Will Fertilizer, Natural Gas Costs Follow Crude Oil Lower?

Crude oil prices have been steadily climbing since about mid-March, now toiling around the $60-per-barrel mark, one that some analysts say is a critical price point that could signal more upside momentum to come. Though a lot of analysts in the energy sector say it's not time to batten down the hatches in preparation for another runup to $80 or $100 a barrel yet, it's a sign that a low is in, at least for the remainder of spring and summer.

That likely means if you haven't covered your diesel needs for your farm the remainder of the growing season, you will likely be paying more, since the two markets are essentially tied at the hip. But just because diesel is going up a bit, it doesn't mean the expense side of the balance sheet will totally grow disproportionately larger just yet, one analyst says.

Though crude oil and diesel prices have risen since then, March saw diesel prices on average around 70 cents per gallon lower than the previous year. For the average Illinois corn farm, that equated to about $24 an acre last year, and the March figures ($2.30 per gallon this March vs. $3.58 a gallon last March) would mean an overall reduction of about $9 an acre.

Though $9 sounds like a lot, it comprises less than a 2% decrease in nonland costs, according to University of Illinois Extension ag economist Gary Schnitkey.

"For soybeans, a 36% decline translates into an $8 decrease from $21 per acre in 2014 to $13 per acre in 2015. An $8-per-acre decrease results in a 2.2% reduction in the $370-per-acre projection for nonland costs," he says. "While helpful, these cost reductions are not large relative to total costs of producing corn and soybeans."

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Where the price difference matters more is in other nonland crop inputs, namely fertilizer and grain-drying costs. Prices for the former haven't changed much, leading some to think that may be in the cards soon. Meanwhile, the same could be true for drying costs, depending on the condition of the crop at harvest time.

"In and of themselves, fuel price decreases will not have a substantial impact on costs. However, several other inputs have had close relationships to energy prices. Two inputs with direct relationships are nitrogen fertilizer and drying. Nitrogen fertilizer is made with natural gas, and natural gas prices have fallen. So far, though, nitrogen fertilizer prices have not decreased. Drying costs may be lower in 2015; however, drying costs will also be highly dependent on grain moisture levels at harvest," Schnitkey says. "Lower diesel fuel prices will result in lower costs of producing corn and soybeans. However, fuel constitutes a small portion of total costs of producing grain. As a result, diesel fuel price decreases will be in the 1% to 2% or total cost range."

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