Limited availability of farm input stocks could see a spike in agrochemical and fertiliser prices as seasonal demand picks up in 2010, according to a recently-released Rabobank report.

With many manufacturers and distributors running on low inventory stocks, any sharp increase in demand could result in a logistical bottleneck causing higher short-term prices for farmers, the Farm Inputs: Getting back to Reality report says.

However, report author Rabobank analyst Adam Tomlinson says that while an increase in agricultural commodity prices may lead to rising demand for farm inputs and drive up prices, he does not expect them to reach anywhere near the highs of mid-2008.

"Along with a fall in agricultural commodity prices since mid-2008, annual fertiliser application by tonnage dropped by 6.7 per cent to mid-2009 and annual global agrochemical sales fell by 6.4 per cent (in nominal US dollar terms) in 2009 compared to 2008," he says.

"Lower demand levels have meant that global prices for manufactured farm inputs remained subdued throughout 2009. The collapse of international farm input prices in late 2008 resulted in many manufacturers and distributors of farm inputs being caught with large stocks of highly-priced inventory and production capacities in excess of existing demand.

"In response to this, manufacturers of farm inputs wound back production and the supply chain ran down inventories which could potentially have a marked impact on prices if we see a seasonal spike in farm input demand."

Finding an equilibrium post GFC

The report says that the impact of the global financial crisis on demand for agricultural commodities was such that prices slumped from their highs of mid-2008. Around the world farmers deferred farm input purchases as sharp falls in commodity prices squeezed returns.

This had a direct impact on farm input manufacturers and distributors with the result being that many are now operating at lower capacity, the Rabobank report says.

With agricultural commodity prices looking likely to rise in line with a recovery in the global economy , there is a risk that a spike in demand for farm inputs may occur, causing the price for farm inputs to push higher due to logistical constraints. However, a repeat of the 2008 farm input price spikes when capacity utilisation nearly reached 100 per cent is not expected.

Energy markets to set price floor

While unlikely to reach the highs of 2008, farm input prices will continue to be impacted by the volatility of crop prices, the report says.

"However, during short-term disruptions in demand for farm inputs, energy markets will play a large role in determining the farm input price floor," Mr Tomlinson says.

"Electricity, petroleum and natural gas prices influence the costs for farm inputs in two ways. Firstly, the cost of raw inputs, such as natural gas or petroleum for nitrogenous fertilisers and agrochemicals. Secondly, the cost of manufacturing and distributing raw inputs such as phosphate rock and sulphur, that are heavily reliant on energy driven extraction and conversion processes."

Price outlook for 2010

Farm input prices have stabilised at similar levels to 2006/07 and Rabobank expects most farm inputs will remain above the pre-2006 average levels in the short-to-medium-term. The upward pressure placed on international prices will come from productivity needs to meet increasing demand for agricultural products as the broader global economy recovers.

Mr Tomlinson says that among the other factors that will place upward pressure on farm input prices will be the higher average cost levels for energy and raw materials, and the increasing costs for managing environment issues such as carbon pollution.

"Although most farm input prices will trade in a moderately higher range compared to the historic average, the response to higher farm input prices in Australia and New Zealand will likely be an increasing focus on using farm inputs more efficiently," he says.

"Over recent decades Australian farmers have increased productivity in the areas of labour and capital expenditure. We expect that future developments in precision agriculture and biotechnology may provide cost reduction techniques and productivity gains for farmers to help offset their manufactured farm inputs cost component."