Editorial comment
GREGG IBENDAHL, ASSOCIATE PROFESSOR, KANSAS STATE UNIVERSITY
Fertilizer prices for farmers increased tremendously during 2021 and through spring planting. Anhydrous tripled in price from US$500/t to US$1500/t. These price increases mainly happened during the latter half of 2021, although the Russian/Ukraine conflict certainly did not help the situation. Prices for most fertilizers have now levelled off and in some cases declined. However, anhydrous is still more than double last summer’s price, and all fertilizers come at a higher cost than last year.
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It has been shown that there is a high correlation between the prices of all fertilizers commonly used by farmers.1 As might be expected, all nitrogen products such as Urea, DAP, and MAP have correlations with anhydrous above 0.90. However, even the correlation between anhydrous and potash is 0.72. Thus, farmers have seen a substantial increase in their cost of production, no matter what crop they grow or the type of fertilizer used.
Fertilizer for corn production now accounts for 39% of direct expenses and 29% of total expenses, while fertilizer for soybean production now accounts for 27% of direct expenses and 16% of total expenses. The fertilizer cost to grow corn in northeast Kansas this year is US$181 compared to US$73 last year, making fertilizer the biggest single line item in the Kansas State crop budgets.
Soybeans have a lower total cost per acre than corn and soybean fertilizer. It makes up a lower percentage of expenses because soybeans are a legume and don’t require nitrogen fertilizer. This provides two advantages in a year like 2022. Firstly, nitrogen has increased in price more than phosphorus and potassium, and not needing nitrogen eliminates the greatest fertilizer price increase. Secondly, unlike nitrogen which needs to be applied every year, farmers can skip a year of applying potassium and phosphorus. Agronomists don’t like the soil levels of P and K to drop too low as it is difficult to rebuild, but for most farmers, skipping a year of these two nutrients is feasible.
Given the fertilizer cost savings that soybeans can provide in a year like 2022, one might expect farmers to shift many of their acres into soybeans in 2022. Not only is the cost of corn and soybeans lower, corn acres for 2022 are estimated by the USDA to be down only 4% from last year while soybean acres are up 1%.
Despite the much higher fertilizer prices, Kansas State estimates that farmers in northeast Kansas have an expected return over all costs of US$142 from planting corn. Soybeans in the same region have an expected return of US$151. So, despite the large increases in fertilizer costs, the price increases in corn and soybeans have actually outpaced the cost rise. Earlier this spring, Ibendahl and O’Brien (2022) forecasted net farm income for 2022 to be above 2021.
The other issue constraining a switch to soybean acres is the crop rotations that farmers use. Weed pressure is reduced by switching crops from year to year and farmers also get a nitrogen credit when planting corn after soybeans.
The final issue to consider with farmers’ use of fertilizer is whether higher prices will curtail fertilizer use at some point. As economists like to point out, an input should be used to the point that marginal costs equal margin revenue. Thus, if fertilizer prices rise (higher marginal costs), all else being equal, fertilizer use should decline.
While the ‘marginal cost equals marginal revenue’ principle still holds, in farming, it is less applicable with fertilizer, as the yield response curve for fertilizer application is often described as looking like an inverted hockey stick. That is, yields increase fairly rapidly up to a point near maximum yield, and then level off. In other words, maximising yield is often the same as maximising profits. Farmers are thus unlikely to greatly cut back on fertilizer.
- IBENDAHL, G., 2022.“Fertilizer Prices - A June Update” AgManager Publication - GI-2022.28, June 6, 2022. (www.agmanager.info/production-economics/prices-and-price-forecasts/fertilizer-prices-june-update)
- BENDAHL, G., and O’BRIEN, D., 2022. “An Update to Net Farm Income Projections for 2022.” AgManager Publication - GI-2022.15, April 13, 2022. (www.agmanager.info/farm-management/farm-profitability/update-net-farm-income-projections-2022)
