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Could Anhydrous Prices Slip in '17?

When it comes to costs for anhydrous ammonia, farmers finally caught a break this year. Prices are around $600 per ton in 2016, compared to $851 per ton in 2014, according to a recent farmdoc Daily article.

Why?  Agricultural economist Gary Schnitkey points to two reasons: lower prices for natural gas, which is a major input for producing ammonia; and the current state of corn prices, which tend to be closely correlated with the prices for anhydrous ammonia. When corn prices are low, as they have been, anhydrous tends to be cheaper too.

But perhaps those anhydrous ammonia prices should be even cheaper, according to Schnitkey’s calculations. “Given historical relationships, anhydrous ammonia prices should have decreased more than they did, given the decreases in corn and natural gas prices in 2014, 2015, and 2016,” writes Schnitkey, who says anhydrous should have been about $103 per ton cheaper this year.

That will come as no surprise to farmers, who have protested the stickiness of high input prices in recent years while corn prices deflated from an average marketing year Iowa cash corn price of $6.94 in 2012 to the $3.50s in 2016. 

Why did anhydrous stay expensive as corn got cheap? Perhaps regulations are making anhydrous more expensive to produce--and many ammonia retailers are currently dealing with a new proposal that they say is too costly. Or farmers could simply be right—it takes more time for input prices to fall than it does for those costs to rise.

Whatever the reasons for the sticky prices, though, Schnitkey wants farmers to pay attention to current big picture affecting anhydrous prices in ’17 and consider their own planting strategies.

“This is an imperative question for farmers as they continue to look for ways to reduce costs, thereby arriving at a point where costs are lower than revenue. Time will tell whether ammonia prices continue to decrease into 2017,” he writes. “Farmers may wish to consider two items for 2017. First, a switch to more soybeans and less corn may be warranted. Soybeans do not use nitrogen fertilizer and have been more profitable than corn in recent years. One reason ammonia prices did not decrease as much in 2016 as projected may be because of the surprisingly large 2016 corn planting intentions. Moving acres out of corn will reduce demand for nitrogen fertilizers, putting downward pressure on ammonia prices. Second, farmers may need to continue to evaluate ways of reducing nitrogen fertilizer inputs.”

Given the big corn number that came out in March, could anhydrous slip if the June 30 Acreage report shows a significant increase in soybean acres? It’s certainly worth watching.

 

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