Inputs Monitor Editor Davis Michaelsen adds his perspective into the happenings of the inputs markets.
Market Like You Mean It -- They Think I'm Crazy Around Here
Jul 19, 2013
We have a theory here at the Monitor that states growers will hit price resistance on NPK bookings at 18% of expected new-crop revenue, based on December corn futures. If we work the numbers using today's Dec corn price -- currently a convenient $5.00 even -- and yield estimates at 152 bu/acre, we arrive at $722.00 in expected new-crop revenue per acre. 18% of that is $129.96 per acre to budget for NP&K for the 2013-14 crop.
USDA's July 11 WASDE predicts, "The projected 2013/14 season-average farm price for corn is unchanged at $4.40 to $5.20 per bushel."
That does not seem like much, and it isn't. I worked up these figures around the same level for my presentation at the Des Moines Leading Edge conference and when I said corn pricing dictates NPK expenditures around $130/acre, the air went out of the room. Growers grunted and guffawed at spending so little, speculating on the tiny yield so little fertilizer would produce.
While the expenditure would do little to support a record breaking yield, on paper, that is how the 18% system is supposed to work. My theory was to forward book 18% when Dec corn is at a low, wait to fill in the rest of your needs at a rally on suggested increased returns. Not a bad thought, but a question came from the audience, "But what if cash prices wind up at $4.95?"
There are two options at that point. Cut back on P&K, or work the 18% backwards. Figure how much you expect to spend on NPK as a means to figure your selling target price for corn. Let's run the numbers. Figure a 175 lb/acre application of anhydrous. At today's 52 cents/lbN, that would total $91.00/acre. Throw in a sidedress of 32% at 30 lbs/acre and we add another $10/acre. That leaves us with $29 to spare for P&K. At current prices, that gets you 22lbs of DAP and 30lbs of K per acre.
Due to high crop returns, growers have banked a little P&K in the soil over the past few years, and most fields could stand to run a little short this year. But that leaves no room for a little lime, or sulphur or anything else. Bu ti do not like allowing fertilizer pricing to dictate the quality of the nutrient profile.
So I asked one of those growers what he expects to spend on NPK and he told me he can't see getting it done for less than $200 per acre. Now that's a figure we can hold on to. Here's the rub. $200/acre NPK would get you 192lbs/acre of anhydrous, 55.5 lbs/acre UAN32%, 83lbs/acre DAP and 60lbs/acre K. Now we seem a little P&K heavy, but a robust nutrient profile leads to robust yield. If these P&K numbers are too high, there is cushion for lime, sulphur, custom application fees, etc.
With our NPK budget set at $200.00/acre and yield at trendline 160 bu, in order to make our money back at 18%, corn prices have to reach -- deep breath, now -- $6.94/bu. That's $1111.11 in new-crop revenue per acre.
Remember from above, USDA's July 11 WASDE predicts, "The projected 2013/14 season-average farm price for corn is unchanged at $4.40 to $5.20 per bushel." Like I said, they all think I'm crazy here. But that is the reality of the math of it. When I came up with $6.94, news spread around the Pro Farmer offices that Davis was off his rocker and, of course, a friendly wager ensued, and while USDA does not expect corn prices to reach $6.94 -- or even $6 -- if it does, my coworkers owe me $6.94.
I've got $6.94 sitting in an envelope in my desk right now as I fully expect to have to pay up on this one, but the exercise is worth pondering. In lean years, growers have been known to stretch that 18% up to 20% and that would help a little, but the fact remains that a general downturn in corn prices is predicted. Nutrient efficiency will be key to maximizing profits in 2013-14. As we begin to look beyond the crop in the ground today, the fall application season draws closer everyday, and intentional marketers will have to get this figured out.
Be aware that profits from harvest are subject to expenditures on the front end. Simple, I know. But turning a profit and maximizing yield in light of lower projected corn prices separates the farmers from the boys. It will take some forethought and awareness of fertilizer pricing. This week's Monitor features outlooks for nitrogen, phosphate and potassium. All are expected to continue to slide through summer, with anhydrous giving the least amount of ground.
Stay tuned to your Inputs Monitor as you embark on the decision making process, going to church wouldn't hurt, and as always, market like you mean it.