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 Economics: June 2008 Other Economics Articles |
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by Dan Childs and Jagadeesh Mosali and David Annis |
As we write this in mid-2008, fertilizer prices have reached all-time highs. Who would have believed even a few months ago that any kind of fertilizer would be priced at over $1,000 per ton? Ammonium nitrate (34-0-0) is selling for approximately $440 a ton, with urea (46-0-0) approaching $640. Potash is about $640 a ton and diammonium phosphate (18-46-0) tops the list at over $1,050 a ton. How did we get to these price levels and how does an agricultural producer make sound economic decisions in this environment?
Reasons Behind the Price Increases
Nitrogen prices have tripled since 2000 largely because of high worldwide demand. At the same time, United States production of ammonia and urea has dropped by about a third. The result is the need to import over half of the nation's nitrogen supply. Almost 70 percent of the dry urea supply is imported. Importing puts domestic prices at the mercy of the falling value of the dollar against foreign currencies - a more than 40 percent decline in the past four years. On top of other factors, freight costs have doubled in the past two years.
Set Realistic Goals
Current prices make it especially important to optimize the economic yield - not the total yield - of crops and forages. Simply applying more fertilizer does not lead to the best economic outcome. As you start to set yield goals, knowing the three- to five-year average yield of a crop or pasture is helpful, but many other factors come into play. Always be prepared for great variation in productivity from field to field and from year to year.
Weather conditions play an obvious role in crop or forage yields. Adequate rainfall, moderate temperatures and proper soil moisture will have a positive effect on production. Topdress fertilizer applications will need to be adjusted according to anticipated weather.
Secondly, it is important to know your soil type, its physical properties and chemical makeup. For instance, a coarse sandy soil has less water-holding capacity than a fine-textured loam. Under drought conditions, better yields can be expected on the loam.
Crop rotation is useful to enhance forage yields. Growing a continuous monoculture crop without rotation or a summer fallow period between can lead to increases in insects, plant diseases and weeds.
Organic matter in the soil will affect the availability of fertilizer nitrogen to the plant. Application of organic fertilizers like poultry litter, animal manures, biosolids or the use of legumes to fix nitrogen will affect fertilizer recommendations.
Fertilizing Crops
With today's high crop prices, it is generally profitable to fertilize crops for harvest - even at fertilizer prices higher than current levels. However, one must keep in mind that when more money for seed, fuel, chemicals and fertilizer is invested in a crop, risks increase. If Mother Nature is unkind and yields are below expectations, losses can add up quickly. Therefore, even though applying high-dollar fertilizer to crops can be profitable, serious consideration should be given to crop insurance or some kind of risk management.
Fertilizing Forages
Applying fertilizer to forage crops requires more study. First, let's consider application of nitrogen to a grass. In many cases in our Oklahoma and Texas service area, this is likely to be bermudagrass that will be consumed by beef cows. Every beef cattle producer's cost of production is different, but, for discussion purposes, we'll use average cow costs. At the current prices for calves, our analysis shows a break-even price for urea is in the $500 per ton range. In the short run, a producer may choose to fertilize and allow time for calf prices to rise or to develop a strategic de-stocking plan. If calf prices do increase sufficiently or if fertilizer prices decline, then a producer can delay implementing the de-stocking plan. A rule of thumb for current calf prices and fertilizer prices is that for each 5¢ move per pound of nitrogen (roughly $50 per ton of urea), calf prices need to move a little over $4 per hundredweight to break even.
A second use for bermudagrass is to feed stocker calves. With purchased stockers, it is much easier to adjust stocking rates than with a cow herd. Currently, the market is paying about 75¢ per hundredweight for gain on summer stockers. This would be considered the value of gain, which determines the amount a producer can pay for fertilizer. According to our analysis, with the value of gain in the mid-70s, a producer can pay in the range of $550-$600 per ton for urea. Another rule of thumb for stocker cattle is for each 5¢ move per pound of nitrogen (again - roughly $50 per ton of urea), the value of gain needs to adjust 2.5¢ per pound to maintain the same level of profitability.
What About Hay?
Bermudagrass hay producers should consider the value of the nutrients that are removed from the soil to decide if production costs are being met. At current fertilizer prices, and assuming that one ton of bermudagrass forage (testing 12 percent crude protein) contains 38 pounds of actual N (nitrogen), 9 pounds of P2O5 (phosphorus) and 48 pounds of K2O (potassium), approximately $1.90 of nutrients are present in a 62-pound square bale. A 1,000-pound round bale will remove approximately $30 of nutrients from the soil.
On top of the price of nutrient loss, expenses are incurred to bale the hay, pay for land, finance equipment and meet other needs. Custom rates for small square bales are typically around $1.10 per small square bale and approximately $22 dollars per 1,000-pound round bale.
When typical expenses are added together, the break-even price for a small square bale is about $3 and $52 per 1,000-pound round bale. In our region, hay is selling for about $4 to $6 for a small square bale and about $35 to $40 for a round bale. If you plan on buying hay, knowing the nutrient content (i.e., crude protein) allows you to make better purchasing decisions. Now may be a good time to invest in a forage probe for testing hay.
Summary
With fertilizer prices at record high levels, it is more important than ever to have up-to-date soil tests to determine needed fertilizer application. Hay buyers would be wise to rely on forage sampling to determine the quality of available hay. Current crop prices are sufficient to justify applications of fertilizer. However, fertilizer applications to forage that will be consumed by either beef cows or stocker calves require judicious study.
With fertilizer prices at today's levels, we, as agricultural consultants, have found ourselves in the unusual position of making the recommendation (on a case-by-case basis) not to apply fertilizer. To determine the proper strategy for your operation, please contact a soils and crops consultant and/or an agricultural economist.