The greatest enigma in agriculture today is not the volatility in grain prices. Most farmers can understand that and have weathered prior storms. But the issue that has everyone scratching their collective head is fertilizer pricing. Wholesale and retail prices went into orbit, and now wholesale prices have returned to Earth, but retail prices are still sky high. Grain can be hedged, but fertilizer can’t. What is a fella to do?

The first thing to do is read the farm management newsletter written by farm management specialist Gary Schnitkey at the University of Illinois, because it may have an impact on what you will be planting this spring.

Fertilizer prices, along with seemingly everything else, are rooted in the turmoil that has captured the global economy. Schnitkey says conventional wisdom is the financial meltdown will lead to a world wide recession, which will diminish the demand for fertilizer, which will lower the price of fertilizer, and that will impact your decision about whether to plant more corn or more soybeans. But how did we get there?

About two months after grain prices peaked in early July, fertilizer prices peaked and then plummeted along a parallel path with grain prices. Wholesale anhydrous ammonia that was once $800+ is now below $200 per ton. Wholesale DAP, that was $1,000+ in September, is now $350 per ton.

Suppliers indicate that a “perfect storm” occurred with the economic collapse, large pipeline stocks of high priced product, and a late fall that prevented typical rates and volumes of application. The credit crunch diminished South American demand, and when US grain prices fell, so did the demand for fertilizer at any price. So fertilizer storehouses are full of unsold products, some of which has a very high price attached to it. Unfortunately for farmers, the closer they are to the fertilizer the higher the price of the product. If retailers are forced to cut prices, they will lose substantial amounts of money on their inventory, but Schnitkey says there are incentives for farmers to delay purchases in the hope prices decline.

But delays could also create unexpected financial risks for farmers, if the recent natural gas price dispute between Russia and the Ukraine boils over to impact the price and availability of anhydrous ammonia. Whatever happens there, as well as the dynamics of pricing for stored fertilizer can potentially impact the acreage relationship between corn and soybeans. Schnitkey says fall fertilizer prices would have been $210 per acre for corn and $92 per acre for soybeans. But potential spring prices could be $143 for corn and $64 for beans. With the lower cost of production for corn, would that change your mind to plant more corn than beans? And if nitrogen prices have one of the biggest cost decreases, that may further encourage increased corn acres.

Summary:
After grain prices collapsed in late summer, production costs continued to rise, particularly with fertilizer. While retail fertilizer is still quite high priced, wholesale prices have dropped substantially because of reduced demand. Local dealers have large stocks of high priced products, and would suffer financially if forced to sell below the cost of their inventory. However, if farmers can gain access to lower priced fertilizers, which would reduce the cost of crop production, substantial changes could occur in whether more corn or more beans would be planted this spring. September fertilizer prices pointed to larger soybean acres, but potential spring fertilizer prices point to larger corn acres.