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Fertilizer dilemma has farmers on edge, analyst says

All aspects of the supply chain may be affected for longer than anticipated.

Skyrocketing fertilizer prices and expectations for increased soybean acreage in the year ahead could create a significant change in the price ratio of corn to soybeans.

These are unusual times with the backdrop of uncertainty created through supply disruptions due to COVID. Just 18 months ago, when the full effects of a pandemic took place, no one likely thought long-term ramifications would have such an impact on so many industries, and almost everything in our daily lives.
Now we see fertilizer prices skyrocketing, and a bigger concern could be availability. All aspects of the supply chain may be affected for longer than anticipated. That includes labor, extract and refine materials necessary to produce the fertilizer, shipping of these materials, and finally, trucking to move product to its destination – all aspects have challenges to overcome.  

Typically, this is the time of year when farmers can negotiate with their suppliers for the year ahead. In some cases, that has occurred. In other cases, suppliers can't or won’t quote a price or delivery window. It is October, a long time between now and spring. Yet, the inability to apply fall applications and the discomfort producers are experiencing has many on edge. Not knowing what they will pay or if the product will even be available has many farmers considering alternatives. The most obvious choice for some is to plant more soybeans.

Typically, the price ratio that encourages more soybean planting versus corn is about 2.4. This ratio comes from taking the price of November soybean futures and dividing it by December corn futures. The current ratio is near 2.33. The ratio is simply a guide that may help farmers decide the acreage for each crop. At 2.33, this would suggest farmers would likely plant more corn. The relevance of the ratio may be immaterial this year, as the price for soybeans on November futures is trading near $12.25, historically high and (for some) an easy decision to grow additional soybeans.
Much can change between now and next spring. The contrarian opinion might suggest that, if farmers are leaning more toward soybeans now, then others will plant more corn and hope for the best. Only time will tell.

Brazil is expected to plant more soybeans, which could add to world supply. From a marketing perspective, it may be a good year to defend soybean prices soon (now) through either put purchases for next fall’s production, or forward sell and buy calls to re-own. This creates a balance of cash sales and the ability to participate in price rallies.

For corn, despite trading over $5.00 on December 2022 futures (historically an attractive price) the same strategies make sense. Defend high prices and re-own or establish price floors that leave the topside price appreciation intact. Visit with your advisor to determine the best route for your operation. Expect these abnormal times to continue as the world navigates uncertainty.

Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.

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