Fertilizer Prices Are Up 49 Percent To 138 Percent, Depending On Type
DR. AARON SMITH
KNOXVILLE, TENNESSEE
Managing financial risk for the 2022 crop will be the most important decision producers make this year. So far, 2022 has been positive for grain and oilseed prices. Since the start of the year, harvest futures contracts for soybeans are up $2.00 ($12.69 to $14.69), corn up $0.98 ($5.46 to $6.44), and wheat up $2.80 ($7.64 to $10.44). However, expenses are up dramatically since last year. Fertilizer prices are up 49 percent to 138 percent, depending on type. Additionally, availability of crop protection inputs are a concern and prices have been continuously changing throughout the winter/spring planning season. As such, it will be important for producers to continually adjust their cost of production estimates and breakeven prices based on their current circumstances and evolving cost structures.
Crop insurance provides a great base for a risk management plan with projected (pre-planting) prices set at $7.14 for wheat, $1.03 for cotton, $5.90 for corn, and $14.30 for soybeans. However, substantial price gaps have opened between the projected crop insurance prices and current futures market offerings (corn +54 cents; soybeans +39 cents; cotton +2.34 cents; and wheat +334 cents). Harvest crop insurance prices provide the potential for establishing higher price guarantees, but what if futures markets peak and then retreat into the harvest price determination period? Producers could unnecessarily leave money on the table. Risk management plans are implemented because we do not know what will happen. As such, strategically removing price risk when opportunities are presented should be strongly considered.
There is still bullish support in grain, oilseed, and fiber markets, however a downside correction is overdue, and volatility will continue to persist. Establishing a cash price on some production, at current prices, to offset increased input prices is a prudent measure to manage financial risk. Factoring in local basis and cash market offers for harvest delivery should be fully explored and the risk/reward weighed. However, being too aggressive with the percent of production priced can exchange price risk for production risk or sell producers out of extended bull markets.
One source of data to evaluate pricing decisions is options markets (this does not necessarily mean pricing though options, but as a source of market information). Specifically, strike prices relative to premium costs. For examples, a December 2022 corn put option at $6.50 has a premium of $0.74 cents or a $5.76 futures floor (compared to a projected crop insurance price of $5.90); a July 2022 wheat put option at $10.50 has a premium of $1.10 cents or a $9.40 futures floor (compared to a projected crop insurance price of $7.14). Elevating the price floor for wheat production may make sense for many producers, whereas for corn the options strategy may not. Options markets provide information on prices and volatility. Desired strategies will vary by producer based on price expectations, cost of production, and marketing tool used, however all producers should look at option markets as a source of information and determine if implementation is worthwhile for your operation.
Corn
Ethanol production for the week ending March 11 was 1.026 million barrels per day, down 2,000 from the previous week. Ethanol stocks were 25.945 million barrels, up 0.674 million compared to last week. Corn net sales reported by exporters for March 4-10, 2022, were down compared to last week with net sales of 72.3 million bushels for the 2021/22 marketing year and 8.0 million bushels for the 2022/23 marketing year. Exports for the same period were down 28 percent from last week at 50.1 million bushels. Corn export sales and commitments were 82 percent of the USDA estimated total exports for the 2021/22 marketing year (September 1 to August 31) compared to the previous 5- year average of 81 percent. Across Tennessee, average corn basis (cash price-nearby futures price) weakened or remained unchanged at West, Northwest, West-Central, North-Central, and Mississippi River elevators and barge points. Overall, basis for the week ranged from 30 under to 25 over, with an average of 3 under the May futures at elevators and barge points. May 2022 corn futures closed at $7.41, down 21 cents since last Friday. For the week, May 2022 corn futures traded between $7.26 and $7.67. May/Jul and May/Dec future spreads were -29 and -96 cents. July 2022 corn futures closed at $7.12, down 16 cents since last Friday.
New crop cash prices at elevators and barge points ranged from $5.94 to $6.74. December 2022 corn futures closed at $6.45, down 10 cents since last Friday. Downside price protection could be obtained by purchasing a $6.50 December 2022 Put Option costing 74 cents establishing a $5.76 futures floor.
Soybeans
Net sales reported by exporters were down compared to last week with net sales of 46.0 million bushels for the 2021/22 marketing year and 17.5 million bushes for the 2022/23 marketing year. Exports for the same period were down 14 percent compared to last week at 26.2 million bushels. Soybean export sales and commitments were 94 percent of the USDA estimated total annual ex-ports for the 2021/22 marketing year (September 1 to August 31), compared to the previous 5-year average of 90 percent. Across Tennessee, average soybean basis weakened or remained unchanged at West, West-Central, and North-Central elevators and barge points and strengthened at Northwest and Mississippi River elevators and barge points. Basis ranged from 20 under to 34 over, with an average basis of 4 over the May futures contract. May 2022 soybean futures closed at $16.68, down 8 cents since last Friday. For the week, May 2022 soybean futures traded between $16.38 and $16.97. May/Jul and May/Nov future spreads were -23 and -202 cents. May 2022 soybean-to-corn price ratio was 2.25 at the end of the week. July 2022 soybean futures closed at $16.45, down 6 cents since last Friday.
Nov/Dec 2022 soybean-to-corn price ratio was 2.27 at the end of the week. New crop cash soybean prices at elevators and barge points ranged from $14.33 to $15.11. November 2022 soybean futures closed at $14.66, down 25 cents since last Friday. Downside price protection could be achieved by purchasing a $14.80 November 2022 Put Option which would cost 117 cents and set a $13.63 futures floor.
Cotton
Net sales reported by exporters were down compared to last week with net sales of 371,400 bales for the 2021/22 marketing year and 49,000 bales for the 2022/23 marketing year. Exports for the same period were down 1 percent compared to last week at 325,500 bales. Upland cotton export sales were 98 percent of the USDA estimated total annual exports for the 2021/22 marketing year (August 1 to July 31), compared to the previous 5-year average of 94 percent. Delta upland cotton spot price quotes for March 17 were 122.86 cents/lb. (41-4-34) and 125.11 cents/lb. (31-3-35). Adjusted world price increased 1.55 cents to 113.26 cents. May 2022 cotton futures closed at 126.86 cents, up 5.83 cents since last Friday. For the week, May 2022 cotton futures traded between 117.05 and 126.86 cents. May/Jul and May/Dec cotton futures spreads were -3.83 cents and -21.62 cents. July 2022 cotton futures closed at 123.03 cents, up 6.24 cents since last Friday.
December 2022 cotton futures closed at 105.24 cents, up 1 cent since last Friday. Downside price protection could be obtained by purchasing a 106 cent December 2022 Put Option costing 11.76 cents establishing a 94.24 cent futures floor.
Wheat
Wheat net sales reported by exporters were up compared to last week with net sales of 5.4 million bushels for the 2021/22 marketing year and 12.0 million bushels for the 2022/23 marketing year. Exports for the same period were down 35 percent from last week at 9.2 million bushels. Wheat export sales were 87 percent of the USDA estimated total annual exports for the 2021/22 marketing year (June 1 to May 31), compared to the previous 5-year average of 97 percent. Wheat cash prices at elevators and barge points ranged from $9.46 to $10.74. May 2022 wheat futures closed at $10.63, down 43 cents since last Friday. May 2022 wheat futures traded between $10.31 and $11.60 this week. May wheat-to-corn price ratio was 1.43. May/Jul and May/Sep future spreads were -19 and -58 cents.
New crop wheat cash prices at elevators and barge points ranged from $8.95 to $10.63. July 2022 wheat futures closed at $10.44, down 33 cents since last Friday. Downside price protection could be obtained by purchasing a $10.50 July 2022 Put Option costing 110 cents establishing a $9.40 futures floor. September 2022 wheat futures closed at $10.05, down 39 cents since last Friday. ∆
DR. AARON SMITH: Assistant Professor, Crop Marketing Specialist, University of Tennessee