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Economist says fertilizer costs will fall in 2016

Iowa Correspondent

URBANA, Ill. — Fertilizer prices are expected to decrease in 2016, the lowest than in all years since 2009, based on current projections that put this year’s costs at about $10 per acre lower than in 2015, said Gary Schnitkey, University of Illinois agricultural economist.
“If fertilizer prices continue to decrease, this cost decrease could become larger,” he said.
Schnitkey said December 2015 prices are used to project 2016 fertilizer costs for corn grown on high-productivity farmland, and are lower than in recent years, leading to lower projected 2016 fertilizer costs. The USDA’s Agricultural Marketing Service reported fertilizer prices in its twice-monthly Illinois Production Costs report.
As of Dec. 10, the average price of anhydrous ammonia (NH3) in Illinois was $650 per ton, Schnitkey said. “This December 2015 price is $78 per ton lower than the $728 per ton in December 2014,” he pointed out. “The $650 price is the lowest price since 2008, when anhydrous ammonia was selling for $478 per ton.”
Currently, diammonium phosphate (DAP) is $536 per ton, $23 lower than the 2015 price. “DAP has been lower than the 2015 price twice since 2008: $408 per ton in 2009 and $501 per ton in 2013,” he said.
“Potash is $414 per ton in December 2015. The 2015 price is $65 lower than the 2015 price of $479 per ton.”
Schnitkey said implied fertilizer costs for the coming year are calculated using December prices.
“These implied costs allow assessing the joint impacts of fertilizer price changes across years, as well as providing predictions of coming year’s costs.”
Per-acre fertilizer costs are calculated using requirements for corn producing 200 bushels per acre, with phosphorus and potash applications at replacement levels, and fertilizer requirements coming from the Illinois Agronomy Handbook.
“Amounts used in calculations are 215 pounds of anhydrous ammonia, 190 pounds of DAP and 60 pounds of potash,” he said. “December 2015 prices result in fertilizer costs of $133 per acre. This cost is below the implied cost using December 2014 prices of $145 per acre.”
Overall, Schnitkey said the December 2015 prices result in the lower cost than any year since 2009.
“In December 2009, implied costs were $109 per acre,” he said.
“Lower implied costs suggests 2016 fertilizer costs will be lower than in recent years. As one would expect, implied fertilizer costs using December prices are not a perfect indicator of fertilizer costs in the following year.
“December is only one month out of the year, while fertilizer is purchased in many months. Moreover, quantities can vary from those used to calculate implied costs. For example, implied fertilizer costs using December 2008 prices is $204 per acre, while costs incurred in 2009 is $185 per acre.”
Even given these differences, Schnitkey said December prices are useful predictors of fertilizer costs in the following year.
Clarke McGrath, Iowa State University Iowa Soybean Research Center’s on-farm research and extension coordinator in Harlan, said Iowa fertilizer prices per acre aren’t far off from Schnitkey’s projections: DAP, $525-$535; monoammonium phosphate, $540-$550; potash, $400-$420; urea, $400; and NH3, $600-$620.
“From the retailer perspective, they understand that we’ve had several big crops over the last few seasons,” he said.
“A lot of soil fertility was removed by these big yields, so in many cases, it needs to be replaced with fertilizer.
“Retailers also have inventory and contractual purchase agreements for fertilizers that they have to deal with, so they need to move some product and try not to take a beating on it,” he added. "They also understand that they and their customers are in this together for the long haul, so we are hearing some of them write down margins, or in some cases, even take losses on tonnage just to get it off the books and to maintain customer ties."
From the grower’s perspective, McGrath said, “We have had a couple of good crops recently and we understand that we need to put some fertilizer back on, but take a look at the grain markets and the balance sheets.”
Long-term, McGrath said fertilizer markets used to follow grain markets to a degree, but with grain and fertilizer becoming more global commodities, they don’t follow as closely as they used to. “Our next best hope is that grain markets recover before fertilizer prices do and we can catch up on P and K needs in the next year or two.
“I hope that happens, but grain prices are moving significantly higher, while at the same time fertilizer markets are holding steady,” he added. “The odds of that happening are long.”