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  • Relative Price of Nitrogen

    Relative Price of Nitrogen

    The last couple of weeks, we have focused on the rise in fertilizer prices.  Today, we are highlighting nitrogen price trends in the context of relative prices.  Historical highs for nitrogen at $1,000/ton were reached in the summer of 2008.  Of course, those levels have been reached and even surpassed recently.  Other nitrogen price peaks occurred in 2011, 2012, and again in 2014.  But are these the “most expensive” fertilizer prices farmers have paid?  The answer depends on the crop you are producing. 

    Figure 1 below illustrates how fertilizer (nitrogen) typically follows corn price.  Nitrogen and corn prices dating back to January 2000 are converted to an index of the respective series average (series average = 100%).  The green line is the monthly index for the nearby Dec Corn Contract, while the red line represents a monthly spot price index for nitrogen.  The black area shows the relative value of fertilizer measured in bushels of corn.  For a corn producer, fertilizer is most expensive when it takes more corn to pay for it.  Examining the relative price history, the fertilizer highs back in 2001, 2003, and 2005 were far more significant than they might first appear.  Driven more by natural gas prices in that era, rising fertilizer coincided with flat or even falling corn prices.  In November of 2005, a ton of nitrogen fertilizer was worth a series high of almost 250 bushels of corn.  High nominal prices in 2011 and 2012 were accompanied by higher corn and the relative fertilizer value was closer to the more affordable 20-year average of 110 bushels per ton of nitrogen.  In 2014 corn price fell quickly, while nitrogen held steady resulting in a relative value increase to almost 200 bushels.  

    Figure 1. Relative Prices (Nitrogen / Corn) 

    Cotton producers have faced a slightly different history because fertilizer is less connected to cotton price.  Figure 2 illustrates the cotton and nitrogen price relationship.  The relative value of nitrogen, measured in pounds of cotton, most often follows the nominal price of nitrogen.  For the 20-year series, the average value of nitrogen was roughly equal to 620 pounds of cotton.  While short-lived, the 2008 nominal price peak for fertilizer also represents the most expensive fertilizer value measured by equivalent pounds of cotton at almost 2,000 pounds.  With all prices riding the same wave in 2010-11, the relative nitrogen value held steady at around 500 pounds of cotton per ton of nitrogen.  Cotton prices retreated over the next 5-6 years, translating into a sustained period of relatively expensive fertilizer value which twice rose above the mark of 1,000 pounds of cotton per ton nitrogen.  

    Figure 2. Relative Prices (Nitrogen / Cotton) 

    The chart data stops in December of 2021, so where do relative values stand today?  Since 2000, only twice has the relative value of nitrogen exceeded 200 bushels of corn.  With corn at $5.75/bu. and nitrogen around $1,200/ton, the relative nitrogen value is 208 bushels.  Similarly, a ton of nitrogen has rarely been valued at over 1,000 pounds of cotton, and today the value is closer to 1,200 pounds of cotton assuming a $1.00/lb. cotton price.  Yes, commodity prices are higher and may offset some of the increased fertilizer prices.  However, even relative nitrogen values are approaching all-time highs in this incredibly challenging environment.  

    Reference: 

    Outlaw, et al. Economic Impact of Higher Fertilizer Prices on AFPC’s Representative Crop Farms.  Texas A&M University System, Agricultural and Food Policy Center Briefing Paper 22-01. January 2022.  

    Sources: 

    AFPC Briefing Paper 22-01, nitrogen prices compiled from DTN spot market price data for the last trading day of each month. The markets include New Orleans, Corn Belt, Southern Plains, South Central, Southeast and Florida.   Corn and Cotton prices are author compiled of monthly futures prices of nearby harvest month contracts. 

    Recommended citation format: Klose, Steven, and J. Marc Raulston. “Relative Price of Nitrogen.” Southern Ag Today 2(7.3). February 9, 2022. Permalink

  • January 1 Feeder Cattle Supplies Decline 2.6 Percent

    January 1 Feeder Cattle Supplies Decline 2.6 Percent

    One estimate that analysts like to calculate from the Cattle Inventory Report is feeder cattle supplies outside feedlots as of January 1. USDA does not report feeder cattle supplies directly, but it is easy to calculate using other categories in the report. The last row in the table listed below estimates feeder cattle supplies outside feedlots for U.S., Arkansas, Mississippi, and Kentucky, respectively. 

    Using data from the table, adding Other Heifers, Steers 500 Pounds and Over, and Calves Under 500 Pounds (steers, heifers, and bulls) gives the Total Feeder Cattle Supply. Subtracting Cattle on Feed gives Feeder Cattle Supplies Outside Feedlots. As of January 1, 2022, there were 25.5 million head of feeder cattle outside feedlots, a 2.6 percent decline from last year. Arkansas had a significant decrease in feeder cattle supplies, down 9 percent year over year. In Mississippi, feeder cattle supplies were about even with the year prior, while Kentucky had a 5 percent decline. 

    Why did feeder cattle supplies decline so dramatically? Strong fourth-quarter prices, coupled with drought, likely resulted in producers selling cattle that they would have otherwise kept through the winter. For example, Arkansas prices for 500-600 pound steers averaged $163/cwt for Nov-Dec 2021, or 13 percent higher year over year. These high prices provided incentives for producers to sell some cattle earlier. Cattle on feed data showed that cumulative Nov-Dec feedlot placements were 5 percent higher than 2020 placements for the same months.

    Recommended citation format: Mitchell, James. “January 1 Feeder Cattle Supplies Decline 2.6 Percent“. Southern Ag Today 2(7.2). February 8, 2022. Permalink

  • Rise in Input Costs for Cotton Production: Make and Keep a New Year’s Plan

    Rise in Input Costs for Cotton Production: Make and Keep a New Year’s Plan

    As farmers are planning for the new year, they have several factors to consider. Besides supply and demand uncertainties for cotton marketing and weather uncertainties for cotton production, we are in the middle of a supply chain crisis with rising input costs and limited supplies. Additionally, inflation is a major concern, with the latest annualized Consumer Price Index at 7.0 percent. Inflation translates into higher production costs for cotton producers. 

    Cotton producers are wondering if they will be profitable this year under rising cotton prices and higher input costs. Figure 1 below shows the estimated costs of production for cotton in 2021 and 2022 from the University of Georgia Cotton Enterprise budgets. The total costs of production rose significantly for 2022 compared with 2021, with an average increase in total costs for irrigated land of 17.4% and a 24.7% increase in total costs for dryland production. Similar year-over-year increases in production costs have been reported for Tennessee (21% for irrigated and 27% for non-irrigated) and Mississippi (11% for irrigated and 12% for non-irrigated).[1]This increase in input costs is largely driven by the rise in fertilizer costs, crop protection costs, land costs, and energy costs. Even though individual producers’ costs vary and are determined by their production practices, these estimates clearly show the increase in input costs year-over-year. 

    To ensure profitability, producers need to have a sound plan for input use, particularly fertilizer application this year. Soil testing will allow producers to determine available nutrients and the profit-maximizing amount of fertilizer that should be applied. Additionally, producers should develop secondary plans for chemical applications (e.g., if product A is unavailable what other products can be used). All of this implies higher production costs and greater financial risk for this year and makes it more critical for producers to estimate and control their cost of production. 

    The good news is high new crop cotton prices (December 2022 closed at 100.87 cents per pound on January 31, 2022), are providing potentially profitable outcomes. With a yield of 1,200 pounds per acre for irrigated land and 850 pounds per acre for dryland production, with the costs shown in the table, cotton producers would need to lock in prices at 89 cents per pound for irrigated land and 96 cents per pound for dryland to break even. Producers need to be cognizant of the elevated amount of money at risk and modify their marketing and risk management plans accordingly. Incrementally removing price risk when purchasing inputs will help mitigate some financial risk for cotton producers. As with every year, producers need to focus on managing their profit margin through sound risk management practices. 

    Figure 1. The Rise in Variable Costs and Fixed Costs for Cotton Production in 2022. Source: University of Georgia Cotton Enterprise Budgets. Average of conventional tillage and strip-tillage production. Costs Exclude Land Rent.

    [1] Budgets were created on different dates and have different specified costs, so some caution should be exhibited when comparing different states.

    References

    Estimate of 2022 Relative Row Crop Costs and Net Returns, Department of Agricultural & Applied Economics, University of Georgia, November 2021. https://agecon.uga.edu/extension/budgets.html

    Cotton 2022 Planning Budgets, Department of Agricultural Economics, Mississippi State University, Budget Report 2021-01, November 2021. https://www.agecon.msstate.edu/whatwedo/budgets.php

    2022 Cotton Budgets, Department of Agricultural and Resource Economics, University of Tennessee. https://arec.tennessee.edu/extension/budgets/

    Recommended citation format: Liu, Yangxuan. “Rise in Input Costs for Cotton Production: Make and Keep a New Year’s Plan“. Southern Ag Today 2(7.1). February 7, 2022. Permalink

  • Carbon Markets Are Not Like Other Markets

    Carbon Markets Are Not Like Other Markets

    Carbon markets are increasingly viewed as a way to combat climate change and supplement farm and forest landowner income. However, carbon markets differ from most other product markets in meaningful ways. First, buyers in carbon markets will generally be unable to determine product quality, as measured in terms of actual reductions in carbon emissions or increases in sequestration. When buyers in other markets cannot readily observe product quality, they often rely on third parties to provide that information. Governments sometimes play the role of information providers when the quality under consideration has wider social benefits. Examples include automobile fuel efficiency and household appliance energy efficiency.

    Carbon markets also differ from other markets in that both buyers and sellers in carbon markets have an incentive to overstate quality, i.e., the amount of reduction or sequestration that occurs. In voluntary markets, buyers participate to generate goodwill amongst consumers, investors, and policymakers. In regulatory markets, buyers participate to satisfy a regulatory requirement. Thus, buyers are motivated – not by actual emissions reduction or sequestration – but by the “credit” they receive from governmental regulators or the public. 

    Because of these differences, regulators and the public will be unlikely to extend this credit without third-party monitoring and verification. However, thorough but burdensome monitoring and verification will increase transaction costs and discourage market participation. On the other hand, lax monitoring and verification will erode trust in the market. Balancing these two will be critical for market success. Similarly, successful participation by landowners will require balancing potential revenue gains against the implementation, opportunity, and transaction costs of participation.

    Recommended citation format: Clark, Christopher D. “Carbon Markets Are Not Like Other Markets“. Southern Ag Today 2(6.5). February 4, 2022. Permalink

  • The ARC-CO/PLC Decision Isn’t as Easy as You Think

    The ARC-CO/PLC Decision Isn’t as Easy as You Think

    Producers have until March 15th to select their Title I safety net coverage at their local county FSA office.  Current futures prices for many U.S. covered commodities are well above the reference prices which has most producers thinking there will be no payments for the Price Loss Coverage (PLC) so they should choose the revenue coverage provided by Agriculture Risk Coverage-County Option (ARC-CO).  The combination of price and yield protection provided by ARC-CO should be somewhat more likely to trigger a payment than just the price protection provided by PLC.  On the surface this seems quite reasonable, however, as is the case with most decisions in life, this one is much more complicated than that.

    First, with a 2022 yield equal to the 2022 county benchmark yield, ARC-CO would not trigger a payment until market prices fall below $3.18/bu for corn, $7.84/bu for soybeans, $3.40/bu for grain sorghum, and $4.73/bu for wheat (Figure 1).  These trigger prices are considerably lower than the effective reference prices for each crop.  So, what if the yield isn’t average?  Across these 4 commodities, it would take a 14 percent yield decline relative to the 2022 county benchmark yield just to increase each commodity’s ARC-CO trigger price to the effective reference price (i.e., $3.70 for corn, etc).

    Second, the supplemental coverage option (SCO) is only available on the crops for which a producer chooses PLC as their Title I safety net program.  Given the extremely high futures prices that currently are in place during price discovery, if a producer is looking for a shallow loss revenue protection option, SCO often provides significantly more revenue protection than ARC-CO which uses marketing year average prices to determine revenue benchmarks.  While SCO has a premium that must be paid, many producers may find the coverage difference well worth the cost.

    Finally, the current high futures prices for most commodities are good indicators that market prices will be quite strong this harvest.  However, both ARC-CO and PLC use marketing year average prices to determine whether a payment is triggered.  The 2022-23 marketing year for corn begins September 1, 2022 and continues through August 31, 2023.  While not likely to crash, a lot can happen between now and August 2023.  Purchasing SCO allows a producer to elect PLC for the covered commodity, effectively establishing a free put option at the reference price (at least on those base acres and program yields).

    Figure 1.  Example ARC-CO and PLC Parameters for the 2022 Decision.

    Crop Name2016 County Yield2017 County Yield2018 County Yield2019 County Yield2020 County Yield2022 Benchmark County Yield2022 Benchmark Price2022 Benchmark Revenue2022 Guarantee RevenuePrice below which ARC-CO is Triggered with an Avg Yield2022 Effective Reference Price (ERP)
    Corn129.62144.90168.80137.45157.42146.59$3.70$542.38$466.45$3.18$3.70
    Grain Sorghum97.93109.10120.0293.1493.48100.17$3.95$395.67$340.28$3.40$3.95
    Soybeans49.4644.5651.9639.0645.1146.38$9.12$422.99$363.77$7.84$8.40
    Wheat74.4586.2461.6961.7764.2166.81$5.50$367.46$316.46$4.73$5.50

    Recommended citation format: Outlaw, Joe, and Bart L. Fischer. “The ARC-CO/PLC Decision isn’t as Easy as You Think.” Southern Ag Today 2(6.4). February 3, 2022. Permalink