Fertilizer Prices and Corn Profit Margins: What Are the Impacts of Higher Input Prices?
Nicholas Bannon, Daniel Schuurmann, and Alfons Weersink
Despite the recent frigid temperatures and piles of snow, many Ontario farmers are beginning to prepare their budgets for the 2022 growing season. Each year, the Ontario Ministry of Agriculture, Food and Rural Affairs (OMAFRA) publishes Publication 60, a tool to help farmers prepare their budgets. This is an annual guide that details cost estimates across a variety of field crops and allows an individual farmer to input details specific to their farm. This allows farmers to easily estimate their profit margin and break-even prices for the upcoming year.
With respect to their 2022 budgets, one trend that Ontario corn farmers are paying close attention to is the rise in nitrogen fertilizer prices. Farmers that use Publication 60 will have noticed that the fertility section of the 2022 budget is much more expensive than in previous years. Compared to prices in 2020, prices for some fertilizers in Ontario have risen by nearly 50%. Such dramatic increases in input costs can tighten farmers' margins, requiring farmers to carefully plan activities such as forward buying to maximize their profits. This is particularly important for corn farmers, as corn requires comparatively more nitrogen fertilizer than other field crops.
The 2022 edition of Publication 60 uses a base price of $1.74 per kilogram of nitrogen. This price represents a 58% increase compared to the estimated nitrogen price of $1.10 per kilogram used in the 2021 edition. The current price is also 39% and 38% higher than the estimated nitrogen prices of $1.25 per kilogram and $1.26 per kilogram that was used in the 2020 and 2019 budgets. As costs for other activities such as seeding, custom application, and drying remain largely unchanged from previous years, the increase in operating expenses that Ontario corn farmers are likely to face in 2022 is primarily the result of increases in nitrogen fertilizer prices.
Overall, Publication 60 estimates that the total expenses (not including land rent) facing a grain corn farmer using conventional tillage in Ontario will be $722 per acre for the 2022 crop year. This represents an increase of nearly $100 per acre compared to the estimate for the 2021 season. As shown in figure 1, break-even prices for corn farmers are noticeably higher in 2022 compared to the previous three years. At 175 bushels per acre, the estimated breakeven price will be $4.12 per bushel in 2022, up from $3.60 per bushel in 2021. For farmers who can spread their costs over a yield of 200 bushels per acre, the breakeven price will fall to $3.61 per bushel. Farmers who experience lower corn yields, will need to pay closer attention to prices, with a farm producing 150 bushels per acre requiring a price of at least $4.81 per acre to avoid falling into the red.
While total expenses and the break-even price for corn are expected to increase in 2022, that doesn’t necessarily mean that farmers will be worse off. Ultimately, the price of corn will determine whether farmers are profitable in 2022. If the price of corn is strong this year and near or above $5 per bushel, the majority of farmers will likely remain profitable despite higher input costs. This outcome is probable, as when input prices are high, commodity prices often follow. For most of 2021, corn prices rose and peaked at $7.82 per bushel in September (Figure 2). This allowed corn farmers in 2021 to capture very strong margins, especially those who locked in a low price for fertilizer early in the year. Since the peak in September, corn prices have fallen slightly, but still remain relatively high. Considering the small dip in corn prices and spike and fertilizer prices, farmers should continue to monitor prices for both corn and fertilizer, as the ratio between them can influence their expected profit margin. As figure 2 shows, the ratio between urea fertilizer and corn prices has increased in recent months but was stable prior to September 2021. The constant nature of the ratio prior to the large spike in fertilizer prices may signal that this trend is only temporary.
As of February 17th, most Ontario elevators are purchasing corn that will be delivered in November 2022 for $7.08 per bushel. At the estimated costs according to Publication 60 and a price of $7.08 per bushel, farmers producing 175 bushels per acre can expect a return of $2.96 per bushel, equivalent to $518 per acre. Under the same cost and current corn price conditions, a farmer would need to produce only 102 bushels of corn per acre to breakeven, significantly below the historical provincial yield average. If farmers can cut costs on fertilizer by reducing application amounts without significantly diminishing their yields, this could push their profits up even further. Additionally, risk-averse farmers looking to secure strong profits margins now could contract corn futures, but at the risk of missing out on higher corn prices. To summarize, Ontario corn farmers' margins may not be as high as they were in 2021, but assuming that the price of corn remains around its current level, it is safe to say that Ontario corn farmers should be able to safely navigate high fertilizer prices and remain profitable in 2022.
#fertilizer #farming #agriculture #corn #costs #profitability #crop
Recommended citation format: Bannon, N, Schuurmann, D., and A. Weersink. "Fertilizer Prices and Corn Profit Margins: What Are the Impacts of Higher Input Prices??". Food Focus Guelph (124), Department of Food, Agricultural and Resource Economics, University of Guelph, March 5, 2022.