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Crop Input Price Surge Predicted For 2012

published: November 14th 2011
by: Jane Fyksen
source: Agri-View

In today's volatile markets-even before they put this year's harvest to bed-most producers already have an eye on the 2012 season. So do experts at Purdue University and Ohio State University, who are warning of a crop input price "surge" next year.

Growing an acre of corn, soybeans or wheat in 2012 will cost producers considerably more than it did this year, says Purdue's Alan Miller, citing farmland rents and volatile fertilizer prices as the two primary drivers of the anticipated higher crop production costs next year. Miller expects seed prices to be up anywhere from 5 percent to 10 percent in the coming year, while pesticide prices are anticipated to vary by product.

"Preliminary budgets show variable costs for rotation corn increasing by 16 percent, soybeans by 15 percent and wheat by 12 percent as compared with our January 2011 budgets," Miller notes.

Miller, who teams up on the 2012 outlook with Purdue agronomist Bruce Erickson, cites September 2011 survey information from Illinois fertilizer retailers showing anhydrous for all application at $790 to $890 a ton, diammonium phosphate (DAP) at $680 to $725 and potassium running $580 to $665. "All of these are more than $100 a ton higher than in September 2010, which means their price per pound of nutrient is significantly higher," notes Miller. "Our budget projections for 2012 put corn fertilizer expenses in the $165 to $211 per acre range, depending on previous crop, soils and other factors (includes N as well as P, K and lime replacement).

"The U.S. fertilizer market is strongly tied to the worldwide situation since more than 55 percent of nitrogen and 81 percent of potash used in the U.S. is imported, and the U.S. exports 44 percent of its phosphorus production. The costs to produce and transport fertilizers are highly energy dependent and thus tied to energy costs. Current energy costs for fertilizer producers are mixed, with energy costs overall remaining high but the cost of natural gas, used extensively for N production, declining in recent years," this Purdue pair reports.

"The optimal rate of a fertilizer to apply is influenced by: cost of the fertilizer, the value of the crop, and other factors. For nitrogen fertilizer on corn, a higher ratio of N price to corn price shifts the economically optimum N rate lower," they say. They offer the following: 2010-N at 30 cents per pound, corn price at $4.20 a pound, N price/corn price ratio of 0.07; 2011-N at 49 cents, corn at $5.54, N to corn ratio of 0.09; projected for 2012-N at 54 cents, corn at $5.50, N to corn ratio of 0.10.

Looking at the numbers for fertilizer costs, Miller suggests growers might consider building fertilizer storage to capitalize on pricing opportunities throughout the year.

"I think that could definitely pay off for farmers," he states. "Whether it's liquid, anhydrous ammonia, or even dry, I think producers who have the opportunity to work with their lenders or self-finance can really take advantage of buying opportunities in the fertilizer market to lower those average input costs for the year. I think we can certainly see the return on investment, just as much as storage of commodities."

Per-acre seed prices-after quantity, early-pay and other incentives-are projected to be up for 2012 to $87 to $107 per acre for hybrid corn in this pair's budgets and $62 per acre for genetically modified soybeans.

Prices for herbicides, insecticides, and fungicides have been relatively flat in recent years, say Miller and Erickson. Prices for glyphosate-based herbicides fell in 2010 and again lower this year, and that isn't expected to change substantially for 2012. "It will be a mixed bag for other pesticides, depending on each particular market, but the overall trend appears relatively flat," they state.

The Energy Information Administration predicts gasoline and diesel fuel prices to remain relatively flat going into 2012, too, following the steep uptick that occurred from 2010 to 2011. The expectation is that next year crude oil, gasoline and diesel will be flat to lower in terms of prices. Other energy products like heating oil, natural gas and electricity should stay flat or see only minor increases. Natural gas is expected to see the largest increase in price at 4.5 percent above last year.

Farm machinery expenses have been increasing in recent years. Sales of smaller tractors across the industry continue to be affected by lingering housing and construction woes, but larger horsepower tractor and combine sales remain strong, the Purdue agronomist and economist remark. Precision-farming purchases remain strong as growers seek more efficiency with high-priced crop inputs; they're referring to planter unit controls and sprayer boom section and nozzle controls that minimize overlaps in planting/spraying/fertilizing in turn rows, point rows and along waterways and field borders.

Even with input costs up in 2012, Miller says farmers can begin to manage their profit margins now, such as pricing their fertilizer for next year. Fertilizer prices are lower this fall than they are expected to be next spring, he stresses.

He also thinks growers should be looking at cash rents. "It's hard to figure out a fair amount of cash rent, especially in an environment with so much potential for quick commodity price declines and input price surges," he admits. "We don't want to see another 2009 where grain prices dropped, costs increased and profitability disappeared. It's a challenging risk management environment for the farmers."

For cash rents, he says flexible lease agreements could help both growers and landowners in today's volatility. "Try to help landowners understand the market and the volatility," Miller suggests. "Possibly look at flexible lease agreements instead of locking in cash rents in case inputs increase and commodity prices stay where they are at now or fall even further."

He urges farmers to be cautious and to try to hold down costs by thinking through all of their purchases, "working on being low-cost producers on a cost-per-bushel-produced basis. Lock in profit margins and don't give up marketing strategies."

The bottom line, Miller contends, is that producer vulnerability is a concern heading into 2012. Growers need to be proactive in managing their input pricing because input prices could rise even more if crop price prospects improve in the spring.

While input prices are up, markets are still signaling that they want more corn in 2012, which could influence producers' planting decisions. It also means producers may need more fertilizer, says Barry Ward, leader of the Production Business Management program at Ohio State University. "The way fertilizer prices have been moving, it's been purely demand driven," he maintains. "With worldwide crop prices being high, fertilizer prices are staying relatively well correlated with commodity prices."

That correlation is the market's way of telling farmers "not to skimp on fertilizer," reports Ward. He points out that farmers in the U.S. compete with agricultural sectors in competitive countries like Brazil and China for many crop inputs, but especially for fertilizer, and demand drives the cost of the product.

Both universities offer resources to help farmers budget for the coming crop year. OSU has a series of free farm management enterprise budgets that can be downloaded at http://aede.osu.edu/programs/farmmanagement/budgets. The budgets (for corn, beans and wheat) are periodically updated when large changes in price or costs occur.

The "2012 Purdue Crop Cost and Return Guide" (ID-166) is available for free download www.ces.purdue.edu/new.