As cotton harvest finishes up during the month of December, farms can assess how they fared for the year. More importantly though, they will make plans for 2022. Compared to this time last year, farm inputs are up sharply; meaning planning for the 2022 crop year is more important than ever to be sure risks are managed.
The chart below shows average weekly fertilizer and fuel prices in the southeastern United States for the past 18 months. Average prices from a year ago December and current average prices are highlighted. The nutrient prices (solid lines) are read on the left vertical axis in dollars per pound of nutrient. Fuel prices (dotted lines) are read on the right vertical axis in dollars per gallon.
Average Weekly Fertilizer and Fuel Prices in the Southeast, July 2020 to December 2021
Chart Source: Author compiled with data from USDA Market News with State Departments of Agriculture from Alabama, North Carolina, and South Carolina
Average nitrogen fertilizer prices increased 106 percent compared to December 2020 from $0.45/lb to $0.93/lb. Average phosphorus prices have increased 69 percent from last December ($0.38/lb) to December 2021 ($0.63/lb). Potash has seen the largest year-over-year percentage increase from $0.32/lb last December to an average $0.68/lb this December, which is an increase of 110 percent. Fuel prices are also up. LP increased $0.70/gallon to $1.77, up 58 percent. Farm diesel is up 60 percent to an average $2.76 per gallon, which is nearly $0.90 per gallon above last December’s price. Average farm diesel price is down slightly from a peak of $3.15 per gallon in early November 2021.
Producers are wondering if this is a price bubble and if input prices will trend down as rapidly as they increased. Unfortunately, there are a lot of factors at play that indicate high prices are here to stay throughout 2022 and perhaps into 2023. Demand and supply issues are both affecting fertilizer and fuel prices.
First, let’s look at what is happening in fuels. Demand is up in the U.S. and abroad as the global economy recovers from the pandemic. Fuel use is back to the pre-pandemic levels we saw during 2019. Supply challenges in the natural gas market in Europe have led to increased prices (which has also affected fertilizers). Three primary drivers affecting supply are natural disasters (hurricanes, extreme weather events, and earthquakes) which have impacted infrastructure both here and abroad, reduced exports by Russia, and China’s efforts to improve air quality. Hopefully the forecasted La Nina weather pattern for this winter will lead to a warmer than usual winter and reduce demand for natural gas. From a petroleum standpoint, the U.S. and OPEC are working to increase supply to meet global demand and fuel prices are expected to see some relief in 2022 although they will remain above 2020 price levels.
Next, let’s take a look at what is happening in fertilizers. Commodity prices drive demand for fertilizer use and that is at a global level. Not only are U.S. producers wanting to plant more acres, but so are producers in other countries, including Brazil and India. As the world continues to recover from the pandemic, commodity prices should remain attractive keeping demand for nutrients up. On the supply side, trade is one of the major factors affecting prices. Russia (nitrogen, phosphate, and potash) and China (nitrogen and phosphate) have announced plans to reduce exports of fertilizers to keep fertilizer use within their borders. Sanctions on Belarus also affect potash as Belarus accounts for one fifth of global potash exports. Subsidies in India make fertilizers less expensive to producers in India, but that drives demand up and increases prices to the rest of the world. Tariffs on imports make fertilizers more expensive to U.S. producers and those are presently in place following low fertilizer prices during 2019 and 2020. Other factors affecting price of nutrients are increased production costs (natural gas, labor, and infrastructure costs) post- pandemic and higher transportation costs (shipping and trucking). Given the expectation for high demand and tight supply, the prices for nutrients are expected to remain firm in the near term.
What does this mean for Georgia cotton producers? With the increased input costs, margins will be tighter in 2022 than this past year. Fertilizer and fuel costs account for over 30% of the direct cost of producing cotton. Nutrient management will be key to managing risk. Soil testing to determine nutrient needs and the efficient and timely application of fertilizers will be critical. Furthermore, producers will need to estimate their cost of production. Enterprise budgets can help do this and calculate breakeven prices and yields. December ‘22 cotton futures are just under $0.90 per pound at the writing of this article. Using the 2022 UGA Irrigated Cotton Enterprise Budget and the USDA National Agricultural Statistics Service state average irrigated crop land cash rental rate for Georgia of $210 per acre, breakeven yields are estimated at just over 1,000 pounds of lint per acre. Breakeven prices are estimated at $0.77/lb. Individual producer costs will vary. The budgets are estimates only and producers are encouraged to enter their own costs and rates for land rent into the enterprise budget. These budgets can be found online at www.agecon.uga.edu/extension/budgets
Amanda R. Smith, Department of Agricultural & Applied Economics