Author: Andrew Wright

Over the last few years, producers have been challenged to balance decreasing commodity prices against high input costs. One of the major factors contributing to this challenge has been above-average fertilizer prices. In 2021 and 2022, a combination of increased demand for fertilizer and disruptions to fertilizer production and supply caused prices to double or, in the case of anhydrous ammonia (NH3), triple in a few months (Figure 1), reaching record highs. The good news is that nominal fertilizer prices decreased throughout 2023 and 2024 as these shocks were largely corrected. In the first half of 2023, prices decreased by 20%-40%, depending on the product, from their 2022 highs. Prices largely declined in 2024 until the last quarter of the year. Since then, prices for most fertilizer products have either remained stable or increased.

Of course, the cost of fertilizer depends not only on the price of fertilizer but also on the price of the commodity the fertilizer is used to grow. It’s much easier for producers to purchase fertilizer when they can sell corn for $7/bushel, as opposed to $4/bushel, regardless of the nominal fertilizer price. Figures 2 and 3 illustrate the price of urea relative to corn and cotton prices for the years 2020-2024. Fertilizer prices used to calculate these ratios come from DTN Progressive Farmer’s weekly average fertilizer price updates. Cotton and corn prices use the weekly closing price for the nearby December contract as reported in Texas A&M AgriLife Extension Economics Basis Data and by Barchart.com.  

Figure 2 illustrates the total bushels of corn required to purchase one ton of urea in each month of the series. Figure 3 shows the total pounds of cotton lint required to purchase one ton of urea each month. From January 2020 until August 2021, producers needed an average of 98.02 bushels of corn or 577.80 pounds of cotton lint to purchase 1 ton of urea. From September 2021 through December 2022, when fertilizer prices reached their highest levels, one ton of urea cost an average of 135.72 bushels of corn or 836.61 pounds of cotton lint. From January 2023 through December 2024, as fertilizer prices fell, one ton of urea was worth 117.40 bushels of corn or 719.26 pounds of cotton lint on average.  

Now, what about relative fertilizer prices in 2025? For the week of January 13-17, DTN Progressive Farmer reported an average price of $492/ton of urea. During that same week, the average price for the Dec ’25 corn contract was $4.56/bushel, and the average price for the Dec ’25 cotton contract was $0.69/pound, according to Barchart.com. This gives us a urea-corn price ratio of 107.92 bushels/ton and a urea-cotton ratio of 711.25 pounds/ton. To put these values into perspective, this urea-corn ratio is similar to the June 2020 ratio and about 0.83 bushels/ton less than in January 2024.  The urea-cotton ratio, on the other hand, is about 52.32 pounds/ton higher than in January 2024, and similar to June and July of last year.  

Currently, fertilizer is slightly cheaper relative to corn prices and slightly more expensive relative to cotton prices when compared to a year ago.  Looking forward, nominal fertilizer prices have been mostly stable since July of last year.  Should this trend continue, changes in relative fertilizer prices this year will depend on how farm commodity prices change. 

Figure 1.  Weekly Retail Prices for Selected Fertilizer Products, 2020-2024

Figure 2. Monthly Urea-Corn Price Ratio, 2020-2024

Figure 3. Monthly Urea-Cotton Price Ratio, 2020-2024

Sources:

Corn Historical Prices.  Barchart.com, https://www.barchart.com/futures/quotes/ZCZ25/historical-prices?orderBy=contractExpirationDate&orderDir=asc. 

Cotton #2 Historical Prices. Barchart.com, https://www.barchart.com/futures/quotes/CTZ25/historical-prices?orderBy=contractExpirationDate&orderDir=asc. 

DTN Retail Fertilizer Trends.  DTN Progressive Farmer, https://www.dtnpf.com/agriculture/web/ag/crops. 

Texas A&M AgriLife Extension Agricultural Economics Basis Data, https://agecoext.tamu.edu/resources/basis-project/basis-data. 

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Wright, Andrew. “Fertilizer Prices: What Can We Expect in 2025?” Southern Ag Today 5(6.1). February 3, 2025. Permalink

A “triple threat” of low commodity prices, high input costs, and high interest rates creates a challenging financial environment for many producers.  This is especially true for producers with little working capital and who rely on operating loans to finance their business activities.  The good news is that one part of this “triple threat” may soon begin to ease.  

The Federal Reserve began raising the federal funds rate in the first quarter of 2022 in response to rising inflation (see Figure 1).  This started a series of rate increases that ended in August 2023.  Since, then, the federal funds rate has held steady at 5.33%.  As the federal funds rate increased, interest rates charged on agricultural loans went up from about 5% to around 9% (Figure 1). 

However, in a speech on August 23, 2024, Federal Reserve Chair Jerome Powell indicated that the Federal Open Market Committee (FOMC) would begin to lower the federal funds rate, perhaps as early as their September meeting.  As the FOMC lowers the federal funds rate, other interest rates will begin to fall as well.  This will be a welcome reprieve for producers as the cost of borrowing to finance operations decreases.  It also provides producers with opportunities to manage the debt they have incurred over the last few years at high interest rates.  Two strategies that producers might use as interest rates fall are debt refinancing and debt consolidation.

When debt is refinanced, an existing loan is replaced by a new loan with different terms and conditions for repayment.  The new loan pays off the remaining principal plus any accrued interest that is still owed on the old loan.  The amount that is paid off becomes the principal owed on the new loan.  Payments are then made on this new loan, ideally with lower periodic payments.  Debt consolidation is a form of refinancing in which multiple debts are combined into a single loan.  The new loan pays off the remaining principal and any accrued interest on all the old loans, and the amount that is paid off becomes the principal owed on the new loan.

The primary benefit of refinancing or consolidating debt is smaller monthly or periodic payments, which occurs for two reasons.  First, refinancing or consolidating debt often involves extending the debt’s repayment period.  The amount owed is paid back over a longer period than the original loan(s) terms allowed for, so payments in each month are less.  Second, refinancing or consolidating debt as interest rates decrease means the new loan should charge less in interest monthly than was charged on the old loan(s).  The potential results of this benefit include improved monthly cash flow and an easier time making regular payments on debt.

Before a producer considers either of these strategies to help manage their debt, it is important to consider the potential pitfalls of refinancing or consolidation.  First, extending the loan payment period may incur higher total interest costs.  Although the amount owed in any single period is less, the fact that the loan principal is paid back over a longer time means interest accrues for longer as well.  Therefore, there may be a tradeoff between lower periodic payments and higher overall costs for the loan.  A second pitfall to consider is the closing costs and fees the producer must pay to initiate the new loan.  Producers should consider whether they can pay these costs, and whether incurring these costs are worth any benefits of refinancing or consolidation, before initiating either process with their lender.  Ultimately, producers will need to consult with their lenders to determine what refinancing or consolidations options are available to them and whether these options will be beneficial in the long run.

Figure 1.  Changes in the Inflation rate, the Federal Funds Rate, and the Unemployment Rate, January 2018-February 2024 

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References

Board of Governors of the Federal Reserve System (US), Federal Funds Effective Rate [FEDFUNDS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/FEDFUNDS, April 1, 2024.

Board of Governors of the Federal Reserve System (US), Agricultural Survey, retrieved from the Federal Reserve Bank of Dallas; https://www.dallasfed.org/research/surveys/agsurvey/2024/ag2401#tab-report.

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Wright, Andrew. “Lower Interest Rates Create Opportunities for Managing Debt on the Farm.” Southern Ag Today 4(37.3). September 11, 2024. Permalink

In March 2022, the Federal Reserve began raising interest rates at an aggressive pace to fight rising inflation.  Now, two years later and with inflation near the Federal Reserve’s target rate, the question on most of our minds is, will the Federal Reserve begin to bring interest rates down this year?

The Federal Reserve enacts monetary policy in the United States with the dual mandate of 1) keeping inflation low and stable and 2) maintaining full employment in the economy.  To achieve these goals, the Federal Reserve’s main policy tool is to adjust the federal funds rate or the rate at which banks in the Federal Reserve System lend to one another overnight.  This rate is set by the Federal Open Market Committee (FOMC), which meets eight times each year (roughly every six weeks) to determine if any change in the federal funds rate is warranted.

Figure 1 below shows how the federal funds rate has changed in comparison to the inflation rate, measured using the Personal Consumption Expenditure index (PCE), and the unemployment rate.  From March 2022 until August 2023, the FOMC increased the federal funds rate every time they met.  Since then, they have held interest rates steady between 5.25% and 5.50%.

Figure 2 below shows how increases in the federal funds rate have impacted the cost of borrowing.  Since March 2022, the bank prime rate has increased from 3.25% to 8.50%.  Rates for variable rate agricultural loans, as reported by the Federal Reserve Bank of Dallas Agricultural Survey, have followed a similar trend.  Interest rates reported in the survey for the first quarter of 2024 were roughly 9.50% for operating loans, 9.27% for intermediate loans, and 8.88% for long-term farm real estate loans.  

Whether or not the FOMC begins to ease interest rates this year will depend largely on whether the inflation rate continues to decline.  As shown in Figure 1, the rate of overall inflation in February 2024 was 2.5%.  The core inflation rate, which excludes food and energy expenditures, was slightly higher at 2.8%.  The Federal Reserve’s target rate for inflation is 2.0%.  

It seems clear from the figure that the FOMC’s aggressive rate increases have been successful in taming inflation; however, inflation remains above the Federal Reserve’s target rate.  Perhaps more concerning, at least from the perspective of the FOMC, is that the rate at which inflation is decreasing has slowed over the past year.  In fact, the inflation rate essentially remained unchanged from December 2023 through February 2024.

It is unlikely that the FOMC will bring interest rates down if inflation remains above the Federal Reserve’s target rate.  However, FOMC members have given no indication that they intend to raise interest rates above their current levels to achieve that goal either.  In the short term, the safe bet seems to be to expect interest rates to hold steady at or near where they are now.  Two caveats to this prediction are unexpected changes in either the inflation rate or the level of employment in the U.S. economy.  Should the inflation rate begin to move upward, the FOMC may decide they have no choice but to resume interest rate increases.  Alternatively, signs that indicate the U.S. economy is entering a recession would pressure the FOMC to begin lowering interest rates despite greater-than-desired inflation.  

According to the Federal Reserve’s description of its monetary policy goals, the Fed does not specify a numerical goal for employment like it does for inflation; therefore, it is difficult to predict what specific economic conditions would encourage the FOMC to ease interest rates prematurely.  One employment indicator that the FOMC will pay attention to as it makes interest rate decisions is the unemployment rate.  An unexpected increase in the unemployment rate could indicate that the economy is entering a recession.

The most recent estimate from the Bureau of Labor Statistics places the unemployment rate at 3.8%, which is below the 30-year average and in line with the long-term projections made by FOMC members.  Furthermore, the unemployment rate has held steady at or near pre-pandemic levels even as interest rates have increased (Figure 1).  Based on this data, it appears that high interest rates have had little impact on employment, at least up to this point.  Should this continue, the chance that the FOMC will vote to decrease interest rates before they reach their inflation target is small.       

Figure 1.  Changes in the Inflation rate, the Federal Funds Rate, and the Unemployment Rate, January 2018-February 2024 

Figure 2. Changes in the Federal Funds Rate, Bank Prime Rate, and Selected Agricultural Loan Rates, Q1 2018-Q1 2024

References

U.S. Bureau of Labor Statistics, Unemployment Rate [UNRATE], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/UNRATE, April 5, 2024.

Board of Governors of the Federal Reserve System (US), Bank Prime Loan Rate Changes: Historical Dates of Changes and Rates [PRIME], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/PRIME, March 27, 2024.

Board of Governors of the Federal Reserve System (US), Federal Funds Effective Rate [FEDFUNDS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/FEDFUNDS, April 1, 2024.

Board of Governors of the Federal Reserve System (US), Median Personal Consumption Expenditures Inflation, retrieved from the Federal Reserve Bank of Cleveland; https://www.clevelandfed.org/indicators-and-data/median-pce-inflation.

Board of Governors of the Federal Reserve System (US), Agricultural Survey, retrieved from the Federal Reserve Bank of Dallas; https://www.dallasfed.org/research/surveys/agsurvey/2024/ag2401#tab-report.

Board of Governors of the Federal Reserve System (US), Monetary Policy Principles and Practice, Monetary Policy: What Are Its Goals?  How Does It Work.  Retrieved from: https://www.federalreserve.gov/monetarypolicy/monetary-policy-what-are-its-goals-how-does-it-work.htm

Board of Governors of the Federal Reserve System (US), March 20, 2024: FOMC Projections Materials, Accessible Version.  Retrieved from: https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20240320.htm