Variable costs for corn and soybean production inputs like seeds, fertilizers, and chemicals are currently expected to be down overall in 2014 on a cost per acre basis. But, the size of the decrease is relatively small with per acre costs in Indiana down an estimated 6% (corn) and 5% (beans) overall, for average yield corn and soybeans grown in rotation. These declines in variable production costs per acre are largely the result of significantly lower fertilizer prices. Other inputs, such as seed and chemicals, are expected to have moderate increases for 2014. The most recent US Energy Information Administration short-term energy outlook forecasts diesel fuel prices to be down 5% for 2014.

Chemical Prices
Prices for insecticides and fungicides have increased steadily since the beginning of the ethanol boom. After initially following fungicides and insecticides upward, herbicide prices dropped after the crop cost-price squeeze in the 2009 crop year. By the summer of 2013 herbicide prices had almost recovered to the 2009 level. In contrast, since 2009 the average annual increase in prices paid by farmers has been just over 3% for insecticides and fungicides.

The factors that drove higher prices were increased sales as farmers sought to maximize yield of relatively high-priced commodities and large planted acreages as farmers responded to high commodity prices. Planted acreage may shift out of corn and into beans or other crops in 2014 if current market prices persist, which may negatively affect demand for fungicides and insecticides. Insecticides and fungicides are applied on considerably less than half of US soybean acres. Herbicides, on the other hand are applied to almost all corn and bean acres. Overall, farm chemical prices are forecast to be flat to up 1-2% in 2014 depending on the type of product.

Fertilizer Prices
NASS conducts an annual spring survey of prices paid for inputs by farmers. When these are compared to the most recent fertilizer prices reported by the Agricultural Marketing Service in its Illinois Production Cost Report (November 21, 2013), it is apparent that anhydrous ammonia fertilizer prices this fall are down about 22% from prices paid for ammonia fertilizer last spring. Urea prices are down even more. Phosphate and potash prices are down about 20% and 18%, respectively.

The normal seasonal cycle for fertilizer prices, where prices bottom out in the early fall and then trend upward into spring planting may hold again for 2014. Lower prices may stimulate even stronger sales worldwide this fall and next spring, so we may have already seen the seasonal bottom on nitrogen and phosphate fertilizers for this year. It will be important to manage the risk that nitrogen prices, in particular, may rebound in response to strong demand during the spring of 2014.

The price prospects for potash, however, are very uncertain. The five major producers of potash globally had been curtailing a significant amount of potash production capacity in order to avoid building up excessive inventories that would depress world market prices. An announcement in July 2013 by one producer that it plans to unleash its production capacity could pressure potash prices downward over the next several months.

The relationship between the price of corn and the price of nitrogen fertilizer is an important consideration when determining the optimal amount of nitrogen to apply. Because the price of both corn and fertilizer have dropped about the same amount percentagewise, the nitrogen price to corn price ratio for 2014 is expected to be very similar to what it was in the spring of 2013. This suggests that the optimal amount of nitrogen to apply won’t be significantly different from last spring.

The longer term trend in nitrogen prices appears to be down, which is good news for US farmers. It is apparent the US nitrogen fertilizer production capacity has started to grow slowly. As growth in US production capacity for nitrogen fertilizers continues and the US becomes less dependent on imported nitrogen the price of nitrogen in the US could eventually decline even more. Lower nitrogen prices would be based on the assumption that low natural gas prices continue in the U.S. for the foreseeable future. For 2014 natural gas prices in the US are forecast to increase almost 10 percent according to the US Energy Information Administration’s current short-term energy outlook.

Seed Prices
Prices for corn and soybean seeds are expected to be up perhaps 2-3% overall for the 2014 crop year. The range of price changes is expected to be fairly wide with the larger price increases limited to newer seed technologies. The seed industry is coming off the drought year of 2012 which was a poor-production, high-production-cost year. Fortunately, 2013 appears to have been a relatively good seed production year in the Midwest. Lower production costs and larger seed supplies should have a moderating effect on seed price increases. Research and development in genetically modified technologies has been a key factor influencing steadily rising seed prices in recent years particularly with respect to corn. In Indiana the percentage of corn acres planted with genetically modified varieties increased from only 21% in 2004 to 85% in 2013.

Income Tax Reminder

Taxable incomes for the 2013 calendar year are forecast to be relatively large on many Indiana crop farms as a result of relatively high commodity prices stemming from the 2012 drought and crop insurance proceeds actually received in 2013. Thus, Indiana crop farmers are expected to prepay large amounts for 2014 crop inputs before the end of the 2013 calendar year. Farmers are reminded that the Internal Revenue Code requires that prepayments be made for specific items in specific quantities, so that the prepayments cannot be construed as a deposit. The deductibility of large amounts of prepayments may be limited under some limited circumstances, so it is always wise to seek advice from a qualified income tax professional when planning on prepaying large amounts. Also, prepayments may increase farmers’ counter-party risk, so steps should be taken to protect the farm against such risks.

Summary
The overall costs of inputs for crops will be down some in 2014, but remain relatively high by historic standards. The potential for input price volatility still remains. Volatility represents both the potential for even higher prices, as well as the potential opportunity to buy at lower prices. The cost-price squeeze farmers’ face for 2014 corn and bean crops should provide plenty of incentive to shop around for the best purchasing opportunities. It will continue to be important to consider both cost and benefits when buying inputs. Low crop prices mean they will be quicker to reduce usage of some inputs that have a low bushel payback.

Unfortunately, it appears that reduced variable production costs will not kept pace with falling crop prices. The resulting cost-price squeeze likely will provide strong incentive for farmers to look for additional opportunities to reduce costs. It is apparent that the returns above variable costs per acre available to pay land rent and other fixed costs will shrink significantly in 2014. It appears likely that cash rents for farmland won’t immediately respond to falling returns above variable costs which will likely create additional economic pressure as tenants try to manage shrinking margins. This may influence farmers’ buying behavior in the aggregate and ultimately reduce demand and potentially reduce input prices for some production inputs.