Painfully high fuel prices could spell higher farm production costs for months to come, as fertilizer prices continue to rise proportionately with the cost of gas.
The correlation between the price of natural gas and nitrogen fertilizer (N) is very high, says Greg Ibendahl, agricultural economist at Mississippi State University.
“A perfect correlation would be 1.0, and the correlation between the price of natural gas and the price of fertilizer is 0.79. They are very highly tied together. The odds are that as natural gas prices go up, nitrogen fertilizer prices will increase in a similar fashion,” he says.
This correlation, he adds, is based mainly on anhydrous ammonia, which has the highest N content of any fertilizer available. Gas makes up 80% of the cost of ammonia.
In 2002, says Ibendahl, the average price for natural gas was about $3/million metric BTUs. This past year, the average price was $5.50, while a recent spot price was more than $11.
“In 2004, prices averaged about $390/ton for anhydrous ammonia based on a natural gas price of $5.10. Going into 2006, $10 could be a realistic average price for natural gas. And at that price, we could be looking at more than $600/ton for anhydrous ammonia,” he says.
Farmers have seen an increase of far more than 50% in the price of anhydrous ammonia from last year to this year, he adds, and transportation remains an issue that could further affect fertilizer prices, with Hurricane Katrina closing some ports and slowing business at others.
A Texas A&M study from this spring found that as gasoline prices at the pump continued to climb above $2/gal., fertilizer prices — especially N — followed suit. The price of 1 ton of urea ammonium nitrate was $235 or 37¢/lb. N this spring, compared with 21¢/lb. just a few years ago.
Other sources of N have been increasing at the same rates while phosphorus fertilizers have been increasing at a much slower rate, according to the study. This is because N manufacturers are dependent on natural gas while phosphorus fertilizer is derived from rock phosphate and acids.
History has shown that whenever natural gas prices exceed $10/million metric BTUs, the price of N escalates because gas is so critical in the manufacturing of all N.
According to Food and Agriculture Policy Research Institute's (FAPRI) most recent Fertilizer and Fuel Outlook, ammonium nitrate prices generally run about 16¢/lb. higher than anhydrous ammonia. When used in place of anhydrous, ammonium nitrate has the ability to further impact growers' per acre costs, the Institute at the University of Missouri says.
During the week of Hurricane Katrina in late August, natural gas prices ranged from $10 to $11, and the futures contract for Oct. 5 was $11.472.
Cliff Snyder, an area director for the Potash and Phosphate Institute, thinks fertilizer prices will continue to increase due to the world demand for N and possible transportation challenges due to rising energy costs and an active hurricane season.
“Farmers should re-evaluate their fertilizer programs and plant nutrition programs in consultation with a certified crop adviser or Extension agent,” he says. “That knowledgeable advice can be invaluable in view of our current energy crisis. The transportation issues will be significant this year”
Snyder reminds growers that potash and phosphorus can help to improve the efficiency of the N that they do apply to their crops. “These days, you want to make sure you maximize all fertilizer applications due to increased energy costs,” he says.
It's critically important, he adds, that farmers make sound investment decisions when deciding how much fertilizer to apply.
“If you haven't soil sampled and soil tested in the last two years, you should do so to make sure you're applying the right amount of nutrients,” says Snyder. “You can't afford to guess on your crop nutrient requirements. They need to be clearly defined through representative soil testing and a nutrient budgeting program.”
Most U.S. farmers have seen excellent yields in some of their commodities in recent years, he says. “But without soil testing, a grower may not see how much the nutrient levels have drawn down as a result of these high yields. Some fertility levels certainly have slipped because the crop has used the nutrients. Growers need a good road map when making future decisions about how much fertilizer to apply,” says Snyder.
Rising fertilizer prices are playing a major role in the higher production expenses projected for U.S. farmers this year, according to a recent USDA report. Total U.S. agricultural production expenses in 2005 are projected to be $218.7 billion, up $8.9 billion or 4% from 2004.
Since a decline in 2002, expenses have increased by about $7 billion or more in each of the last three years. The rising costs of energy-based inputs such as fertilizer and increasing interest expenses will account for more than 60% of the increase in costs this year, according to the report.
Increases of more than $1 billion are expected to occur in fuels/oils, interest, fertilizer and repair/maintenance costs. The only decreases forecast for 2005 are in feed and livestock costs and poultry purchases, both 2% or less. Rising input prices combined with a small reduction in farm output are forecast to result in a higher level of total expenditures for production inputs.
Principal crop-related expenses, including seed, fertilizer and pesticides, are forecast to be 6% above 2004, with fertilizer expenses expected to increase by about 12%. During the past three years, fertilizer prices have risen by nearly 47%, according to USDA.
Fuel expenses are expected to rise by about $2 billion in 2005 to $10.2 billion, an increase of 24%. The price of diesel had risen by 35% through July of this year, and increased further in the month of August.
“The per-acre cost associated with diesel fuel for tillage, planting, spraying and harvest is approximately $8.98/acre for corn, $5.75/acre for soybeans and $4.91/acre for wheat at farm diesel rates of $1.71/gallon. A 1¢ increase in farm diesel prices could impact costs per acre by 57¢ for corn, 36¢ for soybeans and 31¢ for wheat,” the FAPRI outlook says. “Total costs per acre associated with fuel and fertilizer costs for 2005 could range from $60.43 to $102.91/acre, or 15-19% for corn. The range for soybeans is $23.39-33.52/acre or 20-22% above 2004, with the range for wheat at $34.26-43.16/acre or 14-18% above 2004. This would mean an additional 8-9¢/bu. would be required on corn, 10-12¢ on soybeans and 8-13¢ on wheat, to offset the increase in fuel and fertilizer costs.”