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Falling corn prices = cheaper fertilizer

DANIEL LOOKER 11/06/2013 @ 12:27pm Business Editor

If there is a silver lining in today’s storm clouds of lower crop prices and shrinking margins, it’s fertilizer. Prices are falling and could continue to fall – especially for nitrogen – as the global marketplace becomes slightly more competitive. Due to the breakup of a potash cartel between Russia and Belarus, producers are getting a modest windfall in the cost of that input. Changes in production of nitrogen (the product that usually accounts for half or more of a farm’s nitrogen, phosphate, and potash (NPK) costs are even more significant. Cheap and abundant natural gas from the U.S. fracking boom could bring four or five large-scale nitrogen plants to the Midwest, say some in the industry. One being built in southeast Iowa by the Egyptian company Orascom Construction Industries is set to begin production in 2015.

Cheap natural gas in the interior of the U.S. is shifting fertilizer production from the Gulf Coast to the Midwest, says Jeff MacKenzie, a Chicago-area economist who consults for Orascom, which is building a $1.8 billion nitrogen fertilizer plant near Wever, Iowa, a small town near the Mississippi River city of Burlington.

“I believe ammonia nitrogen will stabilize in price down to around $400 a ton from about $700 a ton currently,” MacKenzie said last summer at the Iowa Farm Bureau’s Economic Summit.

Since then, nitrogen has fallen below $700 a ton but few expect nitrogen to get cheap quickly.

By early fall, anhydrous ammonia in Illinois was below $680 a ton, and University of Illinois economist Gary Schnitkey didn’t expect it to go up before the 2014 corn crop is planted. Prices probably aren’t critical for the timing of fertilizer purchases, he believes.

“I don’t see why you’d want to be in a hurry. I don’t see anything on the horizon where N prices are going up,” he says.

Schnitkey projects total fertilizer costs for NPK at about $140 an acre on productive northern Illinois land next year. That’s down sharply from $170 an acre for the 2013 crop and a peak of $200 an acre in 2012.

The decline won’t be enough to keep margins as profitable as they were in 2011 and 2012, Schnitkey says.

Fertilizer is such a big share – almost half – of the projected $357 an acre in direct input costs, that it will make a difference. Fertilizer is also more than a fourth of the total nonland costs of $537 an acre.

“That’s why everybody follows it so much,” Schnitkey says. It’s the single biggest nonland cost, exceeding $110 an acre for seed and $121 an acre for total power costs that include machinery depreciation, repairs, and fuel.

In recent years, fertilizer prices have followed corn prices upward, rising from $90 an acre in 2007 and increasing every year, except for a dip in 2010 and 2011, to the 2012 peak. Nitrogen fertilizer once tracked with the price of natural gas, its biggest ingredient and a power source. In about 2006, nitrogen decoupled from the price of natural gas. At that time, anhydrous ammonia was about $500 a ton.

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