Two Reports Released by Texas A&M on Impacts of Rising Nitrogen Prices
Separate reports presented to some corn groups and Rep. Letlow; NCGA responds
The following are key points in a report from the Agricultural and Food Policy Center (AFPC), Texas A&M Univ., on the Economic Import of Nitrogen Prices on U.S. Corn Producers prepared for Texas, Missouri, Colorado, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Maryland, Michigan, Minnesota, Nebraska, New York, North Carolina, North Dakota, Ohio, South Dakota, Tennessee, and Wisconsin Corn Producers Associations and Checkoffs. The report (PDFlink) is dated Dec. 20, 2021.
- An increase/decrease in crop returns often coincides with an increase/decrease in input expenditures.
- When crop returns decline, fertilizer expenditures do not tend to decline as much. While input suppliers take advantage of higher returns to increase their returns, many other reasons likely exist.
- In testimony submitted to a November 3, 2021, House Agriculture Committee Hearing on “The Immediate Challenges to our Nation’s Food Supply Chain” the Fertilizer Institute President and CEO Corey Rosenbusch concluded,
- “Current factors that have most influenced the current market supply of fertilizer include (1) global demand for fertilizer, which is largely driven by crop plantings and prices; (2) recent weather events that disrupted domestic production; (3) Covid-19 related deferral of facility maintenance that is now being undertaken; (4) international actions, including Belarus and China; (5) transportation costs; and (6) the supply and cost of natural gas.”
- Of the three primary nutrients in commercial fertilizer, nitrogen accounts for more than 50% of total use by weight.
- Recent fertilizer price increases across all three primary nutrients have caused significant concern among producers with particular concern about nitrogen prices due to the amount typically applied.
- Over the past year, U.S. nitrogen prices have increased substantially.
- Two significant price peaks stand, July 2008 and 2021. U.S. AA prices fell to $226.50/ton in June 2020 before steadily increasing to $432.50/ton in February 2021. In one month (March 2021), AA prices increased 34% to $580/ton. Since that time, prices have steadily risen to $1,022.50/ton by October 2021 — the highest levels since 2008.
- Between the 1980s and mid-2000s, declining fertilizer demand and higher fertilizer production input costs led to a contraction in the domestic fertilizer industry, evidenced by the decline from 59 to 22 facilities. The industry also experienced considerable consolidation as the number of firms dropped from 46 to 13.
- A few driving factors led to the resurgence in U.S. nitrogen fertilizer production in the mid-2000s. First, the increasing demand for ethanol due in part to the passage of renewable fuels policies amidst record world oil prices increased the demand for corn for use as a feedstock in ethanol production. Increased demand for corn, in turn, led to increased demand for nitrogen fertilizer by corn producers. Additionally, improvements in extraction methods such as hydraulic fracturing technology and horizontal drilling led to a decline in the price of natural gas.
- Natural gas has, in the past, accounted for as much as 70-90% of variable production costs for nitrogen fertilizer. Despite the renewed growth within this sector, market consolidation continued. By 2019, the four-firm concentration ratio was approximately 75% for total domestic nitrogen fertilizer production, indicating that four manufacturers (CF Industries, Nutrien, Koch, and Yara-USA) operating 32 plants in 17 states account for about three-fourths of the domestic nitrogen fertilizer production.
- The suggestion that recent increases in the price of natural gas are the primary reason for recent increases in the prices of nitrogen products is highly suspect. For example, the price of AA increased $688 per ton from the end of 2020 through the end of October 2021. However, the increase in the value of the embedded natural gas accounts for only $102 (or 15%) of that increase. Once the value of natural gas in a ton of AA has been subtracted from the AA price, the residual tends to closely track the price of corn, albeit on different scales. This close correspondence could be due to increased demand for nitrogen products as corn prices increase, or could be due to the exercise of market power by nitrogen product manufacturers and extraction of economic rents from corn producers. The intent of this brief analysis is to neither prove nor disprove either of those two explanations. But, it does raise serious questions and certainly helps explain the frustration producers are feeling.
- The three periods of higher-than-average planted acreage were 2002, 2008 and 2013 to 2015. There were nitrogen price spikes in 2008 and 2013 to 2015. The planted acres in 2021 are considerably lower than acres that triggered previous nitrogen price increases, even as domestic production of nitrogen products has increased.
- Fertilizer is a major cost for corn producers with nitrogen accounting for more than 50% of the cost. Corn has the highest fertilizer cost at $117 per acre followed by rice ($97 per acre) and peanuts and cotton ($68 per acre). The other five crops all spend less than $45 per acre, with soybeans the lowest ($31 per acre) due to little or no nitrogen fertilizer applied.
- Fertilizer costs for corn (36%) account for the highest percentage of operating costs across the nine commodities followed by wheat (35%), oats (32%), grain sorghum (30%), and barley (27%). This means that over one-third of corn and wheat operating costs are directly attributed to highly volatile fertilizer prices.
- AFPC has been requested to analyze the impacts of higher nitrogen prices on all 64 representative crop farms by a member of Congress. Based on currently available data, the increase in nitrogen prices appears to be 81% higher for the 2022 crop than previous estimates. The 46 representative crop farms that grow corn were analyzed using AFPC’s simulation model for the 2022 crop year. The results indicate an average increase in nitrogen costs of $52.07 per acre across the 46 farms growing corn. This would translate into roughly $0.32/bushel that corn farmers would need from the market or government to offset the higher nitrogen price.
- A reactionary response might be for some to scale back their nitrogen fertilizer application against the backdrop of skyrocketing prices; however, in face-to-face meetings with producers, most have indicated this is simply not feasible. Producers are keenly aware of the yield necessary to break even at current commodity prices. Reducing nitrogen application and expenses, thus directly resulting in lower crop yields, is simply not the prudent management decision for attempting to lower costs of production. This might be a time for producers to look to other nutrient sources (such as manure or other alternatives), to more closely manage and monitor available nutrients already banked in the soil, or to possibly implement variable rate fertilizer (VRF) application methods. Unfortunately, these practices have already been adopted by many, and there is simply no fat left to trim in their nutrient management strategies.
Meanwhile, AFPC conducted a separate analysis of the impacts of higher fertilizer prices on the set of 64 representative crop farms, ranches and dairies at the request of Rep. Julia Letlow, Republican from the 5th of Louisiana. Summary and conclusions from the report dated January 2022 (link):
“As the nation struggles to recover from the Covid-19 pandemic, a number of supply chain disruptions continue to wreak havoc on agricultural input markets, both in terms of availability and cost of inputs. In the case of fertilizer, prices have exploded over the past year. Under FAPRI’s August 2021 baseline outlook, nitrogen prices were expected to increase about 10% in 2022. Based on current spot market prices, it appears as though fertilizer prices will increase in excess of 80% for the 2022 planting season (relative to 2021).
“The purpose of this report was to analyze the impact that increased fertilizer prices would have on AFPC’s 64 representative farms. The report found that the largest whole-farm impact would fall on AFPC’s feedgrain farms at an average of $128,000 per farm and the largest per-acre impact would fall on AFPC’s rice farms at $62.04 per acre. Given the farm safety net is not designed to address rapidly rising costs of production, there are growing concerns in the countryside about the need for additional assistance.”
Chris Edgington, an Iowa farmer and current president of National Corn Growers Association (NCGA), says fertilizer prices are the top issue and concern for NCGA members right now. “One of the things that we're really trying to figure out is why the prices have gone up so much,” he says. “Corn's up 50%, nitrogen fertilizer prices are up 150%, maybe more. In fact, it is more now compared to when the study was done. That's a lot and that is a big economic decision maker as you see a shift in price of one of our inputs. And so it will have an influence whether a farmer plants corn, or soybeans or wheat, and what their overall crop mixture is" ahead.
As noted, AFPC’s study shows farmers are currently facing nitrogen costs 80% higher than last year. That’s as Anhydrous Ammonia prices reached 2008 levels in October at over 1,000 dollars per ton. And those prices have been steadily rising ever since. “You're talking fertilizer price that have gone up somewhere close to $200 an acre for this next year for some producers, and the revenue being generated is not offsetting that. And that's just the fertilizer industry,” says Edgington. “That’s not even talking about the chemistry industry or land values or equipment that people can't get. There is a big, big cash flow crunch coming. And the banking industry is nervous about it as well, as they watch what has been a pretty good year for agriculture could absolutely go completely backwards in this next growing season in a big way.”
Edgington says the study reinforces the fact shell-shocked farmers can’t handle more price increases. That’s why NCGA says it’s urging CF Industries and Mosaic to withdraw petitions that led to the tariffs of 19% on imported fertilizers. NCGA, along with several other commodity groups, have filed a case with the U.S. Court of International Trade. A ruling is expected this year.
“We understand some of the risks that we take in agriculture, but when people are asking for tariffs on top of what is already a price that is not acceptable for farmers to be able to try to make a living on, we have some problems with that,” the NCGA grower president says. “And that's why we're pushing back. It's these tariffs. It's companies that are using trade wars and tariffs that are affecting us individual farmers, as we try to make day to day decisions. It will have an impact. There will be less fertilizer put on; there will be a mix, changing the crops, to what level may depend on supply.”