Ag Input Crunch Ahead

ROCKVILLE, Md. (DTN) -- Agricultural chemicals are expected to see another year of rising prices and spotty shortages, industry stakeholders and farmers told DTN. At issue are continued soaring freight costs, labor shortages and tight inventory, which have left the supply chain vulnerable to sudden weather or logistical hiccups.

The biggest takeaway? Start conversations with your retailers and suppliers early and read those prepay contracts carefully, with an eye toward force majeure clauses. Here's what to expect:

SHORTAGES AND DELIVERY DELAYS WILL CONTINUE

A lot of factors converged, starting in 2020, to mire the industry in its current supply chain chaos.

First, ag chem companies had spent multiple years up to 2020 ridding themselves of excess inventory, as stagnant commodity prices made holding them too costly and unpopular with financers, noted Brett Bruggeman, president of WinField United. That trend appeared prudent and continued in 2019 when record levels of prevented planting pushed planted corn and soybean acres down near 165 million.

Inventories shrunk further after increased tariffs slowed the amount of crop input products entering the country, particularly for post-patent chemicals, Bruggeman recalled. Then came the COVID-19 pandemic, with its unprecedented factory shutdowns and global lockdowns reverberating across the supply chain. Freight and labor shortages led to manufacturing and delivery delays, which left companies in a tight spot when farmers then rushed to the field with 180.5 million acres of corn and soybeans in 2021 -- a record high for the country.

Almost all the flex in the supply chain is now gone, explained Sam Taylor, executive director of RaboResearch. That means any little disruption -- an acreage swing of a few million acres, a bad storm, a factory going offline -- will have unusually large cascade effects. "Everything that might not have had an impact on the supply chain in the past is now going to because of the length of delays that have built up," Taylor explained.

One such event occurred in mid-September, which could affect 2022 glyphosate production, Taylor noted. New environmental requirements from the Chinese government have forced the Yunnan Province to drop its yellow phosphorus production to 10% of its normal capacity through December. The Yunnan Province can account for anywhere from 40% to 45% of China's yellow phosphorus production, which goes into finished phosphates and glyphosate production, Taylor said.

Overall, China's increased environmental regulations as it prepares for the 2022 Winter Olympics in Beijing could be a major constraint on global crop chemical inputs, Taylor warned. "There are more environmental production initiatives coming down on 2,4-D, glufosinate and other active ingredients," he said.

Likewise, the fertilizer market, which started its climb following the heady growth in commodity prices last year, is running into true supply issues, explained Russ Quinn, DTN staff reporter specializing in fertilizer coverage. "Fertilizer retailers I have talked to this summer seem especially worried about the supply of fertilizer for the fall fertilizer season," he said. Record acreage this year drained inventory, and refilling it is not a simple affair.

"Limited fertilizer exports into the U.S. and weather affecting domestic fertilizer production with the winter storm last February and Hurricane Ida shutting down fertilizer facilities in Louisiana are just a couple supply questions," Quinn said. Now, natural gas, a basic ingredient in the manufacturing of fertilizer, is skyrocketing in cost. "Last week, fertilizer heavyweights CF Industries and Yara temporarily curtailed fertilizer production in Europe as the natural gas prices in Europe are affecting ammonia production margins," Quinn said.

PRICES WILL GO UP -- AGAIN

As a result, ag chem and fertilizer prices are almost certainly headed upward again for the 2022 season.

"Higher prices across the board is the big takeaway," Taylor confirmed. "I think farmers have to be cognizant of scarcity -- in the past, shortages have been on lesser-known active ingredients, but this coming year, it could be associated with bigger names and could impact farmer decisions on farming practices into 2022."

Already, farmers and their crop advisers are struggling with widespread shortages of glyphosate, with some crop scientists drawing up weed control plans that don't include the country's most commonly used herbicide. (See more here: https://agcrops.osu.edu/….)

Prices will reflect that scarcity. Currently, year-over-year Chinese price benchmarks for glyphosate are up over 130%, with glufosinate up 80%, 2,4-D up roughly 60% higher, and the common fungicide azoxystrobin rising 30% just this past month, all with continued price risk on the upside, Taylor noted. Some companies are reporting 10-fold increases in freight costs, as well, he said.

As for fertilizer, year-over-year domestic anhydrous prices are now up 77%, both potash and UAN28 are 74% more expensive, MAP is 73% higher, UAN32 is 69% more expensive, DAP is 62% higher, urea is 59% more expensive and 10-34-0 is 39% higher compared to a year earlier, Quinn said.

In addition to product scarcity and costlier freight, companies are wrestling with increased regulatory requirements, Bruggeman added. Whenever a company secures a new source for an active ingredient or even an inert ingredient -- a common event in 2020 and 2021 -- it must prove to the EPA that the new source meets the agency's quality and safety standards. "Regulatory costs have gone up big time ... trying to make sure labels are up to speed," he explained.

PREPAY WILL BE POPULAR BUT LIMITED BY SUPPLY

All of these pressures are leading farmers to consider prepaying for chemicals and locking in their supply. "Last year was a big prepay year, and it will be up again this year, too, I think it's safe to say," Bruggeman said.

Ag chem companies are working to understand what the actual existing inventory of chemicals are in the country, he added. Normally, farmers return unused chemicals at the end of the year, preferring cash in hand over leftover jugs in the shed. This year, the opposite is true.

In Lenawee County, Michigan, Raymond Simpkins is just one of many farmers hanging onto his leftover pesticides from the 2021 season. "I actually have most all my post-applied bean chemicals left from this year," Simpkins said. "Our burndown preplant residuals worked so well I didn't respray many acres."

Part of the inventory mystery for ag chem suppliers is knowing how much of non-returned products are being stored, such as Simpkins is doing, versus those that were actually used up, due to increased weed, insect or disease pressure.

In the meantime, many growers seeking prepay contracts are running headlong into the reality of scarcity, farmers told DTN via email. "This year, my retailer needs to have physical product in hand to sell," noted Rumsey, Alberta, farmer John Kowalchuk. "That makes it tricky for their storage, but ensures I get the product I prepay for."

His experience was echoed by Keenesburg, Colorado, farmer Marc Arnusch, who is trying to stock up on critical tools to fight herbicide-resistant weeds: glyphosate, bipyridinium, fluroxypyr, halauxifen and florasulam, as well as some fungicides. "Every retailer I work with has stated that prepaying does not guarantee delivery," he said. As a result, Arnusch is only paying for product he can physically access now.

That's a wise strategy, Taylor noted. Growers who prepay based on future delivery promises should review their contracts carefully for "force majeure" clauses, which allow companies to back out due to unforeseen extraordinary circumstances -- something the past two years have been full of.

"The contracts I have signed in the past do have force majeure in the contract," noted Claflin, Kansas, farmer Kyle Krier. "I never actually worried about that until now -- more so on the fertilizer side than the chemical side."

SOME CHANGES MAY BE HERE TO STAY

Will supply chains ever fully recover to their pre-2020 functionality? Yes, Taylor and Bruggeman agree, but it will take longer than many predicted last year. Bruggeman sees another year or two of lingering issues ahead.

Krier worries that rents, chemical costs and machinery price tags may never fully recalibrate.

Other, more subtle, changes are likely here to stay as well, Bruggeman noted. Labor shortages, for example, are changing how agricultural companies operate.

"The industry will adopt digital much more quickly because there isn't the labor available," Bruggeman explained. "We're seeing that already, with order entry, order tracking and warehouse management systems, for example."

Some changes are likely to be net benefits to the industry, he added.

In the chaos of 2020 and 2021, ag input suppliers have poured more resources into their forecasting and delivery systems and worked to develop tighter relationships with the manufacturing industry. In addition, market intelligence is at an all-time premium and likely to remain so. The result is likely savvier ag chem companies, with a better handle on what their inventory flow is and closer relationships with their manufacturers, hopefully better able to weather global supply chain disruptions, Bruggeman said.

"Every day, we've had to get better, both upstream and downstream" he said. "We'll continue to work deeper with manufacturers upstream and plan deeper with our retailer owners downstream."

Emily Unglesbee can be reached at Emily.unglesbee@dtn.com

Follow her on Twitter @Emily_Unglesbee

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