When sitting down to do next year's crop budget, expect to plug in high numbers again for fertilizer. Ag economists predict prices will be similar to those of last year. Their predictions are based on the futures market for natural gas, which is the base stock for most fertilizer products.

“I think the days of cheap energy are over,” says Michael Duffy, agricultural economist with Iowa State. “And because fertilizer is so tied to the price of energy, we will be seeing higher prices on average.” Duffy also says farmers will see wider price swings as the world political situation shifts and as weather changes from year to year.

Imports may cause prices to fluctuate and alter predictions. However, the potential for high prices requires buyers to take a hard look at what to buy, when to buy it and how to manage what they've bought to make the best use of their fertilizer dollars.

Let's review

David Franzen, a North Dakota State University extension soil specialist who used to buy fertilizer for plants in central Illinois, predicts prices will be higher than those of last year based on the current price of natural gas and what it was last spring. “Whether prices will be a lot higher than last year is a good question,” he says. “But I certainly don't see a reduction in price from what they were last year.”

Typical prices in 2004 in Franzen's home state of North Dakota were $350/ton for anhydrous ammonia, $245/ton for urea, $235/ton for diammonium phosphate (DAP) and $240/ton for 11-52-0.

Based on those prices, Franzen predicts ammonia will cost somewhere between $350 and $400/ton this year. Other fertilizer products typically follow the price set by ammonia.

Large price swings and spikey markets were also characteristic of last year. Ammonia, for example, experienced a swing of $100 or more. This year's market is expected to be just as volatile.

Surviving the swings will require buyers to have counterintuitive patience, according to Michael Swanson, chief agricultural economist at Wells Fargo. “Don't panic and buy if the price has gone up 25% in the last three or four months,” Swanson says, “because as quickly as they spike, they also fall.”

Contracts an option

Because of the market's recent volatility, the Chicago Mercantile Exchange (CME) for the first time this year is trading futures contacts for fertilizer. Futures contracts are designed to lose money if fertilizer prices fall and gain money if prices increase. “In other words, if the price locked in is lower than the market price at the time of actual purchase, you will have saved money,” Swanson explains. “Conversely, if the price you locked in the futures market is higher than market price, you'll have lost money.”

Futures contracts allow buyers to lock in a price and hedge future needs to better manage risk. Swanson advocates using them as a hedging tool. He advises buyers to start small, covering 50% of their needs on the spot market (today's market and the buyer makes the transaction) and 50% of their needs on the futures market (a defined contract into the future on a certain date).

“And the benefit of that is more psychological than anything else,” he explains. “Because half of your bet is going to be correct and half will be wrong. So you leave yourself some comfort.”

Swanson says if you are averse to risk and suspect prices will skyrocket this winter due to cold weather and high heating costs, you may want to be 100% hedged. “Oil is currently $44 a barrel, which may push up natural gas prices and result in expensive fertilizer,” he says. “But most people need a bit of flexibility in the arrangement so they can feel good about whichever side wins.”

Three types of contracts are being traded in increments of 100 tons: DAP, urea, and urea ammonium nitrate (UAN). You can purchase contracts through a broker who can help you set up an account to cover margin needs. If you are interested in opening an account, you should do so right away so that when the market offers a low price you can lock it in before prices go up. For more information, visit the CME Web site, www.cme.com.

Sharpen management skills

Another way to combat high fertilizer prices is to better manage the material you do buy to maximize its use. “The high price of fertilizer means the cost of production for corn is going to go up,” says John Sawyer, soil fertility specialist with Iowa State. “But you can still get an economic return on the nitrogen applied by properly applying it and avoiding overapplication.”

Following are some management strategies that can help.

Apply it right

Sawyer says one way farmers can save money on fertilizer is to apply it in a manner that will get the highest efficiency out of it. “They need to know the characteristics of the material, how it needs to be applied, and when it needs to be applied to reduce loss from volatilization, denitrification or leaching,” he says.

For example, in Iowa, UAN solutions and urea should not be applied in the fall. Also, because of volatility concerns, these materials should be incorporated, and when used in no-till operations, they should be injected in the ground as opposed to applied on the surface. Application of anhydrous ammonia should be delayed until at least October when the soil has cooled to reduce the chances of it turning to nitrate, according to NDSU's Franzen.

Contact your dealer or extension personnel to learn more about proper application procedures for each material.

Update soil samples

Franzen says a strategy that is still grossly overlooked is soil testing. “How many years have extension people in the Northern Plains states been preaching soil testing and still less than a third of the acres that need testing are actually tested,” Franzen says. “I find this appalling. Certainly all these fields don't need the same rate of nitrogen.”

Soil testing reveals the amount of nutrients present in different areas of the field. Farmers then can apply fertilizer according to what the soil actually needs rather than at high blanket rates across the field, which can save them money. Fall soil testing for nitrate is used in the drier Plains states but is not recommended in higher rainfall states such as Iowa. Check with your extension service to find what fertilizer rates are optimal for your region and crops.

Quality control

Equipment malfunction or operator error can lead to misapplication. As a result, after applying fertilizer, you should spot check your fields to ensure the amount of fertilizer purchased was actually applied.

“You might have put on too little and cheated yourself on yield,” explains Wells Fargo's Swanson. “Or too much and cheated yourself on costs. But until you do quality control or some kind of program, you don't know. And that can be a big dollar amount in the end.”

Swanson says agriculture has not caught up with the rest of the world in quality control. And making sure you know how much fertilizer you put on and how close you were to your target is part of quality control.

Change crop rotations

Different crops have different fertilizer needs. And in some cases you can reduce total fertilizer levels just by changing crop rotations, according to Iowa State's Duffy. For example, you could add an annual legume such as soybeans or field peas that require little if any nitrogen. Also, according to Sawyer, the need for nitrogen fertilization when corn follows a legume is lower than that required when corn follows corn. Data from Iowa indicate that approximately 50 lbs. of nitrogen/acre are needed when corn follows soybeans. Very little nitrogen is needed when first-year corn follows established alfalfa. Corn in rotations also yields higher. Before switching crops, evaluate the costs and returns over the whole rotation.

Take fertilizer credits

You also should consult with extension agronomists to be sure you are taking all the fertilizer credits available. “There are many sources of fertilizer that we have not always recognized in the past,” Duffy says. “Manure is the best example of that. And we don't always take credit for crops following legumes.” You also should account for all nitrogen sources applied to fields, including starter, weed and feed UAN, and DAP and monoammonium phosphate.

Establish realistic yield goals

Finally, be sure you are realistic in the yield for which you are fertilizing. “I have worked with some people who would like to have the average yield include only the good years,” Duffy says. “We have to be realistic with ourselves, especially as the cost of not using the proper amount of fertilizer increases.”

A good bet

Ag economists say that when fertilizer prices are high, it is important for growers to stay in contact with their fertilizer suppliers to keep up to date on prices and availability of product. And farmers who shop around might be able to find good deals on urea this year due to cheap imports from overseas, according to NDSU's Franzen.

The advantages of urea are that it has fewer safety issues than anhydrous ammonia, is easier to transport and is cheaper to store in large quantities. Because of these advantages, use of urea almost equals use of ammonia now that price is becoming comparable, Franzen says. “Ten years ago, farmers used twice as much nitrogen from ammonia as they did urea,” he says. “Now it is almost fifty-fifty.”

However, because urea is dry, it can collect moisture. So buyers need to have a storage building that is relatively moisture tight. Existing buildings on the farm can be converted but should be lined with plastic to prevent rain and snow from entering. Adequate labor is also needed to unload and apply it in a timely window.

Another trend Franzen sees is more warehouses going up at fertilizer retail outlets. Warehousing allows manufacturers and distributors to buy fertilizer outside of North America at cheaper prices and store it until it's time to sell. It also benefits farmers by holding down prices and allowing them to book at fall prices.

“In the past, being able to book fertilizer at fall prices was limited by the small amount of storage that the retailers and their distributors had around here,” Franzen says. “That is being beefed up. So I look for more opportunities for farmers to be able to book early without actually having to apply it early.”

In light of this trend, he recommends you make your fertilizer plans early. “Do fall soil testing as early as you can so you know how much nitrogen you need,” he says. “Then go to your supplier and say this is what we need. What can we book?”

New tool to determine nitrogen rates

A new tool to determine nitrogen (N) rates could save farmers money and protect the environment by reducing overapplication.

Yield-goal method

The traditional yield-goal method looks at yield to determine N application rates. However, the method does not work well in all regions, according to Peter Scharf, nutrient management specialist with the University of Missouri — Columbia. “Research in Missouri and Minnesota shows that the amount of N fertilizer needed varies widely across fields, but is poorly related to yield variability,” Scharf says. In humid regions, rainfall modifies soil N supply across the landscape.

“We knew if we could find out what the optimal rates were, we could make a higher profit than applying N at blanket rates across the whole field,” Scharf explains. “But how to determine the optimal rates was the big question.”

Plant color

Scharf and his team looked at ways other than the yield method to determine nitrogen rates. The one that looks most promising is to use the color of the corn plant to determine how much nitrogen is in the soil.

Researchers have equipped a sidedress unit with an active light source radiometer and variable-rate equipment. The unit senses color of the plant and varies the rate of N applied according to the color of the crop as it moves down the field. “When the plant is dark, it puts out low rate,” Scharf says. “When it is light, it puts out a higher rate. It is variable rate on the go.”

Color-based sidedressing demonstrations are now being conducted in seven field plots across Missouri. “The potential of color sensing is really good,” Scharf says. “You can make up to $15 more per acre — minus the cost of variable-rate application — by varying rates if you do it correctly.”

Two prototypes are being tested. Scharf estimates units for corn will be widely available in two to three years.

For more information, contact Dr. Peter Scharf, 210 Waters Hall, University of Missouri, Columbia, MO 65211, 573/882-0777.