Momentum in tighter credit standards for cash strapped farmers should continue to weigh on crop input expenditures. What we would call-out with respect to margins is that despite the consensus dour view on the sector, fertilizer companies still have a lot of margin to lose, something we will continue to highlight:
- The divergence in the Chicago Fed Farm Loan Repayment Index and the Fed Farm Loan Demand Index continues its years-long divergence.
- Farm Incomes (nominal and real) continue to decline against the increasing demand for loans. Lower incomes = credit needed. After last week’s quarterly WASDE report, the USDA’s Commodity Credit Corporation (CCC) tightened its borrowing rate-based charge for April to 0.625% vs. 0.50% in March. It also raised the interest rate for crop year commodity loans to 1.625%, up from 1.5% in March: LINK
- Using the example of nitrogen, the multi-year divergence in nitrogen prices paid by farmers vs. prices received by farmers for crops remains pinned at the highs. The ammonia to nat. gas price ratio also remains near the most favorable level for producers – Margin to lose to a supply-side “price floor” argument.
- How inelastic is the demand story in nitrogen? We’ll find out in 2016: “Randy Thompson plans to apply 30% less nitrogen fertilizer to his corn this year to save money in the face of crashing crop prices”: LINK