[A-List] Forget fuel costs
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Thu Mar 3 17:30:15 MST 2011
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
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.
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
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.
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
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”
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