To check out the first three parts of the series in the High Cost of Farming, check them out here: The high cost of farming, part one: Inflation takes its toll; The high cost of farming, part two: New build decisions and The high cost of farming, part three: What to ask your builder now.
Global acreage expansion and pandemic-related supply chain hiccups will likely cause fall fertilizer and liquid propane costs to run much higher than last year.
At press time, average Illinois prices for anhydrous ammonia were $710 per ton — a 65% increase from last fall’s lows, according to USDA.
“The higher prices have been a concern for many months,” says Krista Swanson, who raises corn and soybeans with her husband, Brett, and his family near Oneida, Ill. “I think farmers are thrilled with the higher corn and soybean prices in the short term, but there is real concern for the trend of rising
Swanson, who is also an ag policy research specialist at University of Illinois, says she would normally be booking fall fertilizer in August. But pricing information is not yet available.
“The retailers in our area are not willing to lock in prices yet,” she says.
With fewer fertilizer manufacturers supplying ag retailers with fertilizer and chemical supplies, planning for fall harvest has changed over the years on the retailer’s side.
“Right now, the manufacturers have not given us prices for fall ammonia,” explains Jay Kempel, general manager for FS Stephenson Service Co. from his office in northwestern Illinois. “We are dependent on the manufacturers, and they are waiting to see what corn prices do.”
Higher natural gas prices
What is behind the uncertainty?
In its May earnings call, supplier Nutrien cited higher natural gas prices as a key contributing factor to rising production costs for its nitrogen division, which are passed on to ag retailers and, ultimately, farmers.
As a result, Nutrien’s retail price for ammonia rose 13% in 2021’s first quarter, versus the previous year.
Accounting for 40% of U.S. electricity generation, natural gas also is a key fuel source and a major ingredient for fertilizer production. Its usage outside the electric sector this year is expected to increase 18% from 2020 after colder-than-normal February temperatures and with the expanding economic activity.
The U.S. Energy Information Administration predicts natural gas inventories are likely to remain 4% below the five-year average heading into fall, which does not bode well for easing price pressure on fall fertilizer production ahead of harvest.
Global nitrogen production has also struggled to keep up with rapidly expanding acres in China, Ukraine, South America and the U.S., especially following the lags from last year’s supply glut, production downtime due to the February cold snap and subsequent pandemic-related delays.
“We know it is going to be a busy fall,” Kempel shares in between calls to coordinate with terminals to procure the necessary fertilizer volumes for fall fertility needs. But sourcing anhydrous ammonia isn’t the only thing keeping him up at night.
“Liquid propane is higher than we like to see this time of year, too,” Kempel says. Those prices typically ease in July, but he worries that current inventory levels could limit any potential price declines.
“U.S. inventory levels are low because we’ve exported so much,” Kempel explains.
Since LP is a byproduct of the oil-refining process, the post-pandemic consumer demand recovery could help build supplies. “With more people traveling, it could help inventories,” Kempel says.
P, K supplies tight
U.S. MAP and DAP supplies are likely to remain tight ahead of harvest, according to Nutrien, especially as countervailing tariffs keep supplies from top producers Russia and Morocco from replenishing U.S. stockpiles. Global supply chains are not currently operating at efficient enough capacities to adequately supply U.S. growers with phosphate stocks.
In Illinois, phosphate prices have risen 68% to 70% since June 2020, with average DAP and MAP prices quoted at $671 and $679 per ton, respectively, as of press time.
“It keeps going up,” Kempel says of phosphate costs.
Fertilizer producer Mosaic expects prices for sulfur (sulfuric acid), the main ingredient for phosphate production, to double by the end of June from the first quarter of 2021, according to comments in a May earnings call.
Phosphate processing slowdowns earlier this year in the U.S. Gulf, due to pandemic-related production issues, have tightened sulfur supplies, and the shortages are likely to continue through early summer. The added costs will be passed down to farm-level pricing.
According to Kempel, average production costs in northwestern Illinois have risen $60 per acre with higher input prices. “Looking at new-crop corn prices, we need that market to stay in the high $5-per-bushel range to maintain profits,” he says.
Farmers can withstand the higher costs as long as prices remain high, Swanson says. “The crunch comes when we have a big drop in commodity prices and input prices stay high,” she adds.
Swanson’s grain marketing plans for her own farm have shifted slightly in this era of higher revenues and costs.
“We tend to utilize pricing-ahead strategies on cash sales,” she explains. “We align those sales with when we have bills coming due — rent, loans, etc. We try to price throughout the year as our cash flow needs require.”
While Swanson expects their marketing plans will remain steady, she is also actively seeking ways to capture upward price movements. “We are taking the approach of more frequent smaller incremental sales to spread out the price risk a little bit more. We are also doing more pricing ahead of harvest than we normally would.”
Even though Swanson’s operation did not have any troubles sourcing inputs this spring, she continues to keep an eye on input availability. “Retailers are expressing concern about chemicals to spray this summer,” she says. “Prices are higher than last summer, and we are just starting to see that in our area.”
Kempel shares those concerns and adds a few of his own from the ag retail side. “Farmers are extremely efficient with operating speeds and technology. They can plant and harvest all at once,” he says, citing current infrastructure limitations faced by fertilizer manufacturers and distributors as a challenge to meeting farmers’ soil fertility needs.
Inputs may not be the only thing in short supply. Labor for both farm and retail is tough to find, and it could impact the fall application season.
“To do what we do, it’s very difficult without the manpower and skill,” Kempel says. “That will be the biggest challenge of the next five to 10 years.”
Swanson’s biggest concerns about harvest? The unknowns over fall application prices and supply.
“I don’t know if we need to be concerned about this fall, but over the next year or two, it could get worse,” she concludes.
Check out the first three stories in the series: The high cost of farming, part one: Inflation takes its toll; The high cost of farming, part two: New build decisions and The high cost of farming, part three: What to ask your builder now.