Input Outlooks - 2

OMAHA (DTN) -- Global fuel markets' oversupply and a drop in fertilizer demand are helping push input prices lower for farmers this year.

Retail fertilizer prices fell slowly in recent months because of lower commodity prices. Prices tracked by DTN show fertilizers started this year down from a year earlier.

For the last week of January 2016, 10-34-0 was 2% lower compared to last year. All the rest were down double-digits: DAP by 13%, MAP 14%, UAN32 15%, UAN28 17%, and potash, urea and anhydrous all by 20%.

Despite the lower prices, farmers are looking at how they can cut back on fertilizer or be more efficient because of tighter profit margins this year. The big question is how much will farmers cut back.

Paul Bruett, an agronomist with BB&P Feed & Grain located in Winterset, Iowa, saw some farmers cut fertilizer applications in the 2015 growing season. However, generally, most farmers applied the same fertilizer levels for N-P-K as in recent years to prevent any yield declines due to insufficient nutrients, he said.

"However, this may change in 2016," Bruett told DTN.

He said many farmers have built up P and K levels in their soils over the last five years and some may decide to forego applications or, at the very least, apply maintenance levels.

"Farmers are going to cut back where they can in an attempt to stay profitable. They will be seriously looking at all areas, but (particularly) fertilizer application, land rent and machinery," Bruett said.

Clarke McGrath, an Iowa State University Extension area agronomist located in Harlan, Iowa, said he believes overall fertilizer tonnage will be down in 2016 with farmers tempted to cut back, particularly on P and K. The weather was not cooperative for applying much fertilizer this fall and some farmers decided to not apply as much fertilizer.

"Overall around here, fall P and K tonnage was probably down 10% to 15% or so," McGrath said. "Part of this we'll catch up on this winter and early spring, so I think we will end up down on P and K around 5%."

McGrath thinks most farmers are strategically dropping P and K applications, based on nutrient levels shown in soil tests on their fields; however, growers need to understand that this is only something they can do for a year or two before fertilizer levels in the soils begin to fall, he said.

Despite concerns about costs, farmers still need to purchase fertilizer to maintain yields.

Farmers like Jamin Ringger have already pulled the trigger. The Gridley, Illinois, grain and hog farmer purchased some of his 2016 nitrogen fertilizer last August.

He already bought his UAN 28% for spring. "We had a good opportunity in September to lock some in if we hauled it by October," Ringger explained.

He also purchased DAP at $510 per ton and potash at $390 per ton to fall apply on his central Illinois fields. Most of his P and K are distributed as liquid manure from his hog operation.

He didn't buy any fertilizer since last fall as prices have slowly gone down in recent months; he remains in a holding pattern and watches retail prices closely. "Hopefully we will have some more priced before planting," he said.

MORE EFFICIENT APPLICATION

A fine line exists with fertilizer application, said DTN Contributing Agronomist Dan Davidson. Buying fertilizer increases input costs, but if farmers decide to cut back on fertilizer, their crop yields could suffer.

"Soil tests are cheap; you need to do this first," Davidson recommended.

Davidson said farmers need to take advantage of newer technology and methods, such as doing variable-rate applications, to help them fertilize their crops more efficiently.

McGrath said while some precision agriculture technologies have been around for many years, some farmers have been slow to adopt them, especially when high commodity prices helped their profit margin.

"Over the last two years, I think more farmers have looked at these things more closely," McGrath said.

The other technique farmers should consider is applying split-applications of nitrogen fertilizer. The practice has become popular in recent years. By applying fertilizer closer to when the corn plant needs to use it, this allows farmers to become more efficient with fertilizer application, Davidson said.

"Fertilizer represents a huge cost to farmers, but it is one that farmers can actually control the most," Davidson said. "You have to be smarter when you apply it."

FUEL PRICES STAY LOW

The outlook for fuel in 2016 looks to be positive for buyers as prices are expected to stay low because of oversupply. The big questions are how low are fuel prices going to go this year and how long will they stay there.

The U.S. Energy Information Administration (EIA) released a monthly report Jan. 12 that forecast energy prices will stay low for 2016. The West Texas Intermediate (WTI) crude oil price for 2016 is set at $38.54 per barrel, down from $48.67 in 2015. Brent crude oil is predicted at $40.15 per barrel after averaging at $52.32 per barrel in 2015.

Gasoline is expected to average at $2.03 per gallon for 2016, down from $2.43 in 2015. Diesel fuel is predicted to be $2.29 per gallon after averaging $2.71 per gallon last year.

DTN Energy Editor Brian Milne said fuel prices should remain in this current range of prices for 2016. "I can't see crude going above $50 per barrel this year, and so it is hard to see diesel and gasoline prices shooting much higher," Milne said.

That being said, this doesn't mean fuel prices will be at this lower level forever. Any geopolitical issues in the Middle East or problems with worldwide crude supply could cause prices to rise, he said.

The reason for extremely low energy prices is an oversupplied market, according to Milne. The oversupply of crude oil domestically and globally was driven by an unexpected sharp increase in production in the U.S., sparked by new technologies in drilling for oil. By combining fracking and horizontal drilling, new oil was found in North Dakota's Bakken region while production rates surged in Texas.

Sharp growth in U.S. crude production upended global markets, sparking higher production from OPEC and Russia as they feared losing market share, amplifying a growing supply glut.

Milne said OPEC initially didn't believe the U.S. could sustain the tight oil production that drove the leap in production. As global oil supply expanded, OPEC members declined to cut their production to shore up price as they had in the past, worsening the supply glut.

Now, with the end of sanctions on its crude exports, Iran is expected to add 500,000 barrels a day of additional oil to the market soon, and add another 500,000 barrels per day of crude exports later in the year.

Global demand growth has been strong amid lower fuel prices, although demand for diesel has trailed the gains.

"Diesel demand has not grown much as industrial output is not as strong as it has been in recent years," said Milne, who added China's slowing economy has not helped with diesel demand. "In addition, we have had very mild weather in the Northeast earlier this winter, which has limited the need for home heating oil."

This has pushed diesel supplies in the U.S. to four-year highs, he said.

FARMERS DELAY PURCHASES

All of this means farmers will spend less for fuel in the coming year. That's welcome news for Aaron Frerichs, who farms with his brother, Jason, near Wilmot, South Dakota. "It is nice to see lower prices when buying diesel," Frerichs said.

Like many farmers during the 2015 growing season, Frerichs primarily purchased diesel "hand-to-mouth" with some lower prices being present. Not wanting to lock in fuel only to watch prices decline, he bought fuel a few times that growing season without locking in the price.

He purchases semi-truck loads at a time, roughly 7,500 to 8,500 gallons, depending on the truck delivering the fuel. He has 16,000 gallons on-farm fuel storage.

The last time he bought fuel was toward the end of harvest and the beginning of the fall tillage season when diesel price was about $1.80 per gallon. Frerichs said in mid-January the diesel price was now in the $1.15- to $1.25-per-gallon range.

Because of dropping prices, he is in no hurry to purchase diesel fuel. He has not bought any fuel for the 2016 growing season as of yet.

"The fuel market is just so bearish right now," he said. "We will most likely wait until we feel a bottom is in, or if futures would take a big jump up one day, then I would likely put in an order."

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Editor's Note:

Each year, DTN presents an outlook series on what is expected for the year ahead in various areas of agriculture. This is the 17th and last story in a series DTN is running that looks at what farmers can expect as the hot topics for 2016 in areas such as farm finance, land prices, ag and the environment, agricultural policy, crop inputs, livestock, transportation and others. We welcome your feedback on what you think the year will be like at talk@dtn.com.

Russ Quinn can be reached at russ.quinn@dtn.com

Follow Russ Quinn on Twitter @RussQuinnDTN

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