How does the value of inputs affect agricultural production?
The value of inputs directly affects the production of agricultural commodities, and thus, using risk management tools is essential in this context.
Inputs are resources needed to produce goods or services in a given economic activity. In agricultural commodity markets, they play a vital role in bringing greater efficiency and profitability to production processes. In agriculture, inputs are grouped into three categories:
- Biological Inputs: These are organic compounds, such as animal manure and fertilizers.
- Mechanical Inputs: These include agricultural machinery, equipment, and implements. More specifically, they can be tractors, sprayers, seeders, and irrigation instruments.
- Chemical Inputs: These refer to materials that come from minerals and rocks, such as limestone. They also include agricultural pesticides (herbicides, insecticides, and synthetic fungicides).
Critical for the production systems of all crops, inputs contribute to ensuring good crop yields, as well as the quality of the final product. Prices of inputs may vary, as they’re readjusted annually and influenced by exchange rate fluctuations. For this reason, producers also need to pay attention to financial markets in order to make the right decisions at the time of purchase. Given this situation, hedging tools offer greater security to businesses.
In this article, you’ll come to understand how the values of inputs affect agricultural production, and how risk management helps to protect producers from price variations.
Inputs: Effects of price changes on commodity markets
The purchase of inputs is an essential step in the success of the harvest of a commodity. Without them, production can be infeasible. Hence, it’s important that producers are aware and plan their purchases accordingly since high prices can compromise agricultural production entirely.
There are several significant effects caused in commodity markets due to the variation in the prices of inputs, with repercussions both locally and globally. The main ones are shown here:
- Cost of Production: Inputs represent a substantial part of production costs in agriculture. When input prices are high, producers face higher expenses when acquiring the necessary resources. This scenario can reduce profit margins and naturally make agricultural production less profitable.
- Access to Inputs: If prices increase considerably, producers with limited financial resources may find it hard to acquire the necessary inputs. What are the possible consequences? Less availability of these resources results in lower productivity and worse crop quality.
- Planting and Cultivation Decisions: Input prices can influence farmers’ decisions regarding which crops to plant and practices to adopt. If certain input prices are high, farmers can choose to reduce the amounts applied or seek more economical alternatives.
- Technology and Innovation: Variations in input prices can also lead to a reduction in innovative methods used in agriculture. If the prices for inputs needed to implement certain technologies are high, farmers may be reluctant to invest in more efficient solutions.
Supply and Demand: Impacts on input prices
Changes in input prices are related to numerous aspects. Among them, there’s always supply and demand, essential factors in determining prices. If the demand for a certain input exceeds the available supply, the price tends to increase. If supply exceeds demand, we see the opposite, with a probable drop in values.
Other factors such as abundant harvests and favorable weather conditions can interfere with the input supplies. Cases of extreme drought, for example, make it difficult to extract and produce certain inputs, in turn leading to possible shortages and price increases. New government and economic policies and consumer trends also influence world demand.
For us to understand how this happens in reality, let’s use the clear example of the high cost of inputs such as fertilizers, which affected Brazilian agricultural production in 2022. In Brazil, most raw materials that makeup fertilizers and agricultural defense mechanisms are imported from China, India, and Russia. These nations have faced challenges in maintaining their pace of production, as well as limiting shipments due to the pressure to prioritize the local supply.
Disruptions in supply chains, intensified by the war in Ukraine, raised input prices for Brazilian producers, who continue to be extremely dependent on imports. Transport and logistics costs added to exchange rate fluctuations are other key factors that affect prices, especially when the producing country’s currency gets stronger against the local currency.
Is there a precise time to make the input purchase?
The best time to make any purchase is when input prices drop when strong currencies such as the dollar are low. It’s vital to plan the harvest, setting targets for both the quantities to be purchased and the maximum price paid for each agricultural input.
Buying in advance can help secure better, lower prices, but producers don’t always have the necessary capital at the right time. This is where the importance of having a solid financial plan and the proper use of hedging tools comes in.
Risk management offers more security to producers
hEDGEpoint provides financial alternatives in the form of customized products capable of minimizing exposure to price variation risks in commodity markets. To do this, we put together market intelligence and offer hedging products to create a protection plan, which enables actions, through the futures market and options contracts
Talk to a hEDGEpoint specialist today and learn how we can work together to support your business
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