May 14, 2008
Farming Costs Rise Faster Than Crop Price Increases

Under the impression that rising crop price are driven mainly by rising demand? Rising costs suggest that crop production won't rise fast in response to higher prices.

"The price of crops drove what farmers did last year," said Chad Hart, an Iowa State University agriculture economist. Now "it's costs, and that's prompting farmers to reevaluate how they allocate their land this year."

The cost of farming an acre of corn, for example, has risen almost 47% over the last year, according to Wells Fargo & Co. estimates, outpacing the 35% increase in the price of corn in the same period.

It's the same with rice. The price on the futures market of U.S.-grown long grain rice -- the type that is in short supply worldwide -- has risen 64% this year to $22.74 per one hundred pounds. (Such a move also pushes up the price of medium grain rice, which makes up most of what is grown in California.) Still, farmers are expected to plant 549,000 acres of California rice this year, up less than 3% from last year, according to the U.S. Department of Agriculture.

The fact that the cost of farming an acre of corn went up faster than the price of corn makes me think that corn's Energy Return On Energy Invested (EROEI) is rather low. How much of that corn inputs cost increase comes from nitrogen fertilizer whose production is very energy intensive or other chemicals whose production is very energy intensive?

That higher cost of production combined with high prices for wheat and soy are combining to restrict corn plantings. In spite of rising demand for corn for both food and ethanol and a huge increase in prices the amount of corn planted in the United States in 2008 will go down.

Farmers are now expected to plant 86 million acres of corn this year, the Department of Agriculture predicted March 31, down 8 percent from last year, which was the highest since World War II.

Soy doesn't need nitrogen fertilizer since soy roots cooperate with bacteria to fix hydrogen to nitrogen to produce ammonia. The USDA March 2008 plantings report shows some signs of the effects of the high cost of ammonia fertilizer with a shift toward soy and away from corn.

The March 31 report says farmers in all but one U.S. state intend to plant more soybeans this year.

An estimated 75 million acres will be dedicated to the crop, an 18 percent jump from 2007. The U.S. is the world's No. 1 soybean producer.

An acre of corn might yield 160 bushels. Each bushel of corn has about 400,000 BTU of energy (less or more depending on whether you use it for heating or eating). So what happens to total produced available human caloric energy when crops shift from corn to soy? Acreage planted in soybeans might yield 30-43 bushels per acre (depending on whether irrigated). We get 60 lbs per bushel of soy and 17,035 BTU per pound. That is about 1 million BTU per bushel which is higher than the 400,000 or so BTU per bushel of corn. But since land produces only a quarter the number of bushels per acre of soybeans as compared to corn the result is less energy produced per acre. Less energy in. Less energy out. The problem for us is that as we gradually lose the ability to use fossil fuels to produce ammonia fertilizer our crop yields will drop.

The cost of nitrogen fertilizers will likely go much higher as fossil fuels costs continue to rise. But what about other types of fertilizer? A Fortune article about Canadian potash mining company Mosaic reveals expansion of potash mines takes many years.

All this begs a key question: Won't rising demand and sky-high prices lead to new fertilizer supply coming online and eventually to lower prices? Over time, it probably will. But the barriers to entry for newcomers are high. The mine shaft in Esterhazy cost $50 million when it was completed in 1962. "To replicate that today would be $500 million--just to put the shaft down," says Prokopanko. "And it's going to take you five years minimum to develop a new mine complex and a mill and all the infrastructure. Total, it would probably cost you $2.5 billion." (Mosaic recently announced mine-expansion plans that will increase its annual potash production from 10 million metric tons to 17 million, a project expected to cost $3.2 billion over 12 years.)

But in the bigger scheme of things $2.5 billion is not a lot of money. Phosphate and potassium production can probably scale up to meet growing demand - albeit with a delay until big capital expenditures bring new production capacity on line. But ammonia's big price run-up is driven by fossil fuels price increases and the relief there is harder to imagine.

What I'd like to know about the long term cost of nitrogen fertilizer: How much higher does nitrogen fertilizer cost need to rise before electricity as a power source for generating nitrogen fertilizer would become cost competitive? That price, whatever it is, represents the longer term ceiling on nitrogen fertilizer prices.

In spite of recent record highs in the price of a bushel of corn the amount of corn planted in Ohio will go down 13% in 2008.

Maumee agribusiness The Andersons Inc. raised its price for diammonium phosphate farm fertilizer by 177 percent in the last 1½ years.

A short ton, which cost $260 in October, 2006, was $721 in February.

“Fertilizer prices continue to soar. It seems like they just keep going up and up and up,” Mr. Durham, the Henry County farmer, said.

As a result, a March 1 survey by the Ag Department’s Ohio office showed state farmers will plant 3.35 million acres of corn this year, a decrease of 13 percent from last year.

Meanwhile, planting of soybeans, which produce their own nitrogen, will be up 8 percent.

Pennsylvania, which has a lot of manure available from livestock, will see an increase in corn plantings in 2008.

Farmers across the country are expected to plant 8 percent fewer acres in corn this year than in 2007, but Pennsylvania farmers will plant 1 percent more corn than last year, according to a crops expert in Penn State's College of Agricultural Sciences.

The rise in natural gas prices has pushed up the cost of ammonia (which is nitrogen with some hydrogens attached).

A recent NCGA white paper reported that natural gas, which supplies hydrogen for the production of ammonia and has historically accounted for 70 percent of the cost of ammonia production, has seen its price quadruple since 1999 -- from $2 to $8 per million BTUs, ballooning its share of the total ammonia production cost to 85 to 90 percent. Since then, 26 ammonia plants have closed and U.S. production capacity has decreased by 40 percent.

The report also accounts how transportation and distribution costs have jumped, driving up the price of nitrogen since the U.S. has turned to global sources. Ocean freight fees rose from 300 percent to 400 percent from January 2003 to 2008, and shipping anhydrous ammonia by rail has almost doubled since January 2005.

Edward Yardeni, made famous for calling the big 1990s bull market in advance, claims the flow of capital into agriculture will cut crop prices.

TORONTO — Market strategist Ed Yardeni, who made a name for himself with accurate calls on the U.S. stock market's bull runs of recent decades, says that soaring food prices won't last because farmers are rushing to plant more crops and agricultural productivity is increasing with new investment.

“There's so much capital now that's going to pour into agriculture that I think food prices are going to come down sharply,” Mr. Yardeni said at a presentation Wednesday morning sponsored by Thomson Reuters Academy.

That only works if costs do not keep pace with prices. Well, our really big question for your consideration: Will farm costs keep pace with rising food demand from industrializing Asia?

Share |      Randall Parker, 2008 May 14 08:30 PM  Trends Agriculture


Comments
Garson O'Toole said at May 15, 2008 3:52 AM:

The blog posting given above shows that the cost of energy is altering food production choices in complex ways. I enjoy reading the articles that Randall Parker highlights and the commentaries that he composes. Yet articles providing cogent counterpoints are also refreshing. Robert Zubrin is a strong proponent of ethanol and biofuels. His primary motivation is the reduction of oil imports into the U.S. and the associated wealth transfer. Newsweek ran an article disparaging ethanol and Zubrin responded with an e-mail to the author of the story, Sharon Begley. She recounts some of Zubrin’s points in the story titled In Defense of Ethanol.

Zubrin claims that since 2002 the production of corn for food and feed has actually increased even when the corn converted to ethanol is subtracted from the total agricultural output. He also says that overall farm exports from the United States are up.

*Diverting corn for ethanol is not cutting in to food production, he says. “Here are the facts,” he told me in an email. “In 2002, the United States grew 9.0 billion bushels of corn, and turned 1.1 billion bushels into . . . 3 billion gallons of ethanol. In 2007, US farmers grew 13.1 billion bushels of corn, turned 3 billion bushels of it . . . into 8 billion gallons of ethanol,” leaving 10.1 billion bushels for food, more than the 7.9 billion bushels in 2002. Do the math: “despite the nearly three-fold growth of the corn ethanol industry,” Zubrin writes, “the net corn food and feed product of the USA increased 34% since 2002. Furthermore, contrary to claims in many articles, this has not been done at the expense of soy or wheat production. In fact, U.S. soy plantings this year are expected to be up 18% to a near record of 75 million acres, wheat plantings are up 6%, and overall, U.S. farm exports are up 23%.”
Now corn production in the U.S. may go down. But the reason suggested by the articles linked above is the increased cost of planting and harvesting corn versus the new price obtained in the market. Certainly switching to more efficient methods for creating ethanol without using corn would be desirable if ethanol is going to be part of any longer-term strategy for replacing oil.

Randall Parker said at May 15, 2008 7:18 AM:

Garson,

Note that my main focus was not ethanol. Yes, most increased food production is going to non-ethanol uses. My main focus is that inputs are going up quite rapidly in price.

As for corn versus other crops: Other factors are playing a role which I did not mention for brevity sake. Late rains have delayed plantings in many fields and those late planted fields tend to go to soy - I think because soy matures more rapidly.

As for corn ethanol: But the fact remains that we have rapidly growing world demand for food due both to population growth (which is a huge ignored problem) and industrialization. Crops that go to ethanol are not available for other uses. Had ethanol not come along then the amount of food produced for food and feed would have gone up more rapidly.

I've gotten bored of the biomass energy debate. I already had that debate with myself for the last few years. Now the debate is going mainstream and I've already moved on to what I see are bigger problems: Peak Oil, Asian industrialization, population growth, limited minerals.

allan said at May 15, 2008 7:22 AM:

I met Bob Zubrin at a Mars Society Convention a few years back. He's a genius who can communicate with the masses. I've long held the same views that Zubrin has held about bio-fuels and flex-fuel vehicles.

Forget global warming ... being energy independent is both a security issue and an economic issue for the U.S. Bio-fuels are the stepping stone until such a time that PHEVs are widely available and economical.


Bob said at May 15, 2008 8:04 AM:

Randall,

A big part of the reason that corn acres dropped this year is a return to more normal long term crop rotations. Last spring corn was greatly over priced compared to soybeans and wheat. No one knew if this was going to be more then a short term blip so corn acres rose to capture what many thought was a one time windfall. This year there has seen a return to a more normal spread as wheat and soybean prices rose so acreages devoted to these crops also returned to more normal crop rotations.

Diversifying crop rotations to include soybeans, and other crops has long been an accepted and proven strategy for crop production. It spreads out risk of crop failure, it is great for disease and pest control, it permits different classes of herbicides and pesticides to be used and so on. Diversified crop rotations just make a lot of sense on many levels. There is a very well known expression for this: "Don't put all your eggs in one basket".

Farmers, whether they plant four acres of crops or 40,000 acres, are all trying to earn a living. They will try to have profitable returns every year or they won't stay in business for too long. However no one farms for just one year so crop selections and rotations have to be made that take into consideration the long term health of the land, as well as the longer term financial stability of the farming operation.

The energy used to make nitrogen fertilizer currently accounts for more than 50% of all energy used to produce crops in North America. Diesel and gasoline burnt in tractors accounts for only 30%. In the mid to long term I expect plant breeders will get around the problem of higher nitrogen costs by transferring the genes that allow legume crops (like soybeans, alfalfa, peas and clover) to to fix their own nitrogen into corn, wheat, rice and other grass crops. After all why should Monsanto and Syngenta worry about PCS, Agrium and Mosaic's profit margins if they can capture nitrogen profits themselves through nitrogen fixing GMO corn.


Larry said at May 15, 2008 11:18 AM:

A more likely immediate response to high commodity prices than increased supply is more efficient consumption. Supply of commodities, be they corn, fertilizer, or oil to run tractors is all quite inelastic in the short run, as the main post documents.

Instead, just as negawatts, negamiles and NPG (negamiles/gallon, not negative population growth) are the quickest way to deal with rising electricity and gasoline costs, we will figure out ways to do the same with agriculture. We'll plant less resource-intensive crops, and eat less meat (and live a bit healthier.) We may eat a bit more locally (although the energetics on that aren't as simple as they seem.) And we'll shift to more appropriate bio-fuel sources like algae and waste.

Randall Parker said at May 15, 2008 8:07 PM:

Bob,

I understand your point about crop rotations. Then what I want to know: In the United States how much can the number of acres in production for all grain crops go up? The amount of crop land in the Brazilian Cerrado could substantially increase. Unfortunately, that expansion of crop lands will drive a bunch of species extinct Most of the Cerrado has already been deforested:

Brazil’s Cerrado region, a wooded grassland that is one of the world’s 34 biodiversity hotspots, already has lost 60 percent of its original area to deforestation and continues to disappear at twice the rate of the neighboring Amazon forest. Such deforestation leaves protected national parks as savanna islands surrounded by agricultural fields, noted Ricardo Machado, director of the Cerrado-Pantanal Program of CI-Brazil. Using the sniffing dogs to locate trails of endangered species is instrumental in identifying and establishing key areas as corridors to connect isolated areas of native vegetation. That means working with rural landowners to help threatened species survive.

Genetic engineering of non-legumes for nitrogen fixation: What will be the energetic cost of this? Will it substantially decrease yields? I suspect so.

Larry,

Yes, the western industrialized countries have no choice other than to use resources more efficiently. Rising Asian demand decreases the amount of commodities we can afford to buy.

James Bowery said at May 15, 2008 9:35 PM:

Wind to ammonia is poised to take off in the Midwest.

PS: Zubrin is an idiot who can mislead the masses.

Randall Parker said at May 15, 2008 10:07 PM:

James Bowery,

Certainly running a chemical process is a great way to use an intermittent power source if:

1) The intermittent power source is sufficiently cheap.

2) The capital costs of the intermittently busy chemical plant aren't too high.

I'd like to know for a continuously operating electrically powered ammonia synthesis plant what the cost is of ammonia for each 1 cent cost per kwh. Then we could begin to guess whether the wind powered ammonia synthesis plant makes sense.

James Bowery said at May 17, 2008 4:40 PM:

If the ammonia transport infrastructure from the Gulf to the Midwest were converted to natural gas transport infrastructure (I know there are big physical chemistry differences to deal with -- but it can't be nearly as bad as building it all out) then the winter peak wind power could be used to generate ammonia locally while the natural gas provided heat. The main loss of time value would then be limited to the methane to hydrogen equipment during the winter months.

The bigger question here is what to do with all the run-off reactive nitrogen that hits the oceans and this question resolves to another of equal magnitude:

Why is it that the tremendous biomass production blooming off the coastal estuaries doesn't ascend through the food chain to replenish fisheries?

Bob Badour said at May 18, 2008 7:47 AM:

James,

Assuming these blooms are happening, and I have no reason to doubt you, the answer to your question is quite obvious.

These blooms will affect turbidity, temperature and oxygen levels in the water at a minimum.

Reduced visibility and less light at the ocean floor will make foraging and hunting hard for some of the intermediate and higher species on the food chain. Temperature and oxygen levels can render an area unsuitable for a previously established species.

Eventually, new species will evolve or move into the area to reoccupy niches abandoned by other species, but in the short term, expect to see a decline in some established populations and increases in others. The top of the food chain is the most vulnerable because declines anywhere along the chain can deprive them of their food supply.

James Bowery said at May 18, 2008 11:49 AM:

Thanks, Bob but my (inadequately expressed) rhetorical question was directed to this:

What sort of environmental engineering might be done with these blooms to support the weak links in the food chain?

There has been much talk of doing things like iron fertilization to decrease global warming, for example, but so little attention paid to the enormous and damaging waste in the form of agricultural run-off algae blooms.

As an example of the potential of such blooms to support fisheries, I'd point to the Peruvian coast where natural fish production can vary by a factor of 1000 with the variation in upwelling of deep water nitrogen.

Of reactive nitrogen used in agriculture, something like 85% ends up used by oceanic algae blooms.

Anyone seriously interested in either the oceanic environment or in food shortages should investigate this potential.

James Bowery said at May 20, 2008 5:24 PM:

The problem with algae blooms has also been encountered, and remains unsolved, in aquaculture:

Until biological control methods
for algal blooms are identified and
made available to the industry,
producers will be forced to live
with the “boom and bust” nature
of phytoplankton blooms in fish
production ponds. These blooms
are an inescapable part of the
process that producers rely on to
break down excess nutrients. For a
profitable operation, develop the
capability to monitor and detect
algal bloom die-offs. Monitor and
respond to potential oxygen
depletions with aeration equipment
and manpower to operate it.
And, finally, make management
adjustments as needed to minimize
impacts on fish health and
growth.

emmily said at May 29, 2008 10:24 AM:

holy that is really bad in a farmers life i'm glade that i have a life the way i want it thank you

Kelly said at April 23, 2014 6:19 AM:

Yet the president and the Republicans’ chief budget expert are no match for the farm and insurance lobbies, which spent at least $52 million influencing lawmakers in the 2012 election cycle. Rather than thin the most expensive strand in the nation’s farm safety net, Congress is poised to funnel billions of dollars more to individuals who already are more prosperous than the typical American.

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