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Will anhydrous ammonia costs tip the balance in the battle for acres?

In the battle for acres, one key variable is input costs and what it could mean for 2008 corn, soybean and wheat acres. Clearly, wheat inputs are on the low end of the spectrum, but with the corn market lingering on the high side, a farmer can justify higher input costs if he or she can lock in that sought-after target price, even if it means another year of continuous corn.

With the 2007 corn harvest in the books, farmers are now turning to fall fertilizer applications. Does the amount of anhydrous ammonia (NH3) leaving Midwest cooperatives and retailers foreshadow the size of next year's crop? If so, the 2008 corn crop could be a big one.

"There's a lot of anhydrous [ammonia] going out right now," says Dave Lund, location manager of Heart of Iowa Cooperative in Nevada, Iowa. "There's not going to be much switching acres around, at least around here."

Elsewhere in the Corn Belt, anhydrous sales are big -- enough so that farmers like Agriculture Online Marketing Talk member jkaahend says corn is surging ahead early in the battle for acres in his area of west-central Indiana.

"The local fertilizer plant is looking at a possible record amount of NH3 being applied this fall, with the combination of good corn prices and great weather for getting it applied here," jkaahend writes. "That has changed greatly in the past few weeks. The talk a month ago was more beans, to avoid the high input costs of corn."

The jump in sales have made NH3 concerns a common thread in corn country. In central Illinois, Farm Business Talk member ILStUFH has watched orders eclipse supplies at his ammonia facility, and filling those orders is only contributing to the rising costs.

"Pretty much any plant around here in central Illinois is out of its allocations for this fall. At the plant where I work, we are 300 tons over what we were allocated. So we have ours coming from Henderson, Kentucky, six hours one way," ILStUFH writes. "We were told that, once we are out of what is coming in from Kentucky, the price is going up. We are looking at around $610 to $620 next spring. Ridiculous."

Even if the market tilts in favor of soybeans -- as high as $10 per bushel -- that may not be enough to convince farmers to abandon a corn-heavy rotation. At least not under current market conditions, says Marketing Talk membercoup.

"It looks like there will be more of an increase in corn acres than the increase from the previous year," coup says of his outlook for '08. "Soybean acres in '08 are in real trouble. $10 beans sure hasn't got folks interested.

"From the looks of things, corn acres in this part of Illinois will increase about as much in '08 as they did in '07. Beans are going to need to be put on the endangered species list."

With all the NH3 leaving Corn Belt cooperatives and retailers this fall -- so much that some outlets are running short on supply -- that means corn is winning the battle for acres, right? Not so fast, says Iowa State University farm management specialist Don Hofstrand. Hofstrand, who closely follows the relationship between the energy and commodity markets, says a return to more corn in '08 isn't the sole reason for the exodus of NH3 this fall. It's definitely on the battlefield, but potential increases in NH3 prices in the spring are weighing more on farmers' minds.

"Concerns for what prices are going to be next spring are a big factor. Concerns are bigger than facts right now," Hofstrand says.

The marketplace for anhydrous ammonia is highly volatile right now, for several reasons. Natural gas accounts for 80% of the cost of producing ammonia, according to Hofstrand, so it's easy to point to that sector in determining the source of future price spikes.

"The cost of natural gas is the major factor in determining the price of ammonia and the cost of ammonia is a major factor in determining the price of nitrogen fertilizer," Hofstrand says.

But, other factors could contribute to the rise in NH3 costs. At the same time U.S. corn production has increased, domestic ammonia production has actually declined steadily since 2000. "From 2000 to 2006, ammonia production declined from 18 million tons to 10 million tons, a 44% decline," Hofstrand says. "During the same period, the number of ammonia plants declined from 40 to 25 and production capacity declined from 20 million tons to 13 million tons."

A third part of the equation lies in how the market's replenished lost domestic production -- imports. In the last decade, imports have gone from 35% of the total market to 80%. This climb in imports -- largely from the Trinidad and Tobago Republic, Ukraine, Russia and Canada -- has set into motion a chain of events that has, and will likely continue to weigh on domestic production.

"Natural gas prices are substantially lower in many other parts of the world. Several of these locations can produce ammonia, ship it to the U.S. and sell it at a lower price than that of domestic producers," Hofstrand says. "So we are losing our ammonia industry to foreign suppliers."

With more imports, adds Hofstrand, will come higher costs incurred by the end-user. "Natural gas price is not the only factor to consider. The cost of shipping is another. Ammonia is a hazardous material and must be transferred in pressurized containers."

While some farmers may have already made their acreage decisions for the 2008 crop, the decision for many will, in the end, boil down to input costs. And, with such a jump in NH3 prices seen on the horizon for next spring, this may alone be enough to tilt the balance away from more corn and more toward a traditional corn-soybean or wheat rotation.

"The cost issue enters into the calculus of determining what to do with acres next spring," Hofstrand says. "Some farmers I've talked to tried second-year corn for the first time this year and it didn't pan out. They had a yield drop and were concerned with the additional grain to handle. But, at the same time, the beans looked fairly good."

When it comes to anhydrous ammonia prices, as it stands right now, Hofstrand says the current anticipation of higher prices next spring has eclipsed the actual price tag of NH3 now in terms of an acreage decision factor. Because of this combined with foreseen variability in the corn market, the scale at this point may be evenly balanced in the battle for acres.

"A big question is: What kind of corn prices will we need to maintain these corn acres?" Hofstrand says. "Some are looking at moving back to a traditional perspective -- it's shaping up for a good acreage battle for next spring."

In the battle for acres, one key variable is input costs and what it could mean for 2008 corn, soybean and wheat acres. Clearly, wheat inputs are on the low end of the spectrum, but with the corn market lingering on the high side, a farmer can justify higher input costs if he or she can lock in that sought-after target price, even if it means another year of continuous corn.

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