Profitability possible despite high input costs

GREENVILLE - Fertilizer prices have increased exponentially over the past year due to a variety of factors, such as labor shortages, shipping issues and high natural gas prices.

However, farmers still have avenues for profitability, according to an Ohio State University lecturer.

Barry Ward, a leader for Production Business Management and director of the Income Tax School for OSU Extension, was the keynote speaker at Friday's Darke County Ag Outlook luncheon at Romer's Catering.

Overall, Ward said farmers in 2022 can expect higher input costs but also possibilities for profits for some of the major commodity crops. He emphasized farmers should pay attention to their budgets and make adjustments as necessary.

Ohio crop enterprise budgets for this year are expected to increase, Ward said. Compared to 2021, seed costs may be 5% higher and crop chemical costs, such as herbicide, may be 50% higher, he said.

Fertilizer prices have become especially volatile and increasing in price, Ward said. For example, anhydrous ammonia is expected to cost $1,550 per ton, a 145% increase from spring 2021, Ward said.

Monoammonium phosphate, or MAP, is expected to be 50% higher than last spring at a price of $925 per ton, Ward said. Meanwhile, potash is looking at a 115% increase at a cost of $815 per ton, he said.  Much of the price increase can be boiled down to supply and demand, Ward said.

To start, high crop prices in 2020 drove strong domestic and global fertilizer demand, he said.

"What's that (high crop prices) signal to farmers? 'We're not going to skimp on fertilizer applications,'" Ward said. "So the demand for fertilizer has been high right along with crops, and we see a correlation there."

Due to drought conditions throughout the midwest and South America in the fall of 2020, fertilizer manufacturers were caught flat-footed and were unprepared for a run-up in crop prices, Ward said.

Other supply issues have driven up fertilizer prices, such as labor shortages due to COVID-19, shipping issues, Hurricane Ida in Feb. 2021 and high natural gas prices and availability issues in Europe, Ward said.

Further complicating the issue is the war in Ukraine. Russia is the second largest producer of ammonia, urea and potash and the fifth largest producer of processed phosphates, Ward said.

In terms of their share of the global export market, Russia accounts for 23% of ammonia, 14% of urea, 21% of potash and 10% of processed phosphate exports, Ward said.

"Russia is a major fertilizer exporter. We don't get a lot of product directly from them, so what we probably will continue to see is the supply chains and the way the marketplace distributes (it)," he said.

Ward said Russia's state news agency has indicated Russia will cease fertilizer exports, likely to countries that have sanctioned the country.

"The other thing is shipping companies," Ward continued. "The two biggest container shipping companies (I believe) are not going into Russian ports anymore. So this is another issue that will eliminate any fertilizer coming out of that country."

However, Ward said there is some good news for farmers, such as high crop prices. Corn is up 46%, soybeans are up 35% and wheat is up 49% this year compared to 2021, he said.

Ward said the cash price for corn this fall is estimated around $6.50 per bushel.

"That is extremely strong, and that's going to cover up a lot of these cost increases," he said. "I guess the message that I'm saying is, there's an avenue for profitability, even in spite of these higher costs that we're facing."

Soybeans are expected to perform similarly, Ward said, estimated around $14.60 per bushel. Wheat prices are especially volatile, estimated at $10.20 per bushel, he said.

Overall, return to variable costs for corn is roughly $540, soybeans is $514 and wheat is $466, Ward said.

Additionally, farm income increased by more than 23% in 2021, after it had already increased by nearly 20% in 2020, he said.

Farmland markets have also seen a substantial increase in the past year. On average, Ward said farmland prices in Ohio have increased by 15%-20% in the past year.

Cash rents increased by 2.6% in 2021, Ward said. The average rent for Ohio non-irrigated cropland in 2021 was $160 per acre, according to information provided by the U.S. Department of Agriculture's National Agricultural Statistics Service (USDA-NASS).

In Mercer County, cash rent for non-irrigated cropland in 2021 was roughly $213 per acre - the second highest in the state only behind Darke County, which went for $217 per acre, according to USDA-NASS. Cash rent was approximately $194 per acre in Auglaize County.

However, Ward noted interest rates are trending higher, so farmland prices could change.

Ward also touched on the bipartisan infrastructure bill that was passed last year and it's implications for taxpayers.

"There's really no tax impact at the farm gate as a result of this bipartisan infrastructure plan," he said. "We thought earlier on there might be, but there's really nothing that's going to impact the average taxpayer."