Producers should evaluate management plans with high cost of inputs

High commodity prices continue to present opportunities for profits despite soaring fertilizer prices, according to a Texas A&M AgriLife Extension Service expert. Dr. Mark Welch, AgriLife Extension grain market economist, said producers may feel sticker shock when pricing nitrogen fertilizer, but higher prices for crops like wheat and corn put those input costs in perspective.

Welch said producers looking to fertilize wheat fields now, or those preparing management plans for other commodities like corn next season, are seeing record fertilizer prices at suppliers. The most recent and similar runup for nitrogen fertilizers, like anhydrous ammonia, occurred between 2012 and 2014.

“Higher prices might be causing some pause among producers,” he said. “It’s understandable. If you’re putting a budget together, the input cost for fertilizer alone could be double what it was a year ago, maybe more.”

Anhydrous ammonia, the least expensive nitrogen fertilizer used widely in commercial commodity production, has reached $1,000 or more per ton compared to $495 per ton last year. The previous high crop-season average price for anhydrous ammonia was $851 per ton in 2014.

Relative prices

Higher natural gas prices also have contributed somewhat, but Welch said the upward price trajectory is mainly tied directly to higher grain prices. When grain prices go up, fertilizer follows based on demand associated with producers’ reaction to opportunistic market conditions for their crops, which typically includes planting more acres and managing them for maximum yields.

While producers may balk at the rising cost of fertilizer, Welch said an application’s productive value is more positive than in previous years due to the higher grain prices.

“I understand how watching fertilizer prices has been a jolt and is causing real anxiety among producers,” he said. “But I want to emphasize there are better marketing opportunities because grain prices are so good.”

Welch said fertilizer costs per bushel remain better than when prices for grains including wheat and corn were in the cellar. For example, based on Nov. 4 wheat prices, it would take 126 bushels to pay for one ton of anhydrous ammonia, whereas the same ton of fertilizer cost a producer 158 bushels of wheat in 2016.

Opportunities based on $7.50 per bushel wheat and $5.50 per bushel corn futures make bottom-line outcomes more positive relative to the expense of doubled fertilizer input costs, he said.

Minimize risks, maximize efficiencies

The challenge for producers will be to minimize risks associated with higher input cost commitments and maximize pricing opportunities on the marketing side, Welch said.

Efficient application of fertilizer will be an important component to budgeting this season, he said. He recommends assessing available soil nutrients through rigorous testing and pinpointing fertilizer needs. 

Producers should also consider split applications and timing fertilization in ways that maximize crop progress and avoid degradation by environmental conditions, including rainfall events, he said. Establishing nitrogen-fixing cover crops this winter may also be a good investment this year.

“This is a year where management decisions now could help budgeting in the future and ultimately the margins,” he said. “Whether it’s crop rotations, cover crops, extensive soil testing or limiting applications based on timing and need, producers will want to be as efficient as possible with their resources.”

Plan for 2022 management, marketing now

On the crop management side, Welch said it may be a good idea to buy fertilizer for future needs – or, if possible, approach dealers to lock in prices and supplies due to high prices and potential availability concerns.

“Higher prices are one thing, but getting fertilizer when and where you need it, that is an entirely different concern that isn’t very predictable,” he said. “Whether logistical issues like shipping or trucking problems might weigh into supply shortages, that is an unknown at this point.”

Welch said the U.S. imports nitrogen fertilizers from countries such as Canada, Trinidad-Tobago, Russia and Qatar, but he has no recent data on how much national consumption is reliant on other nations. From 2015-19, the U.S. increased ammonia nitrogen fertilizer production and imports declined based on favorable domestic natural gas prices and strong corn production. 

On the crop marketing side, Welch said locking in contracts at current prices could reduce risks associated with potential price dips in futures markets. Crop success in the Midwest drives U.S. production. However, other nations like Brazil can impact overall supplies while demand is driven by China’s increased need for feed as it rebuilds its swine herd. 

“Grain stocks are still very tight, and the demand factor appears to be steady,” he said. “The U.S. crop did well this season, and Brazil is expecting a record crop following a very short crop last season. The question is where prices will go from here, and producers need to be considering that now and factor it into their budgets.”

This article was written by Adam Russell and is courtesy of Texas A&M AgriLife. For more information, visit agrilife.org.