No one can predict the future, but the economic fundamentals are pointing towards a significant bump up in variable input costs for 2012, particularly for fertilizer, says Bruce Erickson, agronomic education manager, American Society of Agronomy.
“Fertilizer is by far the highest variable-input cost that corn growers have, and it’s been on a rising trend in price over the last year or so,” he says. “Fertilizer retailers are saying that compared to last fall, prices are up anywhere from 18-27% for the three major products (anhydrous ammonia, diammonium phosphate [DAP] and potash).So, it’s very likely that farmers will pay more for fertilizer in 2012, barring any more financial shocks to the system.”
Still, unexpected fertilizer price drops have occurred before, most recently in 2009, says Erickson. “The last world financial crisis in September 2008, when we saw a monumental fall in the Dow, didn’t bottom out until March 2009,” he says. “That triggered a fertilizer price drop in the spring of 2009. So, it can happen, but it takes a while for a fertilizer price-drop to shake through the system.”
As far back as February, Purdue University published projections that the average Indiana corn/bean farmer on highly productive soils would spend $163/acre on fertilizer for 2011, notes Erickson. “With fertilizer prices rising since then, costs are probably going to be higher going into 2012, even with the recent financial distress on Wall Street,” he adds.
Much of the costto produce and transport fertilizer is energy, and energy prices haven’t been going down, emphasizes Erickson. “Typically, the industry uses natural gas to extract nitrogen (N),” he says, “and phosphorus (P) and potassium (K) fertilizers are mining-dependent, which is also heavily energy-dependent.”
Gary Schnitkey, University of Illinois Extension ag economist, concurs. “Anything could happen, but right now I don’t see fertilizer prices dropping very much, if at all, due to current high fuel, crude oil and corn prices,” he says. “We’ve reached a higher plateau for fertilizer prices than what we used to see prior to 2006. Due to higher cost levels for fuel and commodity production, we’re probably not going down to those levels again.”
In July, the USDA’s Agricultural Marketing Service reported fertilizer contract prices for fall delivery to be $814/ton for anhydrous ammonia, $688/ton for DAP and $627/ton for potash. Using those prices, Schnitkey calculates that 2012 fertilizer costs will total $162/acre for highly productive Illinois farmland. The $162/acre projection is above 2010 and 2011 costs, but below 2009 costs, he says.
Since July, little has changed that would substantially decrease those projections, says Schnitkey, who currently estimates fertilizer costs in 2012 will represent 32% of the total non-land costs to grow corn on highly productive Illinois farmland. “The next highest cost is seed, at a $103/acre projected cost, or 20% of the total,” he says. “So, seed and fertilizer costs will represent more than half the total non-land cost of production in 2012.”
Because fertilizer prices are so hard to predict, Schnitkey advises splitting up fertilizer purchases to spread the risk in case prices increase – either half now and half later, or one-third now, one-third in the fall and one-third in the spring. “If you do decide to prepay for your fertilizer, keep in mind that you are an unsecured creditor,” he cautions. “So, if the place where you buy fertilizer goes bankrupt before you take possession of it, you’re not likely to get your money back. On the other hand, I can’t think of a case where that has actually happened.”
It might be wise to prepay for some fertilizer now in case prices rise later, agrees Erickson. Still, in 2008 that strategy backfired, and it could again if global financial turmoil continues, Erickson adds.