these patterns are well-defined sector wide, the proactive participants can avoid becoming victims of the cycle and instead leverage downturns for new opportunities.