Beating the cost-price squeeze

Input prices increase faster than product prices, but farmers can do much to limit the effect of the cost-price squeeze on their businesses.

In agriculture, input prices generally increase at a faster rate than output prices. Over the 11-year period covered, the price of farm products increased by an average 9,5% per year, while the cost of farm requisites increased by 11,1% per  year.

Hence, farm profit margins are squeezed between fast-growing input and slower-growing producer prices. An obvious way to limit input price increases is to ensure every input is bought at the best price. Some farmers have enough clout to negotiate better input prices for themselves, but most are ‘small’ compared to the input suppliers and have to band together to obtain better prices.

On the output side, farmers have to add value to products to increase prices and income. Value adding is frequently misunderstood as the sale of products directly to the consumer. But this is only one way of adding value. Farmer groups who offer processors a constant supply of products of guaranteed quality produced through good farming practices will get higher prices.

In addition to these obvious ways of increasing product and decreasing input prices, there’s an important aspect that’s frequently ignored. If you can use less inputs to produce the same product, or increase production from the same quantity of farm requisites, you will improve your bottom line.

The relationship between input and product prices and between the quantity of inputs used and quantity of product produced determines the highest profit level. 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.

Over the past couple of years we’ve seen a tremendous improvement in crop yields as a result of precision farming and biotech advances. The second requirement is to produce at the optimum production level. This isn’t easy to do, as factors other than the level of inputs used determine yields. In most cases, however, money spent on fertiliser is money well spent.

There’s a misconception that farmers can make more money by producing less. I have yet to see an example of this. As the Americans say: “More milk means more money”. This is probably true for most farming systems.

Climate change
Climate change may also provide opportunities for farmers to save on input costs by using environmentally friendly techniques to produce energy, fertiliser and, in some cases, even feed. The deteriorating product/requisite price ratio is a given. Farmers have to accept it and adapt their farming operations to continue farming profitably in the face of rising input prices. Those who do so will obtain higher returns.

Dr Koos Coetzee is an agricultural economist at the MPO. All opinions expressed are his own and don’t reflect MPO policy. Contact Dr Coetzee at [email protected]. Please state ‘Global farming’ in the subject line of your email.