[A-List] Forget fuel costs

[Bill Totten]

US farmers cheer oil surge

Ethanol, food demand drive corn planting increases

by Carey Gillam and Rod Nickel

Reuters (February 25 2010)

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 surged to $100 for the first time since 2008 amid Middle 
East unrest. US crude futures rose toward $100 per barrel again on 
Friday before easing.

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 and 2008, according to National Corn Growers 
Association CEO Rick Tolman.

“When we saw this (run-up) 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 percent 
from the 2010 forecast and the second-highest inflation-adjusted value 
in the past 35 years.

Limited impact

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 three percent 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 forty percent of the total operating costs for corn, versus sixteen 
percent for soybeans, according to USDA 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 Saint 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 on Friday, near a three-month low.

Political unrest in Libya, which pumps nearly two percent of world oil 
output sent Brent crude prices near $120 a barrel to a 2-1/2 year high 
on Thursday, before easing off its top on Friday.

Upbeat countryside

All that means the mood in the countryside remains fairly ebullient as 
corn futures prices hold around $7 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 five billion bushels of 
corn this year, or about 36 percent of the harvest, the USDA said.

And with strong global food demand for a growing population, food prices 
are forecast to rise 3.5 percent 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.

See also: “Turmoil in Middle East spells trouble for your budget”
http://www.msnbc.msn.com/id/41766805/ns/business-eye_on_the_economy/

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http://www.msnbc.msn.com/id/41780676/ns/business-consumer_news/


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