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Corn+Soybean Digest

Crop Input Costs Soar

You can count on some wild price swings between now and summer's end.

The prices of natural gas and fertilizer are the biggest challenge facing corn and soybean farmers in the months ahead. In the last few months, the natural gas price has gone from just over $2/mmbtu to over $10. The cost of anhydrous ammonia has gone from the low $200/ton to over $400 in areas. It may be higher by the time you read this. The one thing that's quite different this time vs. previous input price increases is that this shortage is for real and so are the price increases.

In rough numbers, at $2.19/mmbtu, the cost of producing a ton of ammonia is about $100, with gas being 72% of the total cost. At $6, the cost of production rises to about $229/ton. At $10 - don't even bother to get your calculator out.

Ammonia producers have few alternatives in this situation. Either they produce at a loss or cut back on production. Some of both is happening.

The only good news is that the laws of economics have not been repealed. Natural gas prices have been high enough long enough that production is starting to increase - but not fast enough. The clock has run out. It's far too late in the season to step up production in order to manufacture enough ammonia to meet the needs of all U.S. corn producers. That means very real shortages in many areas of the country - regardless of the price.

This could ultimately translate into some of the wildest corn and soybean price swings this spring and summer that we have witnessed in the last several years. Why? Even before planters start to roll, estimates of planted acreage shifts between corn and soybeans are going to vary widely. Keep in mind that farmers aren't just facing high fertilizer costs. In irrigated areas they're also facing higher water costs, since the majority of irrigation pumps run on natural gas.

Particularly in areas of Nebraska, Kansas, Oklahoma and Texas, acreage will be shifted out of corn and into soybeans and/or milo, regardless of fertilizer costs. Already we're hearing estimates of losing anywhere from 1.5 million to 8 million acres of corn. But don't count on the big numbers yet.

Looking back, with the exception of when dramatic government program changes have resulted in acreage shifts, the declines in corn acres have ranged from 2.4% in 1982 to a whopping 10.1% in 1995. The exact number of acres lost in 1982 was 2.2 million, while soybean acres increased that year by 3.4 million from 67.5 to 70.9. But even in 1995, with a drop of 8 million acres of corn, soybean acres showed only a marginal increase due to the impact of government programs.

The bottom line: If history repeats itself, even with high natural gas and fertilizer prices, the final acreage drop in corn will likely range from 1.5 million to a maximum of 4 million. Most, if not all, of that will be shifted to soybeans.

Parting thoughts: Acreage shifts because of nitrogen shortages will likely be greater than normal - but probably not as much as coffee shop talk would currently indicate. Most Midwesterners still like planting corn. And if weather permits this spring and fertilizer is available, a lot of those shifts that were talked about in the coffee shop won't take place. But you can count on rumors, anticipated changes and out-right guesswork to result in some volatile price swings between now and summer's end. Fasten your seatbelts.

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