Crop profitability prospects for 2011 are positive for the three major row crops in Ohio. Input costs have increased from last year but increases in commodity futures crop prices for the 2011 crop year have increased substantially as well. Enterprise budget projections show positive returns for corn, soybeans and wheat in 2011. These budgets are available online at:
OSU Extension Budgets show projected variable (cash) costs for corn production to be 16% higher in 2011 than 2010. Soybean variable costs are projected to be 10% higher in ’11 than ’10. Wheat variable costs are projected to be 13% higher in 2011. Higher commodity prices and profitability in 2010 and projected net profits in 2011 will lead to cash rental rate increases for 2011.
Higher commodity prices and higher costs lead us to a riskier production year as the cash investment in an acre of corn will top $350 and in some production scenarios be closer to $400 per acre. The cash investment in an acre of soybeans will be in the $200 range.
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 7th, the Energy Information Administration (EIA) pegged the average price for West Texas Intermediate Crude Oil at $86.10 per barrel for 2011. This is a 9% increase over the 2010 Crude price.
The EIA projects the Henry Hub Natural Gas price to average $4.33 per MMBtu in 2011. This is approximately a 1% increase over the 2010 natural gas price.
Fertilizer continues to be the most volatile of the crop input costs and cost management of this important input may be the difference in being a low cost or high cost producer in 2011. Fertilizer prices were relatively flat through July of 2010. Since August fertilizer prices have increased substantially. A number of factors have led to the rapid increase in these fertilizer prices. First, due to relatively low crop prices through mid-summer, fertilizer manufacturers were not producing at full capacity anticipating a flat global demand for fertilizer through the fall of 2010 and into the spring of 2011. This relatively empty pipeline together with an early harvest in the U.S. Corn belt and much higher prices for major row crops has led to the higher fertilizer prices that we are now experiencing. Higher prices for corn, soybeans and wheat have signaled the global marketplace to increase acreage (bringing marginal acres back into production) and increase fertilizer rates on all acres. Higher energy prices have also put upward pressure on all fertilizer prices due to the higher mining, manufacturing and transportation costs.
U.S. demand is projected to be 12.9 million tons in 2011 compared to 11.8 million tons in 2010.
The U.S. imported approximately 15% of our nitrogen needs for crop production in 1980. Today, the U.S. imports approximately 48% of our nitrogen. This highlights the importance of the world supply and demand as we try to evaluate price direction of nitrogen fertilizers.
The retail price of N in December in Ohio was $750-800/ton for anhydrous ammonia (75-87% increase over year ago), $320-385/ton for UAN (28%) (50-82% increase over year ago), and $480-500/ton for urea (25-32% increase over year ago).
Nitrogen fertilizer manufacturers are presently operating at profitable levels due to higher N prices and relatively low natural gas prices, but this fact hasn’t led to supply outstripping demand as the entire supply chain has been more cautious in getting caught in a repeat of the 2008 upside-down fertilizer market.
With the high correlation of nitrogen price to corn price, future movements in nitrogen prices will more than likely take their cues from movements in price of corn.
The retail price of phosphorous fertilizers are much higher over year ago prices. DAP in December in Ohio was $660-690/ton (80-88% increase over year ago) while MAP was $670-700/ton (68-75% increase over year ago).
Phosphate rock, sulfur and anhydrous ammonia, all primary ingredients used in the manufacture of P fertilizers are presently high priced and have contributed to higher P fertilizer prices.
These higher ingredient prices along with strong world demand continue to pressure phosphorous fertilizer prices. These pressures signal continued higher prices for the 2011 crop production year.
The retail price of potash in December in Ohio was $500-550/ton (10-15% decrease from year ago).
The potash industry essentially operates as a duopoly (two firms, in this case, two consortiums, with dominant control of the market) with Canpotex (Canadian Potash Exporters) and Bellarussian Potash Co. controlling much of the global potash supply.
Potash prices will likely remain steady to higher into 2011 as high crop prices will translate into continued strong demand while the two major potash consortiums will meter out supply to keep prices stable.
Fertilizer Buying Strategies
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 these fertilizer prices remain volatile.
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.
Farmland Values and RentsCropland values in Ohio have increased in 2010 due to profitability in crop production. These profits have led many farmers to seek an investment option for these $’s and many have turned to land. Investors outside of agriculture have also been looking at farmland as a stable investment to add to their portfolios. With many $’s and buyers chasing farmland it isn’t a surprise to see land values increase substantially in 2010 (Iowa State reported in November that Iowa farmland increased in value 16% from last November. Ohio increases are likely similar.) Low interest rates and the relative scarcity of farmland up for sale have also helped drive land values higher.
So all of this begs the question, “Where are land prices headed this year?”
The case is strong for land values to see continued strength in 2011 as profitability prospects are very good for this upcoming crop year. Producers and other investors outside of agriculture will continue to see farmland as a good investment alternative. With strong balance sheets many farmers will continue to be in the land buying mode.
Cash rental rates will seem similar upward pressure as higher commodity crop prices and good prospects for profit in 2011 drive competition in local markets.
Seed and Crop Protection Chemicals
Seed company data indicates price for 2011 to be mostly flat among similarly traited seed. Farmers should carefully consider the need for these seed traits by evaluating University and company plot research.
Glyphosate production is energy and capital intensive, but not labor intensive. Thus, China has no competitive advantage in glyphosate production. There’s no sizeable domestic demand for glyphosate in China as the Chinese market is relatively small. Chinese producers have been encouraged by China’s government to expand their capacity to capture export markets around the globe, says Vance.
Their government does this by granting export incentives such as tax rebates to glyphosate producers. Also, lack of wage and environmental standards in China and an undervalued Chinese currency all effectively subsidize unfair trade and pricing practices.
Continued high prices of petroleum products (main ingredients in many crop protection chemicals) will pressure prices to move somewhat higher.