Category: Crop Marketing

Fertilizer prices have come down from the peak in April 2022 (Figure 1), however fertilizer prices remain elevated compared to 2017 through 2020. In 2021 and 2022, high fertilizer prices coincided with high corn prices, resulting in positive profit margins for many producers, especially those that were not affected by adverse weather. Since August 2022, Henry Hub Natural Gas Prices have declined sharply. Natural gas is a key input in the production of nitrogen fertilizer accounting for 70-90% of variable production costs (Outlaw et al. 2022). Two important questions for many producers are how related are these prices and how does this relationship potentially impact profitability in 2023? To examine this, we look at the historical relationship between corn, urea, and natural gas prices.

Figure 1. Weekly Urea, Natural Gas, and Nearby Corn Futures Price, January 2, 2017, to March 27, 2023

Nitrogen, natural gas, and corn prices are positively correlated (correlation describes the strength of an association between two variables, positive correlation indicates that prices move in the same direction, negative correlation indicates prices move in opposite directions; correlation coefficients have values between -1 and 1). Examining weekly price data from January 2017 to March 2023, natural gas and urea prices were positively correlated (0.738), natural gas and corn prices were positively correlated (0.668), and urea and nearby corn futures prices were positively correlated (0.906).  All three variables are strongly positively correlated. However, there are event-based anomalies in the data that create temporary deviations in the relationship between prices. For example, natural gas prices briefly spiked in February 2021 during a winter storm that strained natural gas and electricity markets in Texas and Oklahoma (USEIA, 2022). It is also important to note that correlation does not indicate causation. In other words, a higher natural gas or urea price does not necessarily cause higher corn prices, and vice versa.  However, the takeaway from this figure and correlations for natural gas, corn, and urea prices are they tend to move in the same direction. 

Over the past year, natural gas and urea prices have decreased substantially from recent highs. Urea prices have fallen from $1,031/ton to $626/ton (down 39%) and natural gas prices have fallen $9.56 to $2.01 (down 79%). Nearby corn prices have decreased from $8.13 ½ to $6.60 ½ (down 19%). Based on the realized decline in natural gas prices, the downward trend in urea prices, and the historical correlations above, further weakness in corn futures prices may occur in 2023. There are many factors that will influence corn (and other commodity) prices, such as weather and geopolitical uncertainty, however decreased prices for natural gas and urea provides some indication that weaker corn prices may occur in the not-too-distant future. 

From a profitability standpoint for the 2023 crop year, many producers locked in fertilizer prices last fall or early in 2023. In general, those that priced earlier will have higher fertilizer costs than those that priced later. Producers that have locked in fertilizer prices for the 2023 crop may want to consider locking in futures prices for a portion of their crop to avoid a margin squeeze should corn prices decline.

References:

Barchart.com. Nearby Corn Historical Weekly Closing Prices. Accessed at: https://www.barchart.com/futures/quotes/ZCK23/historical-download

Outlaw, J.L., B.L. Fischer, H.L. Bryant, and J.M. Roulston. 2022. “Economic Impact of Nitrogen Prices

on U.S. Corn Producers”.https://fj-corp-pub.s3.us-east-2.amazonaws.com/inline-files/Economic%20Impact%20of%20Nitrogen%20Markets%20on%20U%20HB-1.pdf

U.S. Energy Information Administration. 2023. Natural Gas. Data. Henry Hub Natural Gas Prices. Accessed online at: https://www.eia.gov/dnav/ng/hist/rngwhhdW.htm

U.S. Energy Information Administration. 2022. TODAY IN ENERGY. Accessed online at: https://www.eia.gov/todayinenergy/detail.php?id=50778

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Smith, Aaron, and Christopher Boyer. “Urea, Natural Gas, and Corn Price Correlations.” Southern Ag Today 3(18.1). May 1, 2023. Permalink

In 2022, the U.S. had a sizable decrease in peanut acreage, as farmers shifted cropland to more cotton acres across the region. This was likely due to price pressure from other crops around planting time in 2022, most notably cotton. However, with the average peanut price received by farmers projected to reach a ten-year high for the 2022/2023 marketing year – at an estimated $540 per ton – what is peanut acreage expected to look like in 2023?

The USDA projects planted peanut acres to increase by 7%, reaching 1.547 million acres nationwide in 2023 (figure 1).^[i] This increase in projected peanut acreage comes as prices for other crops have dropped. As of April 20^th, December 2023 cotton futures closed at 80.58 cents per lb, which is 40.44 cents per lb less than what December 2022 cotton futures were traded at on the same date last year. The rise in peanut acreage is driven by forecasted increases in two of the three peanut-producing regions – the Southeast and Virginia-Carolina. None of the peanut producing states in these two regions are expected to see declines in planted acreage compared to last year. Georgia is projected to lead the way with 740 thousand planted peanut acres, which would mark an 8% increase from 2022. Conversely, the three peanut-producing states in the Southwest region are all expected to decrease acres planted to the crop in 2023, which has possibly come at the expense of their large increases in wheat acreage this year. 

Figure 1. 2023 U.S. Intended Peanut Planted Acres Compared to Previous Year, by State

Now, how accurate have peanut planted acreage forecasts been in recent years? Over the past decade, the error in peanut projections has been relatively small. The final peanut planted acreage estimate has exceeded the intended planted acres forecast in four out of the last nine years, by an average of 2.2%. For example, peanut planted acreage ended up being 7.7% lower than was predicted in 2022, as shown in figure 2. The accuracy of the intended peanut plantings is similar to those for rice and cotton – two other predominantly Southern crops – which are typically less accurately predicted than nationwide crops, such as corn and soybeans.^[i]

Figure 2. U.S. Peanut Intended Planted Acres vs. Final Estimates, 2019-2023

With peanut prices elevated for last year’s crop, it remains uncertain how increased planted acreage would affect peanut markets moving forward. Last year’s decrease in peanut acreage led to an almost 400-thousand ton drop in peanut production.^[i] While peanut acreage is expected to be above last year’s level, the forecasted mark would fall short of what was planted in 2020 and 2021. Coupled with the lower expected peanut consumption this current marketing year, a bumper crop could see peanut stocks soar and prices decline during the 2023/2024 marketing year, whereas a more moderate crop could see stocks remain at a similar level to where they are currently. In all, combining the projected higher peanut production with the lower competition from other crops, it is likely that peanut contract prices for this year’s crop will decrease.

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^[i] Sawadgo, Wendiam. “2023 Peanut Market Outlook.” Southern Ag Today 3(8.1). February 20, 2023. Permalink

^[i] Biram, Hunter, and William E. Maples. “Key Takeaways and Reliability of the 2023 Prospective Plantings Report.” Southern Ag Today 3(14.1). April 1, 2023. Permalink

^[i] USDA-NASS. Prospective Plantings. March 31, 2023.  Available at: https://downloads.usda.library.cornell.edu/usda-esmis/files/x633f100h/rv044597v/gx41nz573/pspl0323.pdf

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Sawadgo, Wendiam. “Peanut Acreage Projected to Increase in 2023.” Southern Ag Today 3(17.1). April 24, 2023. Permalink

Photo by Marina Leonova: https://www.pexels.com/photo/close-up-shot-of-peanuts-7717463/

The USDA February 2023 Cotton Outlook projects world cotton consumption bottoming at 110.7 million bales for the current 2022/23 marketing year.  They then forecast 2023/24 consumption recovering to 115.5 million bales due to: 1) post-Covid reopening in China with increasing GDP, 2) lower Chinese production and greater need for Chinese imports, and 3) an “unusual inventory dynamic” of pent-up cotton demand following previously Covid-disrupted deliveries of cotton textile goods.  Other bullish influences for cotton consumption include the competitively low prices of raw cotton, which appear to have translated to higher levels of U.S. cotton exports since January.

Beyond China, world GDP is also currently forecasted by the International Monetary Fund to rise slightly to 2.9% (Figure 1, dashed green line).  This is important to the cotton market because cotton consumption tends to rise with economic growth and fall with economic declines.  For example, the blue line in Figure 1 shows world cotton consumption ranging between about six and eight pounds per person per year.  The peaks and valleys of per capita cotton consumption coincide with the respective trends of world GDP.  This is not surprising since cotton-made apparel and home furnishing products are both semi-durable and somewhat discretionary.  

Growing expectations of stronger economies, increasing mill use, and stronger export demand are, in turn, bullish influences on ICE cotton futures.  In the near term, they could contribute to stronger old-crop prices, especially if the current hedge fund net short position is liquidated in a short covering rally.

There are, of course, counter influences. First, a bullish demand response would be somewhat self-correcting as mills generally buy less cotton at higher prices. It remains to be seen how long and how high the “unusual inventory dynamic” will push cotton prices.  In addition, there is a potential macro-economic risk shrinking the demand curve and putting downward pressure on prices.  The latter could result from strong recessionary influences due to high interest rates as central banks continue their attempt to lower inflation to target levels.  

Figure 1. World Per Capita Cotton Use and Global Economic Growth

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Robinson, John. “Competing Influences and Expectations for World Cotton Demand.” Southern Ag Today 3(16.1). April 17, 2023. Permalink

Photo by Pixabay: https://www.pexels.com/photo/full-frame-shot-of-cracked-pattern-255509/

Although the Russian war with Ukraine has been pinpointed as the leading cause of high fertilizer prices, the price of nitrogen fertilizer began to increase in May of 2021, long before Russia invaded Ukraine on February 24, 2022. The increases in fertilizer prices in 2021 were caused by supply and demand factors. On the supply side, increases in natural gas prices and shipping costs likely influenced fertilizer prices (Smith, 2022). Additionally, corn futures prices increased drastically in May 2021, incentivizing farmers to apply more nitrogen per acre. Following nitrogen application, fertilizer prices dropped slightly before increasing again in February of 2022 due to the Russian invasion of Ukraine, which caused supply chain disruptions in nitrogen fertilizer exports. Since September, fertilizer prices have dropped significantly. In this article, we reframe fertilizer prices to look more closely at the recent declines in fertilizer prices. Specifically, we focus on the fertilizer price to new crop corn futures ratio. Using this ratio, we can frame fertilizer prices in a form allowing us to account for fertilizer and corn prices.

Figures 1, 2, and 3 show the plotted ratio of fertilizer price to new corn futures ratio for NH3, urea, and UAN from 2020 to early March of 2023, respectively. Unsurprisingly for all three commodities, the lowest ratios occurred before the price increases in 2021. Following the 2021 price increases, the impact of the Russian-Ukrainian war sustained an already high nitrogen price. The red line in each graph depicts the 2023 nitrogen price relative to the price of corn. For UAN and urea, the ratio of fertilizer to new crop corn price has fallen below the 5-year average levels, whereas the price of NH3 is still slightly above the 5-year average. These results may indicate that ammonia fertilizers are still unreasonably high due to Russia being the second largest NH3 exporter, behind Trinidad and Tobago (World Bank, 2021). 

Figure 1. NH3 (Anhydrous Ammonia) Price Relative to New Crop Corn Futures

Figure 2. Urea Price Relative to New Crop Corn Futures

Figure 3. UAN Price Relative to New Crop Corn Futures

As the ratio for NH3 remains above the five-year average, it may be time to look at alternative nitrogen sources. One nitrogen source of interest is urea, the nitrogen source furthest under the 5-year average. The average price of nitrogen/pound of urea is historically higher than that of NH3. However, this season, the current price per pound of nitrogen from both sources is similar, making the switch from NH3 to urea more appealing. If in-season nitrogen application is needed, the relative price of urea is historically lowest in June. However, it is worth noting that an escalation in Ukraine or a discontinuation of the Black Seas Grain Deal would likely cause the price of each nitrogen source to increase.

Sources:

Smith, Aaron. “The Story of Rising Fertilizer Prices.” Aaron Smith, March 2, 2022. https://asmith.ucdavis.edu/news/story-rising-fertilizer-prices.

World Integrated Trade Solution. “Ammonia; Anhydrous Exports by Country |2021.” World Bank. Accessed March 20, 2023. https://wits.worldbank.org/trade/comtrade/en/country/All/year/2021/tradeflow/Exports/partner/WLD/product/281410.

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Gardner, Grant, and Hunter Biram. “Rethinking Fertilizer Prices.” Southern Ag Today 3(15.1). April 10, 2023. Permalink

Photo by Todd Trapani: https://www.pexels.com/photo/corn-field-1382102/

On Friday, March 31^st, USDA released the Prospective Plantings report. These acreage estimates are based primarily on surveys conducted by the National Agricultural Statistics Service (NASS) during the first two weeks of March. Principal crop acres planted were projected nationally at nearly 312 million acres, up roughly six million acres compared to last year. Corn acres are estimated at 92.0 million, up 3.42 million from last year. Soybean planted acres are estimated at 87.5 million, up slightly from last year by 55 thousand acres. Cotton acres are projected to be down 18% from last year, at 11.3 million acres. Peanut acreage is projected at 1.55 million acres, up 7% from last year, and rice area is projected at 2.58 million acres, up 16% from last year. All wheat acreage is projected at 49.86 million, up 9% from last year. Projections from the Prospective Planting results are comparable to recent projections released at the February USDA Outlook Forum which had March projections calling for 1 million more acres of corn, no difference in soybean acres, and 500,000 fewer acres of cotton. 

The market expected more corn acres in 2023 compared to last year. Corn plantings were held back in 2022 due to high fertilizer prices, which have been alleviated slightly, allowing for a rebound in acreage.  Cotton was expected to struggle to retain acres this year due to struggling demand and lower prices compared to other commodities. Every state, besides Arizona, is projected to remain steady or see a decrease in cotton acreage from last year. Rice acres are seeing a rebound on higher prices, but a forecast of wet weather in the Midsouth over the next couple of weeks could lower plantings. Price reaction from the report was mixed, with harvest contract corn unchanged, soybeans 10-15 cents higher, cotton 0.40 cents lower, and rice unchanged.

How reliable are the March prospective planting numbers? The NASS planted acreage projections across the U.S. generally hold well with low predictive error and hold especially well for corn and soybeans (Figure 1). There appears to be a larger error, albeit still quite small, when predicting planted acreage for cotton and rice. This is likely for two reasons stemming from the fact that cotton and rice are grown primarily in southern states.  The larger variance can be due to (1) the smaller sample size of farms and (2) the alternative crops available to plant in place of corn and soybeans. Most of the U.S. corn and soybean acreage is grown in the upper Midwest but tends to take up acreage across the entire U.S. which allows for a larger sample of farmers and less variance. In the south, farmers rotate corn and soybean crops with cotton, peanuts, and even some vegetables.  This makes it more difficult to project acres that may shift based on rotational needs, commodity prices, input costs, and weather.  

One way to investigate the difficulty in projecting acreage is by choosing the subsample of southern states to see if 1) there is more variance across the changes in corn and soybean acreages given a smaller sample and 2) the pattern of acreage changes across cotton and rice still holds in the subsample. We find this to be true (Figure 2). We see more differences each year between prospective and actual planted acreages in corn and soybeans across southern states, and the general pattern of differences each year for cotton and rice still holds between the full U.S. sample and the southern subsample. This implies that we should generally not expect any significant changes in harvest price expectations driven by differences in planted acreages but rather look to future market-moving events.

Figure 1. Comparison of Prospective vs. Actual Planted Acreage across the U.S. (2014-2023)

Figure 2. Comparison of Prospective vs. Actual Planted Acreage across Southern^[1] States (2014-2023)

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^[1] States included are Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, Virginia.

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Biram, Hunter, and William E. Maples. “Key Takeaways and Reliability of the 2023 Prospective Plantings Report.” Southern Ag Today 3(14.1). April 1, 2023. Permalink