Riding Out the ‘Perfect Storm’ of 2007: Part II

Challenges Remain Despite Boom 

So with record prices and global demand running at a fevered pitch, one would assume the boom times are pretty good for the U.S. ag sector. The optimism is somewhat tempered by sky-high production costs and transportation challenges.

“Production costs could neutralize profits to some degree as fertilizer, fuel and other inputs have increased dramatically,” Babb notes. “Because of the higher risk growers need larger operating loans,. In some cases in the Midwest, lenders have increased operating loans by an average of 20% to cover input costs.”

Babb also explains that this increase in production costs naturally result in higher prices passed through to the end user, which, often requires coaching for trade partners to understand the production/price relationship.

“We counsel trade partners that rising costs of production do result in higher prices for them, but this provides an excellent opportunity to explore options and fine-tune their purchasing planning,” Babb says. “Container shipping is an example of an attractive alternative for timely delivery of our products.”

For Edwardson and Hoffman, they see transportation costs and logistics issues as major challenges for their respective industries in 2008.

“Transportation problems can be a real profit drag because all the unit trains and railcars are tied up by big shippers moving corn,” Edwardson says. “With a potential increase in feed barley acres upwards of 30% for this year, getting that crop to market in a timely manner presents some challenges.”

“Movement of beans through the pipeline will be critical to capitalizing on market opportunities,” Hoffman notes. “Reasonable rail rates are important and we need to be more efficient at getting grain from the farm gate to the ports because every day we’re late, results in costly delays at the ports.”

What does all this mean for elevator managers and grain marketers? It means that efficient, reliable customer service will become more important than ever, as pressures increase to move more grain to more destinations, more quickly and economically.

“The grower now has more control over their crop’s fate than ever before and their choice of wherethey sell that crop is wide open,” says Edwardson. “Those managers who demonstrate an ability to nimbly maneuver through the marketplace and get the crop quickly into the pipeline will win the day in 2008.”