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'Steel' Yourself for Higher Prices

Posted Nov. 1, 2005

Year after year, more and more of the products we buy are made out of plastic. Frequently, I hear people say, "This car is made out of plastic." The truth is, we are using more plastics in all aspects of our lives. In reality, this trend likely will persist as prices for steel continue to increase. As someone who works in the agricultural production business, I have noticed the longevity of a bid on a piece of farm machinery has declined. It used to be that a particular bid on a piece of machinery would be valid for six to eight months before it had to be re-priced. Today, the average length of time a bid is valid is only about three days. When I inquired about the reason for the reduced longevity of bids, I was informed it was being driven by the rapid rate of increase in the market price for steel.

Several reasons explain why the price of steel is increasing. One primary reason has to do with global demand. As incomes and industrial capacity in countries such as China and India rise, the demand for products and inputs such as cars, washers, dryers, tractors, refrigerators, combines and many other consumable products that require steel in their production also will continue to increase. This will have the effect of putting upward pressure on the price of raw and scrap steel. In addition to the demand side of the steel price equation, supply-side issues also are present in this market. One leading issue pertains to the substantial increases in the energy costs associated with steel production. Higher prices for oil and natural gas are affecting the price of producing steel. It now costs much more to produce raw steel due to higher energy prices.

Given this information, I thought it would be useful to know how the increases in steel prices have affected the sale prices for a variety of agricultural machines and equipment. Based on quotes from local vendors, I found that over the last year, on average, the sale price of new tractors has increased by 6 percent, round balers by 8 percent and various tillage equipment by about 12 percent - all of which are produced using a substantial quantity of steel inputs. Although plastic has been a substitute for steel in many of the products we Americans consume each year, including automobiles, much of the farm equipment agricultural producers use still requires the use of steel inputs to produce them. Companies like John Deere and International pay more for the steel inputs used in the production of tractors and other farm equipment. As a result, these companies are passing the cost increases along to agricultural producers who use them in the production of farm commodities. Due to the fact that farm commodity producers have little ability to influence the prices they receive for their commodities, oftentimes they are required to absorb the increased costs themselves, which puts enormous economic strain on their farm businesses. We all know this is having an adverse effect on farmers and the rural communities surrounding them.

Tractors and equipment aren't the only area where the price of steel is evident. Here at the Noble Research Institute, we have been constructing several miles of five-wire barbed wire fence each year for the past three years. As illustrated in Table 1, the increase in the price for the fencing materials alone has been dramatic.

After querying vendors further, it appears the problem of increasing steel prices will not be alleviated any time soon. In fact, I have been informed we can anticipate even higher price spikes in the future. As a result, this might be the time to consider future purchases. Waiting until later may, in fact, have a substantial cost associated with it - assuming the cost of steel, and, hence, farm machinery, equipment and supplies, will continue to increase over time.

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