Lower fuel and nitrogen prices in the last half of 2006 have signaled trends that should hold throughout 2007. The outlook numbers laid out in this article can be used to formulate budgets for 2007. Outlook information presented here was developed with data from AEDE research, Energy Information Administration, USDA, other Land Grant research, futures markets and retail sector surveys.
As of December 12 th , the Energy Information Administration (EIA) pegged the average price for West Texas Intermediate Crude Oil at $65.17 per barrel for 2007. The EIA projects the Henry Hub Natural Gas price to average $7.87 per thousand cubic feet (mcf) in 2007. The Henry Hub in Louisiana is the nexus of 16 intra- and interstate natural gas pipeline systems that draw supplies from the region’s prolific gas deposits. The pipelines serve markets throughout the U.S. East Coast, the Gulf Coast , the Midwest , and up to the Canadian border. Natural Gas Futures quotes are available via the online New York Mercantile Exchange at: http://www.nymex.com/
(Natural Gas Futures are traded as million British Thermal Unit (mmBtu). One contract equals 10,000 mmBtu. Natural Gas is sold wholesale per thousand cubic foot (mcf). Btus per cubic foot of natural gas do vary. One cubic foot of natural gas = 1000 to 1031 Btu. One thousand cubic feet (1 mcf) of natural gas = 1to 1.031 mmBtu.)
Off-road diesel is expected to average $2.20/gal for 2007. This represents approximately a 2% decrease from 2006.
Futures prices of natural gas and retail survey data point toward slightly higher propane prices in 2007. The price of propane is expected to increase slightly in 2007 and average $1.50/gallon. A warm start to winter in much of the country may allow for lower prices of some fuel related inputs.
Natural gas prices have fallen substantially since they peaked in the winter of 2006 when the Henry Hub price for Natural Gas was around $15 per thousand cubic feet (mcf). Since then, the Henry Hub natural gas price has fallen below $8 per mcf. (For the week (Wednesday-Wednesday, December 13-20), the price for next-day delivery at the Henry Hub decreased 78 cents per MMBtu, or 10.8 percent to $6.43 per MMBtu.)
The average price of nitrogen increased 37% from 2004 to 2006. Natural Gas, DAP, Urea and UAN(28%) Futures together with surveys of industry personnel signals lower N prices in 2007. Using anhydrous ammonia as our base for projections, N is expected to average $0.244 per pound of N in 2007. (NH3 price of $400/ton equals price per actual pound N of $0.244.) This is a 27% decrease from 2006.
Phosphorous (P 2 O 5 )
The average price of phosphorous fertilizers increased approximately 29% from 2004 to 2006. Increases in anhydrous ammonia price and transportation costs together with strong world demand continue to pressure phosphorous fertilizer prices. These pressures signal continued higher prices for the 2007 crop production year with the price for P 2 O 5 expected to average $0.3125 per pound. (This equates to a MAP price of around $325/ton).
Potassium (K 2 0)
Although world potash production continues to increase, demand has increased at a faster pace. Demand in growth areas such as Asia and South America have contributed heavily to price increases in farm-gate potash. Potash prices increased 51% from 2004 to 2006. Potash prices for the 2007 crop year are expected to remain at these high levels and average $0.205 per pound. (K 2 O price of $0.205 per pound equals Potash (White) at $250/ton.)
Land and Rents
Cropland values in Ohio have increased 9.9% and 9.5% the last two years. There is a mixed bag of evidence at this point suggesting on one hand land prices will increase at these high rates, and on the other hand that land markets may cool “a bit” from the rates of increase that we’ve seen the last 2 years. Higher commodity crop prices coupled with somewhat lower input prices (due to much lower N prices) signal continued strong increases in land values. Higher interest rates together with a stronger securities market and a cooler housing market signal a trend towards a slowdown in the rates of cropland value increases. My projection is for land values to continue to increase, but only at a 5% rate for 2007.
Cash rents in Ohio increased 4.9% in 2006 and indicators suggest similar increases for 2007. Landowners hesitant to negotiate for higher rental rates due to past poor crop years, low commodity crop prices and/or high fuel and fertilizer prices may now seek higher rates with the run-up in crop prices and lower nitrogen costs projected for 2007. Projections are for 2007 Ohio cash rental rates to increase 5% over 2006.
Seed and Crop Protection Chemicals
Seed company data indicates price for 2007 to be 2-4% higher among similarly traited seed. This is a fairly nominal amount and one not out of the ordinary. However, the “real world” increase to the farmer’s seed bill may be much more than 2-4%. Whether producers choose to switch to “traited” seed or are “forced” to select “traited” seed to plant the latest genetics from a given seed company, the result is the same; much higher seed costs per acre. Farmers should carefully consider the need for these seed traits by evaluating University as well as company research. Increases in gross revenues for many Ohio row crops projected for 2007 may allow producers to easily absorb these seed cost increases, but farmers should still carefully consider the need for the traits. Increases of $20-25 per acre may not be uncommon as producers switch from a “non-traited” to a “traited” hybrid or variety.
Crop protection chemicals prices have remained fairly flat over the last 2 years and several products have seen price decreases due to the prevalence of generic products in the marketplace. Continued high prices of petroleum products (main ingredients in many crop protection chemicals) will pressure prices to move somewhat higher. Increases of 2.5% for the total basket of crop protection chemical are predicted for 2007.
At first glance, farm wages may be expected to increase nominally at a 3% rate over 2006, but expected higher margins for crop producers in 2007 (and possibly beyond) may allow for (and employees may request) better compensation packages for farm employees. Livestock producers facing tighter margins may not have the same ability to offer cost-of-living (or possibly any) wage increases in 2007. Employers offering health insurance should continue to see health insurance premiums increase by 10% or more per year depending on the product and company.
“Corn after Corn” or Soybeans?
Many producers are trying to decide if planting some additional corn in 2007 will result in higher net profit. Will “corn after corn” net more than the more common rotation of “soybeans after corn”? This corn-soybean rotation has many advantages, but the recent surge in corn prices has many producers looking closely at the “corn after corn” scenario.
See last months article “Thinking of ‘Corn after Corn’? Pencil It Out First!” for a more detailed discussion on this topic.
A simple method to compare the two choices is to calculate the contribution margins of each alternative: “Corn after Corn (or 2 nd Year Corn)” and “Soybeans after Corn”. The “Contribution Margin” is simply gross receipts minus variable costs. Below is my latest comparative analysis of the two scenarios. Your numbers will vary from these, so be sure to analyze this decision based on your yield, price and cost projections.
My brief (and rough) estimates of the present “Contribution Margin’s” (or what’s left to pay land, machinery and labor/management) of 2nd Year Corn versus Soybeans. The following table shows gross receipts minus variable (or operating) expenses. Caution: Your relative yields and direct payments may vary considerably from those listed. Be sure to pencil your own numbers out!
Is this “advantage enough to offset probable higher fixed costs for corn? Higher labor and machinery costs for producing an acre of conventional corn versus an acre of no-till “glyphosate resistant” soybeans may require more of an advantage for corn when comparing their “contribution margins. So do we need an even higher ’07 fall delivery corn price (relative to soybean prices)? Pencil it out!
See my recently updated powerpoint presentation on “Inputs Outlook” at: