Kansas City, Missouri/Winnipeg, Manitoba: Not too long ago, a surge in oil prices such as this week’s would have caused a groan of misery from the US farm belt, forced to pay higher prices for tractor fuel and fertilizer. Today, farmers are far more likely to cheer.
The farm sector’s response to a surge in fuel costs has inverted for two important reasons: the rise of biofuels now means more corn and soybeans are likely to be drawn into the fuel pool; and the disconnect between natural gas and crude prices means fertilizer costs are not being dragged higher.
While neither trend is new, it’s been put in sharp relief this week as US oil prices surge to $100 for the first time since 2008 amid Middle East unrest.
On balance, the surge is far more likely to lend support for a near-record corn sowing season than it is to crimp farm income through higher costs for crop chemicals and transportation charges, analysts say.
“All indications are that the only thing that will keep a farmer from planting this year is if he drops dead walking out the door ... and then somebody else will grab his tractor and plant for him,” said Missouri corn farmer Richard Oswald.
“There is every incentive in the world to plant. High oil prices are just one more incentive.”
In addition, the surge has come long after most farmers have tilled their fields and locked in fertilizer purchases, leaving them better prepared than in 2007-2008, according to National Corn Growers Association CEO Rick Tolman.
“When we saw this (runup) a couple years ago, it really raised input prices and squeezed the margin,” said Tolman.
This year input costs may pinch, but they won’t puncture the upbeat mood. Grain futures have fallen sharply this week as risk-averse speculators flee the market, but most remain within sight of their records struck in 2008.
Profits this year look to be strong. The US department of agriculture has forecast farm income to be $94.7 billion in 2011, up 19.8% from the 2010 forecast and the second highest inflation-adjusted value in the past 35 years.
To be sure, higher oil prices raise transportation costs for farmers just like everyone else.
However, fuel to run farm machinery, trucks and other equipment accounts for only a tiny portion of overall inputs -- about 3% of the total cost of growing corn on an acre of land in central Illinois this year, said Gary Schnitkey, professor of farm management at University of Illinois.
That’s more than offset by the bullish impact on grain prices.
“I think crude oil probably causes (crop) commodity prices to go up more than costs,” Schnitkey said.
Another important factor is natural gas, used to make urea, a source for nitrogen fertilizer used on corn. Fertilizer generally accounts for more than 40 percent of the total operating costs for corn, versus 16 percent for soybeans, according to US department of agriculture data.
Until the past few years, a rise in oil prices would almost certainly have dragged natural gas higher; however the discovery of decades’ worth of cheap domestic shale gas has put a semi-permanent damper on the market, keeping prices at unseasonally low levels even as oil surges.
Partly as a result of the benign natural gas cost, fertilizer prices look to hold steady through the US spring planting season and then soften, said David Asbridge, president of NPK Fertilizer Advisory Services in St. Louis, Missouri.
“At the world level, we’ve got plenty of nitrogen fertilizer,” he said. “We’ve got a lot of imports coming into the US and there’s really no reason for prices to stay as high as they are.”
Oil prices have risen to a record premium over natural gas on an energy-equivalent basis. Natural gas futures traded below $4 per million British thermal units (mmBtu) on Thursday, near a three-month low.
Political unrest in Libya, which pumps nearly 2% of world oil output has sent Brent crude prices near $120 a barrel to a two-and-a-half-year high this week.
All that means the mood in the countryside remains fairly ebullient as corn futures prices hold over $6.00 a bushel and government agricultural officials look for American farmers to plant 92 million acres to corn this spring, up from 88.2 million acres in 2010/11.
Ethanol makers are expected to consume a record 5 billion bushels of corn this year, or about 36% of the harvest, the USDA says.
And with strong global food demand for a growing population, food prices are forecast to rise 3.5% this year, nearly double the overall inflation rate.
This year, with natural gas costs staying low, and global demand for short supplies of corn strong, farmers won’t be deterred from planting corn.
“This year, with the price of corn where it is, and the yield advantage of corn over soybeans and the fact that it’s good to rotate, all of those are in favor of corn holding its acreage,” said North Dakota State University agronomist Joel Ransom.