Photo: By Magda du Toit
In agriculture, input prices generally increase at a faster rate than the output price. This creates the cost or price-squeeze effect as farm profit margins are squeezed between fast-growing input and slower-growing producer prices.
The cost-price-squeeze effect is not something new in agriculture, but it remains an important topic as it has a major impact on profitability.
Corné Louw, Applied Economics and Member Services lead at Grain SA, pointed out that farmers were often faced with a cost-price-squeeze when the prices they received for their products fell while the costs of inputs like seeds, fertilisers, technology, and machinery rose. This can significantly impact their profitability and financial stability.
The challenge for farmers is to produce more with less, but at the same time rising input costs and fluctuating market prices are creating financial pressure on farmers. This situation is exacerbated by factors such as inflation, supply chain disruptions, and geopolitical uncertainties.
According to Senekal, the volatility of input costs is one of the major threats to a producer’s profitability.
“To manage volatility is a challenge. We specifically see volatility in the crop protection market where the cost of active ingredients such as glyphosate, for instance, sharply increased over the past couple of years. This constant change in prices make it difficult for companies to set a price and for farmers to budget.”
To survive, Senekal said, farmer needed to optimise their inputs.
Louw agreed and stated that fertiliser and agricultural chemicals comprised the biggest part of a farmer’s input costs, and that farmers should place their focus regarding optimisation on those products.
“The purpose of optimisation is to generate more profit. Producers should manage their inputs carefully with a view to making a profit. It is no good making use of a great number of inputs to ensure a high yield, and the income remains low. Farmers should rather focus on profitability than solely on yield,” Louw said.
Volatility can be manged by using new technology. Van der Westhuizen said the cost-price-squeeze occurred across the globe, but the difference was that in South Africa farmers did not receive any subsidies and this underlined the necessity for farmers to become more efficient.
The first requirement for economic efficiency is that the maximum output must be achieved for a particular level of input. Often this can be done through new technology or improved practices.
Van der Westhuizen added that there was no magic wand to address this issue and that co-operation between the various role players was important.
According to Hudson, one of the ways in which farmers have adapted in the past was to focus on economy of scale. “Although this can still be a strategy, being efficient is even more important,” Hudson stressed.
The panel agreed that the following aspects were important elements that could assist farmers in remaining profitable and in addressing the price-cost-squeeze:
- Precision farming – including precise application of chemical products.
- Variable rate applications.
- Soil mapping.
- Using less water – irrigation as well as during chemical applications.
- Using available technologies.
- Knowing the capabilities of the technology that a farmer uses on the farm.
Van der Westhuizen stressed that often one small change could be the catalyst for being more efficient, cost-effective and profitable. “Farming is a game of small margins,” he pointed out.
Van der Westhuizen further said it was also important that farmers should talk to someone knowledgeable if they wish to implement something new.
“Often farmers are not aware of all the features of a new tractor or implement. Just by knowing what the technology can offer and how it works, can already bring about major changes and more efficiency and profitability,” he emphasised.
Louw summarised the discussion and pointed out that although optimisation was important, a focus on profitability remained the most important goal.
“Yield is important, but it’s also important to look at profit. New technologies are great, but do not put all your focus on technology ─ use what you have optimally.”
