While higher grain prices are very welcome in the hard-pressed crop world, it seems that the associated inflation consequences for input prices will more than undo the benefits they bring.
This is a real concern for the next few years but, first, let us consider the consequences for 2022.
Most farmers will be very aware of what has been happening in input markets around the world.
This is most visible in fertiliser where price levels are already up by 150% to 250% on last year.
It is becoming increasingly obvious that the higher product prices being enjoyed by most sectors of agriculture will not be sufficient to compensate for the input price inflation.
While the impact of these inflationary pressures for 2022 cannot be fully nailed down, the direction of travel is unquestionable. But it would be foolish for farmers to just accept the higher costs without taking measures to try to offset some or all of them.
If we have a threefold increase in fertiliser prices, the simple basics of cost and return should dictate that we use less, unless there is a massive increase in output prices.
Finetuning input use
Virtually every input is subject to the laws of cost and return. Optimum recommendations are made based on the cost of the input relative to the value of its return. So good farming should involve being able to alter general recommendations to suit each input, crop and field.
Who would willingly spend €200 for a return of €50? This is something that needs serious consideration between now and next spring.
A change in the crops grown might also be considered. Winter crops are already in the ground so they cannot be changed, but they are more expensive to produce and have a higher fertiliser requirement. But perhaps you might grow different crops in spring.
Oats have a lower fertiliser requirement, but they may not measure up on margin. Spring rape stands out as an option because of the high current price level.
Opting for a legume such as beans or peas saves on nitrogen purchase for that area of land.
Higher prices drive higher costs
So what is the impact of these higher costs on margins? This involves trying to factor in the uncertain costs of fertiliser, chemicals, diesel, contractors, etc, so the best we can do is make assumptions and work them through.
In doing this, we have taken the Teagasc Crop Costs and Returns (CC&R) for 2021 as the baseline and modified the costs and prices as deemed appropriate.
We have taken revised fertiliser prices for 2022 and these are shown in Table 1 in comparison with the figure for the same product used in the 2021 CC&R.
Using the use levels indicated by Teagasc, the cost of fertiliser for winter wheat would increase from €345/ha in 2021 to €837/ha for 2022.
The situation is similar for spring barley with the 2021 cost of €262/ha increasing to €683/ha in 2022. The impact is broadly similar for all other crops.
These prices are not fixed and may change substantially by springtime – higher or lower. Either way, it is important that we react to the higher cost and consider changes at crop and farm level.
For this exercise, we have also increased agrochemical costs by about 5% to reflect what seems like inevitable increases due mainly to logistical issues.
We may also have higher machinery costs and higher diesel prices, but these have not been factored in. And outside of the farm gate we may see higher transport and drying costs, which would also drain profitability from the sector.
So what might we do in response to a 250% increase in fertiliser cost? Well, because all inputs are subject to the law of diminishing returns, it is essential to question the last 10% to 20% of the rates we normally use.
Some may react by cutting out phosphorus and potash use or reducing it substantially.
While this is understandable, it may not be the right reaction. Whether it is or not, will depend on the relative price of fertilisers and crops in the coming years. In the past, we saw fertiliser prices rise following single years of high grain prices only to end up with high fertiliser prices and low grain prices.
If this continued for a few years, it would be very difficult to afford to rebuild declining soil P and K levels.
For this reason, my reaction would be to continue to apply P and K but at reduced rates. I would also opt for reduced use of nitrogen to help control overall expenditure on fertiliser. Indeed, it is likely that a 20% reduction in fertiliser rate may only result in a 5% reduction in grain yield.
In the revised crop costs and returns in Table 2, we have reduced the P & K rates for all crops by 20%. This could mean that we will not be supplying enough nutrients to replenish offtake, but a lower yield will remove slightly less.
For the winter cereals, we have reduced nitrogen rates by 20% for all crops. As spring cereals are more sensitive, we have used smaller nitrogen rate reductions – spring barley 15%, malting barley and spring oats by 7%.
There is less scope to alter N for malting barley because overall profitability is highly influenced by grain protein levels, so N is important. A similar assumption was taken for spring oats because a proportion of the area carries a price premium.
Reducing fertiliser rate, especially nitrogen, will inevitably result in lower average yields. These are impossible to quantify but they may not be much more than 5%, especially in good ground. The impact of this will vary by field depending on its cropping and rotation history but some assumptions are needed to try to guide advice.
Grain prices will obviously have a big bearing on the cost effectiveness of inputs. The green prices used in Table 2 reflect the dry prices available today. Perhaps these will rise further by harvest or perhaps they will fall, but the margins are calculated against this background.
For us in Ireland and in Europe, fertiliser is one of many different costs in crop production.
For producers elsewhere in the world, particularly those on the drier plains with big acres and small yields, fertiliser is a bigger proportion of total cost.
Will these growers react by reducing fertiliser use or by switching to other crops?
If they reduce fertiliser use this will send a message to global markets of the inevitability of lower production in 2022.
This would likely impact on grain prices to encourage extra production to minimise a supply deficit. But we may not know this until after fertiliser is applied.
They might also switch to lower cost crops or legumes to decrease fertiliser cost.
A change in land use would filter through to markets much faster and might influence grain price in time to guide spring fertiliser use here.
The crop margins in Table 2 are shown at different yield levels. Oilseed rape stands out because of the high price. We have included an aid level for beans of €250/t but this could be much lower if there is a big swing to beans.
Standard minimum values are used for straw, but some growers may significantly exceed these nominal values.
All target yield levels (underlined) represent a 5% yield reduction on other years (excluding beans). Individual crops may better suit specific soil types and this knowledge must always be used. If the yield loss on a winter wheat crop with 20% less fertiliser can meet the suggested level, it would be the most profitable of the cereal crop options.
Lime becomes a hugely important input where fertiliser use is being reduced. Putting an area in peas or beans would reduce the total nitrogen purchased. Ultimately, all these computated margins are lower than they were in 2021, despite higher grain prices for 2022.