Projected higher costs to hit Tillage margins in 2022
Tillage farmers are facing a potentially large decrease in margins for 2022 compared to 2021 due to increasing costs, especially the extraordinary increase in fertiliser prices, a return to trend yields and reflecting forward grain prices. When comparing Gross margins for 2022, beans, a crop with low fertiliser inputs, is now very competitive against cereal crops.
Over the past six months fertiliser prices have continued to increase at alarming rates. Expectations of a doubling in the cost of nitrogen are being widely talked about for next year. The increases are driven by the continued rise in the cost of natural gas, which is a key input in the production of nitrogen fertilisers. Costs of other major elements such as Phosphorus (P) and Potassium (K) have doubled in the past few months with these increases expected to contribute to higher costs for 2022. As fertilisers are one of the largest inputs to tillage crops, these huge cost increases will severely affect profit margins in 2022.
Teagasc budgets show that Tillage margins in 2021 are well above the five year average, with the effects of increased grain price and good yields giving a gross margin in winter wheat of €1,302 per hectare and spring barley of €916 per hectare (both gross margins are calculated using 2021 output and input prices with estimated national average yields. See the Teagasc Crops Costs and Returns 2021 for detailed input costs).
Comparing margins from 2021 to predicted margins in 2022, winter wheat margins (€554 per hectare) decrease by 57%, and spring barley (€444 per hectare) decrease by 52%. The 2022 margins are based on average yields, Sept 2022 forward grain prices which is €30 per tonne drop compared to 2021), and an increase in fertiliser prices of 100% compared to 2021 (with CAN at €450/t and 10.10.20 at €550/t). Other cost increases in direct inputs such as fuel and spare parts are not factored in here but will also erode margins further.
Other crops such as beans, a legume crop fixing its own nitrogen, is not as dependant on chemical fertiliser inputs and will not see as big a decrease in margins next year, but margins are affected nonetheless. The predicted margins in beans is €529/ha in 2022 compared to €702/ha in 2021, a decrease of 25% (2022 margin based on trend yields, grain price of €245/t and an increase in fertiliser prices of 100% compared to 2021).
There is high volatility in the fertiliser markets at the moment and the fertiliser industry in Ireland is unsure where the market will settle in early spring 2022, when most fertiliser is purchased.
Growers should also be aware the 2022 predicted margins are calculated on a relatively high grain price compared to the last five years, but this price may not be available by next harvest.
Michael Hennessy, Head of Crops Knowledge Transfer in Teagasc said; “The tillage production cost increases are looking extreme at this point and all growers need to sit down and work out the costs on their own farm. All avenues of protecting margins should be looked at on farm including forward selling grain, targeting fertiliser to minimise use and costing out fertiliser types to maximise money spent”. He added; “Growers need to be very careful when committing to large outlays such as machinery purchases and especially land rental as the rental demands from land owners will quickly erode margins in this high cost environment.”
Mark Plunkett, a soils and plant nutrition specialist in Teagasc, indicated there are a number of actions which all farmers can look at to decrease chemical fertiliser use and get the best from any fertiliser which is applied. Mark Plunkett said; “The starting position is to ensure your soil pH is correct and then tailor your fertiliser to the soil P and K index. Adjusting potassium levels to take account of straw incorporated and also utilising available organic manures to get the best from its nitrogen content is essential to realise chemical fertiliser savings in 2022”.
Tillage farmers are urged to complete a financial analysis of their business in 2021 and then project the effects of the increased costs on margins in 2022 for their farm. Teagasc tillage advisors are available to help farmers with this financial analysis with tools such as the Teagasc eProfit Monitor and other calculators. Contact your advisor sooner rather than later, especially before committing to land rental, or other major commitments for 2022.