Higher fuel and nitrogen prices in 2007 have signaled trends that will most likely hold throughout 2008. OSU Extension Budgets show projected variable (cash) costs for corn production to be 24-35% higher in ’08 than ’07 depending on seed trait selection. Soybean variable costs are projected to be 23% higher in ’08 than ’07. Higher commodity prices and profitability in 2007 and projected net profits in 2008 have already led to cash rental rate increases. Cash rents increased 5.8% in Ohio in 2007 and projections are for these rents to increase at a larger rate in 2008.
Higher commodity prices and higher costs lead us to a riskier production year as the cash investment in an acre of corn will top $300 and the cash investment in an acre of soybeans will top $150. 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.
Fuel
As of November 6 th , the Energy Information Administration (EIA) pegged the average price for West Texas Intermediate Crude Oil at $79.92 per barrel for 2008. This is a 12% increase over the 2007 Crude price.
The EIA projects the Henry Hub Natural Gas price to average $8.01 per thousand cubic feet (mcf) in 2007. This is a 9.7% increase over the 2007 Henry Hub Natural Gas price. 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.
Diesel price is expected to increase 8.1% in 2008 with an expected average price of $3.09 per gallon for on-highway diesel.
Why Are Oil Prices So High?
• Strong world economic growth driving growth in oil use,
• Moderate non-Organization of the Petroleum Exporting Countries (OPEC) supply growth,
• OPEC members’ production decisions,
• Low OPEC spare production capacity,
• Organization for Economic Cooperation and Development (OECD) inventory tightness,
• Worldwide refining bottlenecks, and
• Ongoing geopolitical risks and concerns about supply availability.
Fertilizer
Nitrogen (N)
Ten years ago the U.S.imported approximately 35% of our nitrogen needs for crop production. Today, the U.S. imports approximately 80% of our nitrogen. This highlights the importance of the world supply and demand as we try to evaluate price direction of nitrogen fertilizers.
Due to continued high natural gas prices and strong U.S. and World demand, the cost of all N sources remains very high. The retail price of N in November in Ohio was at $680/ton for anhydrous ammonia, $290/ton for UAN (28%), and $505/ton for urea.
Using anhydrous ammonia as a base for projections, N is averaging $0.415 per pound of actual N compared to $0.289 per pound of actual N in 2007. (NH3 price of $680/ton equals price per actual pound of N of $0.415 and $475/ton equals price per actual pound N of $0.289.) This is a 43% increase from 2007 to 2008.
If UAN (28%) is your N choice, the $290/ton price equals $0.518 per pound of actual N. Retail Urea price in November was $505/ton which equals $0.549 per pound of actual N.
Phosphorous (P 2 O 5 )
The average price of phosphorous fertilizers is expected to increase approximately 65% from 2007 to 2008. 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 2008 crop production year with the price for P 2 O 5 expected to average $0.5144 per pound. (This equates to a MAP price of around $535/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 are expected to increase 40% from 2007 to 2008. Potash prices for the 2008 crop year are expected to remain at these high levels and average $0.283 per pound. (K 2 O price of $0.283 per pound equals Potash (White) at $340/ton.)
Fertilizer Buying Strategies
Buy-As-Needed Approach
This is easiest way to procure fertilizer but often the most expensive as we tend to buy when others are buying and prices are highest.
Price Target Approach
We can set price targets for these three fertility products but
if prices don’t move you may never hit your buying triggers.
Historical Price Pattern Approach
Pricing N product during fall (for application or storage) or early winter (pre-pay for early spring delivery where the pricing opportunities exist) may allow you to average lower prices than other buyers.
Storage Approach
To take advantage of “lows” in the market during seasonal lows or unforeseen dips in the market, building storage for your N, P and K needs may be an option to consider as prices for these three products remains volatile.
“Home-Run” Approach
Pricing all of your needs and storing the product or locking in a price on a pre-pay basis may result in a “home-run” as you may hit the low in the market. On the other hand you may see prices drop and you have priced product in the upper 1/3 of the market.
Price Averaging Approach
As fertilizer price remain high and volatile it may be wise for producers to spend more time on pricing these critical inputs. Spreading out your purchases and buying N, P, and K at several different times should result in a better price average over the long run as you average your high priced purchases with your low priced purchases. The only drawback to this option is the inability to take advantage of volume discounts if you are spreading your purchases over several different buying opportunities instead of buying product in one large volume at one time.
Land and Rents
Cropland values in Ohio have increased 9.9% (’04 to’05), 9.6% (’05 to ’06) and 10.7% (’06 to ’07) the last three 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 3 years. Higher commodity crop prices and good to excellent crops in many regions of Ohio signal continued strong increases in land values. A much cooler housing/development market signals a trend towards a slowdown in the rates of cropland value increases. Land values should continue to increase at a 8-10% rate from 2007 to 2008.
Cash rents in Ohio increased 5.8% in 2007 and Enterprise Budget analysis suggests larger increases for 2008. 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 continued high commodity prices and positive returns for ’07 and positive returns projected for ’08 and ‘09. Areas hard hit by drought and late season flooding may see cash rents remain relatively more stable as producers struggle with very low or negative returns. Projections are for 2008 Ohio cash rental rates to increase 5-15 % depending local factors.
Landowners and farmers should both consider different price/yield/cost combinations when negotiating cash rental rates for 2008 and beyond.
Seed and Crop Protection Chemicals
Seed company data indicates price for 2008 to be 5-10% 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 5-10%. 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 2008 will allow producers to absorb these seed cost increases, but farmers should still carefully consider the need for the traits. Increases of $25-35 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 3-4% for the total basket of crop protection chemical are predicted for 2008.
Farm Labor
At first glance, farm wages may be expected to increase nominally at a 3% rate over 2007, but expected high margins for crop producers in 2008 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 2008. Employers offering health insurance should continue to see health insurance premiums increase by 10% or more per year depending on the product and company.