Fertilizer prices are already seen leading the charge. Recent reports show both a rise in stock prices for large fertilizer makers as well as an increase in Midwest farm operating loan volume, both signs that fertilizer’s heading higher and farmers are paying more even if it means taking out loans to do so.
A look back over the last decade shows per-acre fertilizer costs rose from $57 to $185 per acre from 2002 to 2009, according to a report this week from University of Illinois Extension ag economist Gary Schnitkey. And, they’re expected to move even higher for next year’s crop, continuing a trend started last fall, Schnitkey says.
"Fertilizer prices began increasing in 2010, resulting in higher costs in 2011 of $150 per acre. Prices have continued to rise in 2010," he says. "Actual costs will vary from the $162 per acre estimate, primarily due to changes in fertilizer prices. A feel for this variability can be gained by looking at changes in anhydrous ammonia prices. The contract delivery price for fall delivery in July 2008 was $500 per ton higher than the April 2009 cash delivery price. The summer contract price in July 2009 for fall delivery was $120 per ton lower than the April 2010 price."
But, it’s not just fertilizer. Right now, farmers are facing major increases in other inputs, especially machinery, one northern Iowa crop consultant tells Agriculture.com.
"What some of these tractors are bringing is bordering on lunacy. In fact, I believe we’re in line for a new post machine next year, so I went online to see what a typical Deere 4710 is retailing for, and I nearly fell out of my chair," he says.
Though non-land costs like fertilizer, fuel and machinery look to stay higher through the 2012 crop year, land costs could see some correction, but it’s not yet a bubble ready to burst, according to Murray Wise, farmland market analyst with Murray Wise Associates, LLC.
"We have tight supplies, global growth in demand for grain, and operating farmers competing for productive land with their own cash. That situation is quite different than the overleveraged housing market, the speculation driven demand for dot.com businesses yet to show a profit, or the ‘irrational exuberance’ we saw in the stock market several years ago," Wise says. "Some correction is possible, maybe even likely…just not the sort of cataclysmic retreats seen in those other markets. It’s not a bubble."
So, looking at early projections for input costs and grain market prices, it looks like 2012 should be "a profitable year," Schnitkey says. But, that’s right now. If grain markets slump at the wrong time, that could change rapidly. The price for a grain market options contract right now, he adds, is evidence that there’s risk in the market that’s not far from becoming reality.
"Current projections suggest that 2012 will be a profitable year. However, cost levels are high, resulting in high levels of risk. If returns fall because of price declines, much lower returns will result," Schnitkey says. "Options prices suggest that there are significant possibilities of prices occurring that would cause low returns."