The fuel and fertilizer markets face more price volatility than seen in the past 5-10 years.
Purchasing fuel and fertilizer supplies ahead should pay off this winter as prices start to swing higher. Since July 1, prices for both products jumped considerably, causing some concern that last winter's frenzied energy crisis with skyrocking natural gas prices and high fuel costs would return.
Fuel economists predict that the markets will remain volatile. Any disruption in production creates big price swings. Considering the potential for high fuel and fertilizer prices and a tight agricultural economy, growers will need to use smart strategies for their fuel and fertilizer purchases this year.
Take Team FIN member Bob Zarse, for example. When LP gas prices dropped this summer, he bought enough to fill his grain dryers' tanks, about 5,000 gal. The Reynolds, IN, grower also planned to buy anhydrous ammonia early before harvest for fall application. In addition, he will watch anhydrous prices this winter and lock in a low price for next spring's crop needs. Pre-buying fertilizer paid off last winter because Zarse avoided high anhydrous ammonia prices.
“Farmers have doubled their energy efficiency. They have cut their fuel requirements in half across all of agriculture from the late 1970s to now.”
Doug Tiffany, ag economist, University of Minnesota
“Experience says that we will see equal to or greater volatility in the market,” reports Mike Derickson, manager of farm fuels for Country Energy, owned by Cenex Harvest States and Farmland Industries. “If you forward contract, you don't have to worry about it. Farmers know what they need (and can buy ahead at lower prices). We're doing everything from our perspective for a normal year. There will be plenty of product in the pipeline to meet demand.”
But problems could crop up if everyone waits. “Most pipelines are 6 to 8 in. wide and the product travels as fast as you can walk. So you really have to plan out supply,” Derickson says.
An energy analyst from Growmark, another big supplier of fuel and fertilizer, also suggests locking in supplies early at low prices. Randy Miller recommends buying diesel and heating oil supplies ahead to avoid any surprises over the winter, although he expects prices on all fuel and energy to be “calmer” than they were last year. “I'm thinking we're not going to see as much volatility as we did a year ago,” he says.
Good news, bad news
Fuel economists credit a slow economy for the summer's price softening. “The biggest factor is we have a cooled-off economy that will help moderate petroleum prices,” Derickson says. “In the spring, things were heating up and that caused the upward pressure we saw.”
Fuel economists partly blame the spring climb in fuel prices on refineries, which conducted normal maintenance when heavy driving demand built. “If the inventories don't build as fast as the experts think, then they bid the price up to cover their short positions,” Derickson explains. “That helped cause the price increases we saw last spring. People were worried; we had a strong economy.”
While things quieted down, recent refinery problems in the Midwest and the Rocky Mountain area caused another swing in prices during July and August. Prices should again adjust down until the next disruption that brings on another price spike. That may be a cold winter. Derickson says a colder-than-normal winter is being predicted for the northern U.S.
Natural gas outlook
“The big driver for nitrogen prices was the spike in natural gas,” reports Rich Pottorff, Doanes chief economist. “Natural gas prices went over $10/million btus. They are now $3.50. So we've seen a dramatic turnaround in the cost of feedstocks for nitrogen production.”
Last year's natural gas price increase was not unexpected. “The fertilizer industry saw a natural gas spike coming, but not to $10,” Pottorff continues. “They have been talking about the growing demand for natural gas for the last couple years. But the magnitude of the going up surprised everybody.”
Pottorff predicts that fertilizer prices won't be as high as they were last spring and that “availability will be reasonably adequate.”
Growmark's energy analyst adds that natural gas stocks have been building this summer, better than last year. “At least we're heading into the winter with natural gas supplies that look improved over a year ago,” Miller says.
Also helping to keep costs down is a soft demand for fertilizer. “Crop prices are low and farmers aren't exactly rushing out to apply extra fertilizer in these kinds of economic situations,” Pottorff says.
But long term, Pottorff believes demand for natural gas will go up and fertilizer prices will follow. At some point, he says, fertilizer production will then move offshore to lower production costs.
His advice: “It makes sense to pre-price some fertilizer this fall for next spring's [fieldwork]. The upside risk is pretty big.”
Diesel fuel prices
If you stocked up on diesel fuel, hopefully you did it when prices traditionally hit bottom during July. “Historically, we see higher diesel and heating oil prices from August through early fall,” Miller explains. Then weather affects prices until late February or March, when prices back off.
He suggests growers forward contract diesel in the summer when prices are low. Many cooperatives offer pricing tools to lock in a price.
The problem with petroleum is the industry has not built new refineries, Derickson says. “And demand has caught up to the peak levels of 1978 when demand in this country reached 20 million barrels/day,” he says.
Reducing fuel and fertilizer expenses is important to any grower's bottom line. According to financial records for the year 2000 from 1,800 Minnesota farms, fuel and oil cost an average $11.23/corn acre. Fuel for corn drying cost $5.03/corn acre, and fertilizer cost $41.87/corn acre. Fuel expenses were less for soybean production, averaging $8.87/soybean acre. Fertilizer cost $4.26/soybean acre.
Growers have been careful users of energy, however. “Farmers have been thoughtful about fuel use,” reports Doug Tiffany, ag economist, University of Minnesota. “Farmers have focused on cutting tillage operations and converting to more fuel-efficient diesel tractors, combines and trucks since the late 1970s.”
Farmers also have purchased other farm equipment with energy efficiency in mind. For example, grain dryers now use microprocessors to prevent overdrying. Heating and ventilation equipment in livestock facilities use sensors to precisely control the environment without wasting fuel and electricity.
“Farmers have doubled their energy efficiency,” Tiffany says. “They have cut their fuel requirements in half per unit of output across all of agriculture from the late 1970s to the present.”