Increasing Expenses More of a Challenge This Year

BY JOHN MILLER

Over the past two years we have all noticed the rising cost of just about everything we use in daily living. It is absolutely the case that over the past couple of years Covid related issues across the globe have played a huge role in market disruptions.

The nature of this disease led governments around the world to be very proactive to prevent further spread. Government led sanctions on travel and commerce sent shockwaves through most commodity and equity markets. In addition, the civilian population has been required to make personal decisions about how to live out daily life with less risk to catching this disease, and for many this includes cutting out travel and face-to-face commerce. Merely the chance for further spread of Covid related sanctions or impact on the civilian mindset about how to carry out daily life has created extreme price volatility in the marketplace.

One measure of the economy that affects us all is the consumer price index charted in Figure 1 below. I don’t have to mention that prices for just about all consumer goods has gone up, and many are very limited in supply. Try buying a new vehicle to drive, or some common food items. Figure 1 goes back to the early 1970’s, and you can clearly see how our current situation is starting to resemble the much-remembered inflation of the late 1970’s. Something to keep in mind is that the high inflationary period of the late 1970’s was followed by a recession that was strongly felt across Texas since this was very painful period for the oilfield. most closely with the highest inflationary areas across Europe which in this case are Eastern European countries. One could spend pages debating all the causes and possible cures for our current inflation and include topics like national debt, trade policies, federal reserve monetary policy, taxation and regulatory measures and the like. The bottom line however is the fact that prolonged inflation coupled with the uncertainty of commodity prices add tremendous risk to farming. And at this time US agriculture, while experiencing better than average prices for their products as illustrated by Figure 3 which is the corn futures price for next summer, is struggling under the weight of rapidly rising input costs. This is nowhere being more revealed than in fertilizer products which are so vital to crop productivity and can comprise anywhere from a quarter to a third of the annual budget.

For a closer look at the US inflationary situation see Figure 2 which shows how we compare to Europe. It may surprise you that it is the middle US that has the highest inflation here at home and compares Over the past year, the increasingly tight supplies and rising prices of fertilizer has been related to North American production problems, largely related to Hurricane Ida that hit the MS delta so hard, the skyrocketing natural gas prices in Europe that all but halted production there, and Chinese and Russian government policies limiting exports from the world’s main suppliers. Across Europe, natural gas values over the past few months have risen from less than ten dollars risen from less than ten dollars per mmbtu to over 40. This has been a game changer for nitrogen production since natural gas is a major price component. The extreme val-

ues of natural gas led to facilities slowing down, or in many cases shutting down completely. What is interesting is that industry professionals have indicated that even plants that had pre-purchased lower prices for needed natural gas, it was more profitable to resell those supplies rather than operate the plant. It is also the case that European production will likely not return to normal until they see lower natural gas prices. As referred to above, part of the problem is a Russia that is using tight supplies to gain political leverage for building their network of pipelines to Western Europe. And it does not help that Europe has become so dependent on renewables such and wind and solar, both of which have not met expectations. Using the Port of New Orleans for perspective, prices for UAN (32% nitrogen by weight), has increased by $ 235 dollars per ton over the past three months, or 75 %. Over the past year, this product has increased by over $ 400, or 300 percent. This creates a challenge for farmers that must decide on which crop to plant, and how strongly to hold to time-proven applications. At a minimum, farmers need the price of natural gas to fall so that the cost of producing fertilizer can decline otherwise fertilizer production is unlikely to increase. Figure 4 shows January Natural Gas futures, and while we recently saw some correction to the downside, prices are again rising as we head into increased wintertime use.

For nitrogen-based products like the popular UAN, experts suggests it would be natural gas prices falling back to $ 10 or less in Europe that would encourage fertilizer manufacturers to drop prices rather than face competition from competing products such as urea or ammonia. For now, about the only saving grace for farmers is that we are experiencing 2022 commodity prices that suggest that their cotton and grain prices could meet or beat this past season. But we all understand that commodities such as cotton and corn and sorghum can see prices rise or fall dramatically in a short period of time. Figure 5 provided by StoneX is interesting since it shows a comparison of the current ratio of this same UAN product to the price of corn. In this Midwest example, you can see where this ratio in the heavy red line has skyrocketed from approximately 35 bushels of corn to cover 1 ton of UAN to over 100 bushels to cover 1 ton of UAN. While the valley will not be this extreme, it does show the 2021 trend versus the past few years of relatively little change.

Other fertilizer products such as Phosphates and Urea also seem destined for strong prices into spring. China continues to all but totally restrict the export of phosphate and urea despite some optimism that the government there would have reversed that decision by now. This is of critical importance since China is practically the largest exporter of phosphate worldwide. Experts agree that until China relaxes this policy and allows a free market to operate, supplies here in the US will likely remain tight enough to keep prices higher than we are used to seeing. China’s system of communism allows them to artificially stop the movement of fertilizer to the ports that would normally ship to largely the US and Brazil. It has been reported that China controls up to 40 percent of world phosphate supplies so it is hard to imagine that world supplies will become more balanced until this situation changes. We have to hope that the old adage of ‘high prices lead to a cure for high prices’ will prevail. The US Midwest will be an interesting study this spring as we find out if farmers there will pursue alternative crops that require less fertilizer, or simply apply less fertilizer. Other possibilities include lower natural gas prices if trade politics between Russia and broader Europe change, or some yet to be seen marketplace or political change that would abruptly change the price landscape. For now, most fertilizer traders seem to be more in favor of a continuation of high fertilizer prices into spring. When you see crops growing across the Valley this season, remember that a lot of financial planning and risk taking is involved in seeing a crop through to harvest. We so often only talk about what prices are received by famers for their cotton or grain or sugar or cattle and often pass over the consideration of how much time and effort it takes to control cost in the face of uncertain yield and price received at harvest. The good new is that we are seeing some good prices for 2021 at this time, and technology has provided some measure of opportunity, but we need Mother Nature to help in paying for it as much as ever before.