Soaring costs squeeze farmers’ returns in North American grain belt

Bryan Perkins, whose family has farmed a patch of the Canadian prairie for more than a century, has never seen his costs rise like they have in recent months.

The day-to-day cost of running his operation was already escalating quickly coming into 2022 amid rampant inflation and supply chain bottlenecks: fertiliser, diesel, electricity and freight were all marching higher.

“Russia-Ukraine has exacerbated the whole issue,” the grain and pig farmer said, sitting at his kitchen table outside Wainwright, a town in the western province of Alberta.

Perkins’s experience echoes that of many farmers in North America’s farming heartlands even as grain prices hit the highest levels in a decade. Russia’s invasion of Ukraine is threatening food shortages in import-dependent nations, but it is also increasing costs for growers based in big agricultural exporters.

The primary challenge for US and Canadian farmers is the price of fertiliser. Soaring natural gas prices have pushed up the cost of nitrogen-based fertilisers such as ammonia, which jumped from about $700 a tonne in August to more than $1,600 in May. The price of potash, rich in potassium, has hit records above $1,100 a tonne as sanctions curtail supplies from Russia and Belarus, which together account for almost 40 per cent of global supply.

“We’re in uncharted territory, in terms of fertiliser costs. At the farm level, we’re really at record levels,” said Tom Scott, vice-president for agribusiness consulting at S&P Global Commodity Insights. “Moving forward, this is going to be a challenge, especially if crop prices come down.”

A study by academics at the University of Illinois estimated that rising fertiliser costs would cut farm incomes by about a third between 2021 and 2022, even before the invasion of Ukraine began. In the US, the Biden administration has said it will pump funds into domestic fertiliser production in an effort to cut costs, but any results will take time.

High fertiliser prices have triggered a shift to crops that require less of it: US farmers intended to plant 4 per cent fewer acres with corn this spring, while boosting land for soyabeans, according to the US Department of Agriculture.

Bert Frost, vice-president of sales at CF Industries, a US-based fertiliser producer, last month said it would be a “mug’s game” for farmers to avoid applying fertiliser to save on costs, given that these were already reflected in higher crop prices.

“If you are not applying maximum nutrients, you’re just not that intelligent, because it’s $8 corn, it’s $12 wheat, it’s $16 soyabeans,” he told an industry conference hosted by BMO Capital Markets. “Every crop that’s out there that needs nitrogen or any nutrient is highly valued, and highly valued because it’s highly needed.”

The price of diesel fuel that powers tractors, harvesters and grain trucks has also soared, with US prices at the pump rising 70 per cent in the past year to record levels of more than $5.50 a gallon.

Perkins, in Alberta, said local farmers had been paying roughly C$16 (US$13) for a litre of glyphosate, a herbicide often used with canola, corn and soyabeans. Last year the weed killer, often known by the brand name Roundup, was selling for just over C$6 a litre.

In central Illinois, one of the highest-yielding corn and soyabean regions in the world, pesticide costs are expected to be up by a quarter this year versus 2021, according to a University of Illinois study. Machinery repair costs are also set to jump about 20 per cent because of supply chain constraints.

The price pressure comes as the US Federal Reserve raises interest rates, pushing up the cost of borrowing for equipment and crop inputs.

“Drought, increased fertiliser, chemical and fuel costs and rising interest rates are the primary concerns in our area,” one south-west Nebraska agricultural banker told Federal Reserve Bank of Kansas City researchers in a survey published last month.

Consumers are unlikely to directly feel the pinch from rising production costs alone. The bulk of the increase in food prices is driven by costs beyond the farm gate, including transport and packaging, analysts said. Farmers received 16 cents for every dollar spent on food in 2020, according to the USDA.

Elevated crop prices mean many farmers will be able to weather higher costs for now. Early estimates suggest that should crop prices remain high, returns for corn and soy will be down on last year but remain well above previous years.

“If those [crop] prices stay up there farmers will absorb those prices and be profitable,” said Gary Schnitkey, a professor at the University of Illinois at Urbana-Champaign. “But the minute they come down . . . we’re looking at very large losses. The returns are still there, but those risks are high.”

In parts of the developing world, however, the situation is direr. High costs could force some South American and African farmers to leave crops unfertilised, or abandon planting altogether.

“The US farmer is not going to stop growing crops because of high fertiliser prices,” the S&P’s Scott said. “But there are other parts of the world where it may be difficult to put in a crop.”