It’s been a record setting year for prices in organic corn, wheat and soybeans. And with a late planting season, drought or flood in parts of the Midwest and South, a perceived supply shortage keeps many farmers holding out in the hopes of getting top dollar for each of these crops.
But is this the best strategy?
The initial response would be an obvious “yes”. After all, rising fuel prices have already cut into farmer profitability. The markets in the early summer have been strong in supporting higher prices for organic crops. Demand has remained steady among world crises and organic products are becoming a regular site in mainline supermarkets.
The first one is Surcharge. As in fuel surcharge. And while it doesn’t appear to be important at first, it actually has a large influence on the price a farmer gets for their crop.
If you’ve checked the news lately (or the gas pump), there have been steadily rising fuel prices due to fuel shortage from Russia, as well as a decrease in the US supply on hand. While farmers feel the pinch in their wallets when it comes to topping off their tractor tanks, few really understand the influence the rising prices have on the bids they get for their crops.
Unless a farmer is delivering a crop directly to the end user, more transportation is required to deliver the grain. With fuel prices on the rise, this means that both trucking and rail transport are now coming with a surcharge ranging from 15-40 cents a bushel.
This pushes down the price that customers are willing to offer farmers for their crop, knowing that there are additional and rising costs to get that crop from the farmer to the end user. This slashes profits and threatens break even for products in their organic portfolio.
Did we mention that railroad reports from the end of June mentioned a forecast of rising fuel surcharge prices for the rest of 2022? Not a pretty picture in the transport arena.
The second word is Ukraine. Russia, Ukraine and NATO have reached an agreement to start exporting the stranded grain sitting in Ukrainian ports. This grain will reach the United States within the next couple of months, bringing an increased supply of grain and more competition to US farmers.
This additional grain will soften the US market as supply and demand start to even out again.
The third one is inflation. Yes, it’s a word that gets tossed around like tinker toys in a hurricane whenever there’s a problem with domestic or world economics.
Does inflation really apply and does it affect farmers and organic crops? Yes.
Whether you watch or avoid the news, most media outlets and a bearish stock market point towards a contracting of the US economy, or a recession. Inflation is up over 9%, and is forecasted to be at 6-9% within the rest of 2022 based on the Consumer Price Index. This is important because it means 2 things: consumers can buy less with their income, and they will also change their purchasing patterns.
While that doesn’t initially sound problematic, here IS the issue: organic foods are seen as a luxury item by many consumers. They would LIKE to buy organic, but if push comes to shove, they will buy conventional to save their pennies. For most consumers, organic products do have a price ceiling.
In a recession, consumer spending patterns show that most people will cut back on luxury items and put off larger purchases to save more. This result is a softening demand for organic products, which pushes control for pricing back towards the purchaser instead of the farmer.
The market is showing a lack of direction and confidence right now, which is historically a churning point before a downturn.
Is waiting to lock in prices really worth the risk of all these potential forces that could push down pricing? While only time will tell, some things are not worth the wait.