Commodities Watch: Fertilizer, Food Prices Could be Spiraling; US Drought Threatens Wheat Crop; China Rejects Coal Shipments (SYT, MON, MOS, GLD, SLV)

Today’s commodities report focuses on rising costs for fertilizer and food, the drought in the US southwest, and reports that China is re-selling some of its coal imports. Earlier today we noted the outlook for some fertilizer makers following the earnings report from Swiss giant Syngenta AG (NYSE: SYT).  Monsanto Co. (NYSE: MON) and Mosaic Co. (NYSE: MOS) have already reported quarterly earnings, with reports from Potash Corp. of Saskatchewan (NYSE: POT) and others to follow shortly. Overall the outlook for fertilizer makers is upbeat for 2011.

For food producers, fertilizer costs are rising rapidly so far in 2011, though not as quickly as they did in 2010. In Illinois, anhydrous ammonia is up $20/ton, diammonium phosphate (DAP) is up $15/ton, and potash is up $33/ton so far this year.

As fertilizer prices rise, crop prices also rise, likely because more crops like corn and soybeans are planted, which increases the demand and price for fertilizers. Because farmers can pay the higher prices for fertilizer as a result of the higher prices they receive for their crops, fertilizer prices rise again. This scenario closely resembles the classic inflationary wage-price spiral.

According to the Dairyherd Network, it cost $113/acre to fertilize corn in August of 2010. By mid April 2011 it cost $155/acre, a jump of 37%. Of that cost $58/acre was spent on nitrogen fertilizer in 2010, while $85/acre is the current cost of nitrogen.

The price of a bushel of corn last August was about $3.73, compared with about $7.55 today. Figuring 300 bushels/acre, one acre of corn in August 2010 yielded $1,011, compared with $2,265 today. Ignoring other costs and subtracting fertilizer costs, an acre of corn in August put $898 in a farmer’s pocket. Today, that same acre puts $2,110 in the same pocket.

The actual numbers could be different from this back-of-the-envelope calculation, but the conclusion remains the same. The more acres a farmer plants in corn, the more fertilizer they need to buy. More fertilizer costs more, but it increases the payoff by about 2.5 times. The only question is how long this can continue.

In the Southwest, the US wheat harvest on 36% of planted acres is projected to be either “poor” or “very poor.” More than half the country’s winter wheat comes from Texas, Oklahoma, and Kansas, and both Texas and Oklahoma are the driest they’ve been since the Dust Bowl years of the 1930s. The outlook for rain in Kansas, which alone produces one-quarter of US winter wheat, is promising, provided the storms don’t coalesce into severe thunderstorms or tornadoes. Winter wheat prices in Kansas City are around $8.74/bushel, down slightly from yesterday.

China has turned back at least four cargoes of South African coal in the past month, sending them all back to European buyers. China’s rejection of the coal is not unusual, but previously the coal was taken by other Asian buyers. The re-sold coal is competing with Australian coal, which has made its way back into the European market for the first time in years. Low prices for China’s domestic coal is responsible for the resales.

Gold prices rose to a record high at $1,487/ounce earlier this morning before pulling back to around $1,485. Silver rose to another 31-year record high of $42.80 as well. The SPDR Gold Shares ETF (NYSE: GLD) posted a new 52-week high this morning, putting its 52-week range at $110.54-$145.07. No to be outdone, the iShares Silver Trust (NYSE: SLV) also posted a new 52-week high, putting its 52-week range at $16.73-$41.82.  As noted earlier today, the calls for $50 silver are growing.

Paul Ausick