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Financial Impacts of Higher Fertilizer

Last week we looked at the basic supply/demand factors contributing to the surge in fertilizer prices. The abnormally high fertilizer market prompts the question: How much of a financial burden do these prices represent for producers? Today we are highlighting a study attempting to address that very question. The Agricultural & Food Policy Center (AFPC) at Texas A&M maintains data on 64 representative crop farms across the U.S. The data, provided by the consensus of local producer groups, describes the capital structure and operating parameters necessary to forecast a financial outlook for each representative farm. The basic idea of the study was to impose higher fertilizer expense on each farm and compare the bottom-line results for a 2022 outlook with that of a baseline scenario (a fertilizer market without the current surge in prices expected in 2022). Here’s the link to the full paper: Economic Impacts of Higher Fertilizer Prices on AFPC’s Representative Crop Farms.

As a baseline, the study assumes the market outlook as described by the Food and Agricultural Policy Research Institute (FAPRI) August 2021 Baseline for commodity prices and cost inflation. In the baseline, fertilizer price inflation estimates in 2022 were 9.9% for Nitrogen (N) and 13.6% for Phosphorous and Potash (P & K). Based on estimates of spot prices observed at the time of the study, the alternative higher cost scenario assumed inflation factors of 55.4% for N and 50.8% for P&K. Results outline the total impact to each farm’s NPK costs for 2022. Alternative inflation assumptions result in an approximate 37% higher fertilizer bill for all farms. For 25 feed grain farms, the average increase in fertilizer cost for 2022 was $128,000 (or almost $40/acre over the baseline scenario). Rice farms saw the highest per acre increase with an average across 15 farms of roughly $62/acre. Both cotton and wheat farms would experience near $100,000 higher total NPK costs on average or approximately $30/acre and $20/acre, respectively.

Summary Results of AFPC Study on Fertilizer Price Impact

Type (# of Farms)	Avg. Planted Acres	NPK CostsBase($1,000)	NPK CostsAlternative ($1,000)	NPK CostsDifference ($1,000)	NPK CostsDifference ($/Acre)
Feed Grain (25)	3,178	350	478	128	39.55
Wheat (11)	4,319	249	343	94	19.64
Cotton (13)	4,199	303	417	114	29.72
Rice (15)	2,512	337	463	126	62.04

While the study illustrates a significant cost increase, two important factors suggest the results are somewhat conservative in measuring the impact of recent fertilizer trends. First, the study only measures an estimated change in 2022 costs. Fertilizer prices started their recent trend well before 2022. Fertilizer had already seen significant increases in 2021 (17% for N and 26% for P&K relative to 2020). Combining the two years, even the baseline in the study reflects 2022 prices that are 29% (N) and 43% (P&K) higher compared to 2020. Second, the approximate 50% increase for 2022 may not be high enough. Since the study was completed, spot prices this year have approached triple the prices from 2020. On the other hand, it is important to note that current commodity future prices indicate an improved revenue in 2022 for most producers, which will offset some of the sting of increased costs of production. In that vein, next week we will look at current and past fertilizer trends relative to commodity prices.

Monthly Average Fertilizer Nutrient Prices, January 2000 to October 2021

Source: AFPC Briefing Paper 22-01, 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. The phosphorous price is specifically for diammonium phosphate (DAP).

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.

Recommended citation format: Klose, Steven, and J. Marc Raulston. “Financial Impacts of Higher Fertilizer“. Southern Ag Today 2(6.3). February 2, 2022. Permalink

February 2, 2022

Cattle Inventory Report

Yesterday, the National Agricultural Statistics Service (NASS) released the biannual Cattle inventory report. This report provides a review of the changes in cattle inventory over the last year. Using the Cattle report, we can glean insight into the expected cattle supply and resulting beef supply in the near future. These supplies also inform our longer-term cattle and beef price expectations.

The last two January reports indicated that the number of beef cows that calved declined approximately 1.6% and 1.1% in 2021 and 2020, respectively. Declines in the number of cows are followed by a decline in the number of calves and, finally, a lower beef supply; one less cow calving in spring 2020 means one less live calf placed on feed in the fall of 2020, and subsequently, there is one less fed calf available for processing in summer 2021. Lower supplies, all else equal, mean higher prices.

Since 1990, in years when the cowherd shrank year to year the average decline in all cattle and calves was 1.2%. Yesterday’s inventory report indicated a 2% decline in all cattle and calves (from 93.8 million head to 91.9 million head), a 2.4% decline (from 30.8 million head to 30.1 million head) in the beef cow herd, and a 1% decline (from 35.5 million head to 35.1 million head) in the calf crop from 2020 to 2021. The larger drop in inventory than recent historical averages was likely a result of persistent drought across much of the western U.S. In fact, the average change in inventory in states to the west of the line including Texas to North Dakota was a loss of 2.7%, whereas the average change in inventory to the east of that line was a loss of 1.9%. A final interesting point: the number of heifers expected to calve in the upcoming year declined 3% year over year, suggesting a continued contraction in the cattle herd over the next year. The contraction in the cattle herd will support higher prices in the next year, all else equal.

Recommended citation format: Benavidez, Justin. “Cattle Inventory Report.” Southern Ag Today 2(6.2). February 1, 2022. Permalink

February 1, 2022
Variation in Corn Prices in the Southeast
Corn prices are outside producers’ control, marketing is not. Corn prices are influenced by domestic and global supply and demand, government policies, and money flows between asset categories. While it is important for corn producers to understand and monitor factors influencing global and national prices, it is equally important to understand local market conditions and sale opportunities that can substantially increase average cash sales price.

In general, corn prices in the Southeast are higher than the national average (Table 1 and Figures 1 and 2). Of the four states analyzed North Carolina and Texas had the highest five-year average cash price, however all four states had five-year average monthly prices greater than the national average. 2021 presented a slightly different picture with Kentucky having lower prices in six months than the national average. Additionally, both Tennessee (September) and North Carolina (August) had months with state average prices below the national average.

While Southeast corn prices are generally higher, it is important that producers understand seasonal trends, returns to storage, and historical basis to consistently obtain a higher cash price. This is primarily due to strong demand from poultry, livestock, ethanol, distilleries, and proximity to export markets through Mississippi River terminals or ocean ports. However, tremendous variation exists between states and within states based on prevailing local supply and demand. As such, understanding local market conditions is essential. Three basic considerations that should be factored into every corn producer’s marketing plan are:
1. Typical harvest period– Harvest interval will vary by location and will influence when early harvest premiums may become available. Harvest timing can vary from year-to-year due to planting and weather, so it is important to account for both “typical” harvest timing and current growing season influences.
2. Storage – For many Southeast producers, storage is one of the most effective marketing tools. Storage can help mitigate production risk and extend the marketing interval. Storing the crop allows producers to know what they have to sell before committing to a final cash price. It is important to note that this does not eliminate the need for in-season price risk management tools (ie. options and crop insurance). Not having to sell the crop at harvest typically avoids seasonal price lows in futures markets and basis.
3. On-demand sales opportunities – Due to high demand for corn in many locations, producers who have storage can also have the ability to meet on demand requests, for a price premium, for large corn end users. To access these markets, producers need to be on the end user’s contact list to obtain emergency or short turnaround corn supplies and be able to deliver corn quickly (trucking requirement).
Producers should utilize their knowledge of local supply and demand factors to extract the highest cash price possible. Developing a marketing plan and risk management strategy that factors in national price trends and local market conditions will aid in achieving higher prices in local markets.

Table 1. Average Monthly Corn Prices

Source: USDA NASS

Figure 1. Five-Year Monthly Average Corn Prices for Select Southeast States Minus the National Average

Source: USDA NASS

Figure 2. 2021 Monthly Average Corn Prices for Select Southeast States Minus the National Average

Source: USDA NASS

Recommended citation format: Smith, Aaron. “Variation in Corn Prices in the Southeast.” Southern Ag Today 2(6.1). January 31, 2022. Permalink
January 31, 2022
Promoting the Importance of Southern Farm Raised Oysters

Southern oysters are an important food source with a rich cultural and culinary history. Because of this, it is not surprising that southern consumers tend to eat more oysters than those in other parts of the US. And, with wild oyster harvests diminishing, the south is experiencing a dramatic rise in oyster aquaculture farms. However, unlike most seafood products, farmed oysters cost more than wild harvested oysters. This places the marketing burden on oyster producers to differentiate their farm-raised products to justify higher prices.

To help oyster marketing efforts, several southern land grant universities have researched oyster consumers to determine key marketable oyster traits. Clemson University researchers have also completed an oyster consumer preference study, with results forthcoming. In addition to oyster consumer preferences, Clemson research also discovered two key findings about consumer perception of oyster farming: more than half of consumers (58%) did not know that most oysters are farm-raised (worldwide), and almost half (45.6%) were unsure whether farmed oysters are good or bad for the environment.

This finding represents a golden marketing opportunity for oyster farmers to educate the public on the importance of supplementing wild harvests and the environmental benefits of oyster farming. Rather than try and manage public perception after the fact, oyster producers can get in front of the news and manage a positive narrative about oyster farming. Because of the appeal to the general public, this message may be easily amplified through public-service-announcements (free) sources such as the local media, land grant universities and cooperative extension, Sea Grant, and Farm Bureau. Local and state restaurant associations and chambers of commerce may also be prime audiences, as they can communicate this message to their members.

It is also important to collaborate with other southern oyster producers to strengthen communication and marketing efforts. An excellent example of this sort of collaboration is Oyster South, whose annual symposium will be held February 3-5, 2022, in Biloxi, Mississippi. For more information on the symposium, please visit www.oystersouth.com. For more information on the findings of Clemson’s oyster consumer preference survey, please contact the author directly.

Recommended citation format: Richards, Steve. “Promoting the Importance of Southern Farm Raised Oysters.” Southern Ag Today 2(5.5). January 28, 2022. Permalink

January 28, 2022
U.S. Imports and the Continued Rise in Fertilizer Prices

Last November, I wrote an article for Southern Ag Today about the spike in fertilizer prices. Since that time, import prices have continued to rise. As mentioned in the previous article, U.S. fertilizer imports have averaged nearly $6 billion over the last five years (around 25 million metric tons), accounting for a significant share of total U.S. fertilizer use (USDA-ERS, 2019). Additionally, the global fertilizer market had already been tightening before plants were forced to cut production given the rise in the cost of natural gas, a key feedstock (Larkin, 2021). Given the continued rise in U.S. fertilizer prices, a more detailed look at imports could help explain why the price of some fertilizers have increased more than others.

In 2020, the U.S. imported about $6.5 billion in fertilizer. That year, the top imports included potassium chloride ($2.7 billion), urea ($1.3 billion), monoammonium phosphate ($590 million), urea-ammonium ($400 million), and diammonium phosphate ($400 million). In January 2020, import prices ranged from as low as $130 per metric ton (MT) for urea-ammonium to about $267/MT for and diammonium phosphate. In 2021, diammonium phosphate increased to over $1000/MT and monoammonium phosphate increased to over $700/MT; urea increased to over $500/MT. Interestingly, the price of imported diammonium phosphate fell in November 2021 to $625/MT, which was a significant decline from the $1,008/MT high the previous month. Other trends, however, suggest that fertilizer import prices will continue to increase.

U.S. Fertilizer Import Prices Significantly Higher in 2021 Due to Global Supply and Demand Issues

Source: U.S. Department of Agriculture, Foreign Agricultural Service’s Global Agricultural Trade System (2022). https://apps.fas.usda.gov/GATS/default.aspx

References

Larkin, N. (October 15, 2021) Supply Lines Fertilizer Crisis Piles More Pressure on World’s Future Food Supply. Bloomberg. https://www.bloomberg.com/news/newsletters/2021-10-15/supply-chain-latest-warnings-mount-over-fertilizer-crisis

U.S. Department of Agriculture, Economic Research Service (USDA-ERS) (2019). Fertilizer Use and Price. https://www.ers.usda.gov/data-products/fertilizer-use-and-price.aspx

U.S. Department of Agriculture, Foreign Agricultural Service (USDA-FAS) (2022). Global Agricultural Trade System. GATSFertilizer Use and Price. https://apps.fas.usda.gov/gats/default.aspx

Recommended citation format: Muhammad, Andrew. “U.S. Imports and the Continued Rise in Fertilizer Prices.” Southern Ag Today 2(5.4). January 27, 2022. Permalink

January 27, 2022