Fertilizer prices and natural gas prices have unexpectedly been decreasing globally, including in the United States, since last fall. The drop in fertilizer prices is directly due to the decline in natural gas prices since the production of fertilizer is connected to natural gas as a source of energy or feedstock. In the past nine months, our U.S. natural gas prices have declined by a whopping 67%, while the prices of anhydrous ammonia, phosphate (MAP), and potash have declined by 24%, 16%, and 18% respectively. We’ve seen nothing but costs falling across the board.
Current corn and natural gas price projections by Department of Agriculture members suggest anhydrous ammonia prices will go above $1,100 per ton in the spring of 2023. Nitrogen fertilizer prices have been high and volatile in the US since August 2021, causing difficulties for farmers when making fertilizer decisions. Several aspects contribute to these volatile prices, some being the aftermath of COVID and resulting supply chain problems. High corn prices traditionally lead to high nitrogen fertilizer prices, hence the conundrum.
Our global supply chain problems and inflation have sent fertilizer prices soaring and left many suppliers sold out, limiting farmers on their own execution. With limited plantings of say corn, as an example, which require heavy use of fertilizer, could drive up the consumer’s cost of bread, cereal, and other staple foods. The demand for U.S. could rise further if Ukraine and Russia engage in a full-blown war, disrupting shipments from those two key export countries.
Since we now understand where fertilizer comes from and what effects price spikes have on other links in the chain, this brings us to spring planting. When fertilizer prices decline by double digit rates ahead of a planting season, the next question is whether falling prices of fertilizer, which is the largest operating cost line item for most crop farmers in Colorado, might influence their spring planting intentions or not. The theory is that lower fertilizer prices should drive greater corn acres relative to soybean acres since corn uses more expensive nitrogen fertilizers (such as anhydrous ammonia) than soybeans use. (USDA estimates that the total operating and overhead costs to raise U.S. corn is approximately $870 per acre compared to $591 per acre for U.S. soybeans, largely due to the fertilizer-intensive nature of corn.)
However, the decrease in natural gas prices may not affect the spring planting decisions of local Colorado farmers, despite being the largest operating cost for crop ranchers for two main reasons. One being that most farmers have already prepaid for their 2023 fertilizer needs based on their crop plans and are unlikely to switch their crop this late in the season. As an example, corn is already in process for this year, receiving its nitrogen treatment last Fall, so by now it’s too late to change any spring crop seeding. Secondly, since nitrogen is generally not used in soybean production, local farmers will stick with their corn crop decision this spring unless they skipped the fall application. There’s no sense in pulling out now.
There is a risk of asset impairment for fertilizer dealers as they may have built up their fertilizer inventories at high prices during 2022 and would have to write down the value if the wholesale acquisition cost exceeds the retail price at delivery. However, ag retailers have learned from the 2008-2009 fertilizer price spike and have taken measures to avoid a similar situation. Fertilization companies have increased their prepayment programs, spread out their fertilizer purchases, and strengthened their internal risk management processes. Despite the decline in wholesale prices, agriculture retailers will be able to maintain retail prices due to the high grain prices and profitability of farms this year.
When it comes to planting crops for spring in Colorado, seasoned farmers and ranchers usually know all too well what to expect from fertilizer resources, resource shortages, price fluctuations, and every other resource that impacts their ag business. This year could be deemed as abnormal, but we know our farmers have it all under control. We have faith in our cultivators and always trust that they can produce what is promised. So, know that although there have been some unforeseen price changes in fertilizer, it doesn’t have a significant impact on our local spring planting decisions.
This blog post is for informational purposes only and should not be considered financial, legal, or investment advice. Any information contained in this post is subject to change without notice and should not be relied upon without seeking the advice of a qualified professional. The views and opinions expressed in this post are those of the author and do not necessarily reflect the official policy or position of our Association. The author and Association are not responsible for any errors or omissions and are not liable for any losses or damages arising from the use of the information contained in this post.