Manage your nutrients and pocketbook
How to minimize cost of production and retain farm profits.
As producers turn their attention toward next growing season, there are increasing concerns about input prices and impacts to farm profits. Questions about availability of key inputs and what they will cost are largely unknown. Despite uncertainties, farms can position themselves to minimize costs of production and retain farm profits.
Minimizing costs starts with understanding current market conditions, including inputs and commodities. You need to know what expected prices are before you can identify options to minimize costs. Once identified, you need to analyze which options are best for your farm.
Understanding Market Conditions
In order to maximize prices received, understanding market conditions now and into the future is needed. Many economists agree that current prices for commodities will continue favorably into next year’s harvest. However, once we reach harvest, prices are expected to decline as global supply and demand moves towards pre-2021 norms. The USDA estimates corn producers will receive an average of $4.80 per bushel for grain harvested in 2022 and sold throughout 2023. A similar trend exists for soybeans as the USDA expects a 2022/2023 price of $10.50 per bushel. For more information, visit USDA Economic Research Service.
Knowing Expected Prices of Key Input Purchases
As you think about how declining commodity prices will affect your farm’s profitability, it is important to remember another important trend about prices. When commodity prices are trending upwards, input prices tend to follow quickly. A higher demand for a product often brings with it an equally higher demand for inputs needed to produce it. However, when commodity prices decline, input prices are not as quick to follow.
Consider current retail prices for U.S. No. 2 diesel compared to historical averages. As of November, diesel prices rose to $3.727 per gallon. During the ethanol period, prices hovered around $4 per gallon while corn peaked at $6.89 per bushel. Once ethanol demand began to fall, commodity prices declined rapidly while diesel prices remained strong for almost two years. By the time diesel fuel reached $3 per gallon, corn prices had fallen to $3.70 per bushel.
Farm inputs are expected to remain high in 2022, but how high is still unknown. Factors affecting prices are commodity markets, global supply and demand, and domestic supply chain constraints leading to uncertainty about product availability. Those factors have led fertilizer retailers to hesitate releasing spring prices or limiting quantities. Quantities of fertilizer offered are as little as 20%-30% of a farm’s previous year purchases.
Similar concerns on product availability may reach into other input purchases, such as chemicals. Supply limitations of glyphosate and glufosinate have many farms looking to alternative products to meet their pesticide control needs. Producers should also prepare to discuss current uncertainties and strains on farm profits with landowners. Landowners tend to follow commodity prices and often have similar expectations as input suppliers when demands are higher for their inputs to farming. For more information on land rent considerations, visit: https://www.canr.msu.edu/resources/farmland-rent-considerations
Is Planting More Soybeans an Option?
When fertilizer prices are high, many producers consider a second or third year of soybeans. Soybeans require less investment than corn or wheat, but that does not always mean more profit.
Potassium fertilizer has had significant increases in prices the past few months. Since spring of 2020, potassium has increased 115% compared to urea at 99%. Price increases since this recent spring have seen a 77% increase for potassium compared to 55% for urea. Before deciding soybeans are a viable option, consider nutrient requirements from soil testing and potential profits from consecutive soybean years. If a significant amount of potassium is needed, your original planting intentions may be more profitable.
Keep Planting Intentions but Give Yourself Some Credit!
Your farm’s current intentions for planting can be strengthen by accounting for available nutrient credits. Consider practices or alternative nutrient sources already in place to reduce fertilizer costs. One option is nitrogen available from last year’s legumes, such as soybeans or alfalfa. At current nitrogen prices, a 30-pound nitrogen credit is worth almost $30 per acre. Using USDA’s corn price of $4.80 per bushel, that’s over six bushels of corn!
Manure applications may offer costs savings as well. Even at a charge of $0.01 per gallon, an application of 3,500 gallons could save an additional $20 per acre. That’s another four bushels of corn added on to the nitrogen credits! A nutrient analysis is recommended to ensure a true comparison of savings against commercial fertilizer. Incorporation timing is also important to minimize volatilization and increase nutrient retention. For more information, visit Michigan’s Right to Farm homepage.
Analyze Best Options for Your Farm
Knowing what options you have available is one part of minimizing costs. The key is deciding which options will work best for your farm and its current situation.
- To find which options are best for your farm, start with your soil. Soil sampling is critically important to reducing fertilizer costs. You need to know what you’ve got to work with before considering any other decisions.
- As you think about yield goals, consider how reasonable those goals are to meet. Are they based on historical trends or wishful thinking? It is always best to focus on a goal that is within your farm’s potential. Remember, you are basing your cost planning on what yield you want to achieve.
- Account for all options to reducing costs. Those options can include changes in planting intentions, renting out acres, or adopting new practices to reduce fuel or chemical usage.
Last but not least, weigh through options using available decision tools. Michigan State University Extension offers a number of decision tools through the Farm Management website. One of the latest resources is the Fertilizer Cost Comparison Decision Tool that can consider nutrient needs and fertilizer product costs. The decision tool does not replace soil testing or soil-based recommendations. Instead, it offers an opportunity to consider how to meet nutrient needs at the lowest possible cost. For more information, visit: https://www.canr.msu.edu/news/msu-extension-introduces-fertilizer-cost-comparison-tool.