Fuel, fertilizer, labor and interest rates are major concerns for farmers when they consider the cost of doing business, and 2012 promises to be another year of uncertainty for some inputs as the spring planting season approaches.
Retail gas and diesel prices spiked in 2008 when they got to close to $5 per gallon, says Greg Ibendahl, Mississippi State University agricultural economist.
“I think one day we’ll go back and look at this period from the 1980s to the 2000s as more or less our golden years, with inflation rates being down and prices staying fairly steady, with everything being pretty consistent and not much controversy,” he says.
After 2000, gas and diesel prices became more volatile, says Ibendahl.
“One of the things that pushed us over the edge with the most recent recession and probably broke the camel’s back is when gas went over $4 per gallon. That extra cost to consumers did it. When the recession started and demand dropped, prices started going lower and we started our slow recovery,” he says.
The EIA — a branch of the U.S. Department of Energy — predicts oil prices of about $80 to $90 per barrel for the next year and a half or so, he says. “But they seem kind of clueless, since their range goes from about $40 per barrel to $190 per barrel, so it looks as though they’re pulling numbers out of the air. They’re also predicting diesel prices to stay about steady in that $4 range,” he says.
Looking at consumption versus production, consumption dropped significantly during the height of the recession, which one would expect, says Ibendahl, with consumers having less money to spend.
“Production didn’t drop off too much though, which led to a surplus and led to the price of oil going back down. On the plus side, for the next couple of years anyway, OPEC does have excess capacity. We’re at about the 10-average as far as excess capacity. We’re not really looking for any dramatic increases in oil prices because of that.”
Stocks above typical average
Commercial oil stocks are above the typical average, so oil stocks are available if we need it, and if there’s a big demand for oil again, he says. “Even though we’re cutting back here in the United States, China is using more oil, which is helping to keep prices up.”
Gas and diesel prices are seasonal, says Ibendahl, with certain times being better for buying than others.
“You would think gas prices would be higher in the summer because of more people driving and taking vacations, so you expect a higher demand for gas in the summer, with prices going lower in the wintertime, and that’s certainly the case. Prices start climbing in May and stay high through the fall.”
But, he says, diesel fuel is a different situation. “I used to argue that because diesel fuel and fuel oil were similar products, diesel prices should be highest in the winter because people are using more home heating oil. But that isn’t the case, because diesel prices peak in the summer along with gas prices, but it’s a different kind of peak. There’s also a peak in the spring and in the fall. That shows a fundamental shift in how the diesel market works now. It’s not so much now that heating oil is driving the market, as it is that the construction side is driving things.”
This is bad for farmers, says Ibendahl, because they need fuel in the spring, in May or March, and then in the fall for harvest, during October through November, which corresponds with when diesel rates are highest.
“I tell farmers not to wait until the last minute to buy their fuel, because they’ll probably be paying the highest price if they do that.”
For spring planting, it’s an easy decision, he says, since the lowest price comes in February.
“So if you’re buying for the spring market, it makes sense to buy most of your diesel during February. But buying in February for fall use probably wouldn’t be your best option unless you have a really cheap cost of capital. Somewhere at about July might be the best time to buy for fall use.”
As for predicting the cost of natural gas, since about 2009, variations have been consistent, all within a range of $5, says Ibendahl. Before this time, however, the natural gas market was very volatile. Natural gas reserves that have resulted from new mining technology, especially in the northeastern U.S., could solve any natural gas problems for a long time to come, he says.
But, he adds, these discoveries came late for agriculture because a lot of our fertilizer production now has moved out of the country.
Fertilizer use by region
Looking at fertilizer use by region, North America currently uses about 14 percent of the world’s fertilizer while China uses 28 percent and India uses 14 percent.
“Before 1992, fertilizer prices were fairly easy to predict, but it has become much more volatile. Going into 2012, we’re looking at a lot higher prices than we saw back in 2010. We’ve seen a steady increase in fertilizer prices since the summer of 2010.”
A large share of U.S. fertilizer needs continues to be imported, he says, and that makes it difficult to predict what fertilizer prices will do in the future. The United States imports 55 percent of its nitrogen or 10.57 million tons and 81 percent of its potash or 6.92 million tons.
“But we are a leading producer of phosphate, producing 90 percent of the world’s use and exporting 44 percent of what we produce. So at least the U.S. has some control over phosphate.”
Someone would think that natural gas would be a leading indicator of the price of nitrogen fertilizer, but there’s too much variability there, says Inbendahl.
“But there is some correlation when we predict spring anhydrous ammonia price based on the October oil price. With this model, $80-per-barrel oil equals a price of $661 for anhydrous ammonia. If I was a farmer, I wouldn’t be in a hurry to purchase my fertilizer for next spring. There’s a chance the price might come down. Also, $80 oil translates into $496 urea prices.”
As far as the labor and wages side of things, he says, unemployment continues to be high. “This is actually a good thing for agriculture if you’re looking to hire somebody because there should be plenty of people looking for a job. And wages haven’t increased much either.”
Interest rates continue to be low, says Ibendahl, so borrowing, if you can get money, shouldn’t be a problem. The issue is whether or not your bank is loaning money.
“Prices have increased somewhat for chemicals. But Roundup prices have dropped significantly, so if you have Roundup Ready crops, the price is a lot less than a couple of years ago.
Machinery prices have bumped up with combines being up 7 percent in 2011, cotton pickers up 9 percent, and 150-horsepower tractors up 8 percent.”