Setting your 2007 farm budget by the numbers

January 11, 2007

Lower fuel and nitrogen prices in the last half of 2006 have signaled trends that should hold throughout 2007.

The outlook numbers laid out in this article can be used to formulate budgets for 2007.

Fuel

As of Dec. 12, the Energy Information Administration pegged the average price for West Texas Intermediate Crude Oil at $65.17 per barrel for 2007.

The administration projects the Henry Hub Natural Gas price to average $7.87 per thousand cubic feet (mcf) in 2007.

The Henry Hub in Louisiana is the nexus of 16 intra- and interstate natural gas pipeline systems that draw supplies from the region’s prolific gas deposits. The pipelines serve markets throughout the U.S. East Coast, the Gulf Coast, the Midwest, and up to the Canadian border.

Natural gas futures quotes are available via the online New York Mercantile Exchange at www.nymex.com/. (Natural gas futures are traded as million British Thermal Unit (mmBtu.) One contract equals 10,000 mmBtu. Natural gas is sold wholesale per thousand cubic foot (mcf).

Btus per cubic foot of natural gas do vary. One cubic foot of natural gas = 1000-1031 Btu. One thousand cubic feet (1 mcf) of natural gas = 1-1.031 mmBtu.

Off-road diesel is expected to average $2.20/gal for 2007. This represents approximately a 2 percent decrease from 2006.

Propane

Futures prices of natural gas and retail survey data point toward slightly higher propane prices in 2007. The price of propane is expected to increase slightly in 2007 and average $1.50/gallon.

A warm start to winter in much of the country may allow for lower prices of some fuel-related inputs.

Fertilizer

Natural gas prices have fallen substantially since they peaked in the winter of 2006 when the Henry Hub price for natural gas was around $15 per thousand cubic feet (mcf).

Since then, the Henry Hub natural gas price has fallen below $8 per mcf. (For the week — Wednesday-Wednesday, Dec. 13-20 — the price for next-day delivery at the Henry Hub decreased 78 cents per MMBtu, or 10.8 percent to $6.43 per MMBtu.)

Nitrogen — The average price of nitrogen increased 37 percent from 2004 to 2006. Natural gas, DAP, urea and UAN (28 percent) Futures together with surveys of industry personnel signals lower N prices in 2007.

Using anhydrous ammonia as our base for projections, N is expected to average $0.244 per pound of N in 2007. (NH3 price of $400/ton equals price per actual pound N of $0.244.) This is a 27 percent decrease from 2006.

Phosphorous (P2O5) — The average price of phosphorous fertilizers increased approximately 29 percent from 2004 to 2006.

Increases in anhydrous ammonia price and transportation costs together with strong world demand continue to pressure phosphorous fertilizer prices. These pressures signal continued higher prices for the 2007 crop production year with the price for P2O5 expected to average $0.3125 per pound. (This equates to a MAP price of around $325/ton.)

Potassium (K20) — Although world potash production continues to increase, demand has increased at a faster pace.

Demand in growth areas such as Asia and South America have contributed heavily to price increases in farm-gate potash.

Potash prices increased 51 percent from 2004 to 2006. Potash prices for the 2007 crop year are expected to remain at these high levels and average $0.205 per pound. (K2O price of $0.205 per pound equals potash (white) at $250/ton.)

Land and rents

Cropland values in Ohio have increased 9.9 percent and 9.5 percent the last two years.

There is a mixed bag of evidence at this point suggesting on one hand, land prices will increase at these high rates, and on the other hand, that land markets may cool “a bit” from the rates of increase that we’ve seen the last two years.

Higher commodity crop prices coupled with somewhat lower input prices (due to much lower N prices) signal continued strong increases in land values.

Higher interest rates, together with a stronger securities market and a cooler housing market, signal a trend toward a slowdown in the rates of cropland value increases.

Projections

My projection is for land values to continue to increase, but only at a 5 percent rate for 2007. Cash rents in Ohio increased 4.9 percent in 2006 and indicators suggest similar increases for 2007.

Landowners hesitant to negotiate for higher rental rates due to past poor crop years, low commodity crop prices and/or high fuel and fertilizer prices may now seek higher rates with the run-up in crop prices and lower nitrogen costs projected for 2007.

Projections are for 2007 Ohio cash rental rates to increase 5 percent over 2006.

Seed costs. Seed company data indicates price for 2007 to be 2 percent to 4 percent higher among similarly traited seed. This is a fairly nominal amount and one not out of the ordinary.

However, the “real world” increase to the farmer’s seed bill may be much more than 2 percent to 4 percent.

Whether producers choose to switch to “traited” seed or are “forced” to select “traited” seed to plant the latest genetics from a given seed company, the result is the same: much higher seed costs per acre.

Farmers should carefully consider the need for these seed traits by evaluating university as well as company research.

Increases in gross revenues for many Ohio row crops projected for 2007 may allow producers to easily absorb these seed cost increases, but farmers should still carefully consider the need for the traits.

Increases of $20-25 per acre may not be uncommon as producers switch from a “non-traited” to a “traited” hybrid or variety.

Chemicals

Crop protection chemicals prices have remained fairly flat over the last two years, and several products have seen price decreases due to the prevalence of generic products in the marketplace.

Continued high prices of petroleum products (main ingredients in many crop protection chemicals) will pressure prices to move somewhat higher. Increases of 2.5 percent for the total basket of crop protection chemical are predicted for 2007.

Farm labor

At first glance, farm wages may be expected to increase nominally at a 3 percent rate over 2006, but expected higher margins for crop producers in 2007 (and possibly beyond) may allow for (and employees may request) better compensation packages for farm employees.

Livestock producers facing tighter margins may not have the same ability to offer cost-of-living (or possibly any) wage increases in 2007.

Employers offering health insurance should continue to see health insurance premiums increase by 10 percent or more per year depending on the product and company.