Impact of Iran war pressing input costs

The war in Iran is making it painful for farmers, and the longer it lingers means high fertilizer and diesel fuel prices are going to hover over the ag industry.

Gregg Ibendahl, an agricultural economics professor who studies farm input costs and finances at Kansas State University, provided an update during a recent K-State webinar. Ibendahl said high volatility is nothing new in the ag sector. Four years ago, Russia’s invasion of Ukraine sent oil prices to $130 per barrel, although they came down relatively soon.

If the per-barrel price reached that range, it would add another $47,000 to the cost of production for a typical grain farm in Kansas. About half of it comes from higher fertilizer costs, and the other half comes from higher fuel costs, he said.

In the $100-per-barrel range, a possible scenario, those expenses could add $35,000 to production costs, he said.

In his presentation, he took a closer look at fertilizer and diesel costs.

Fertilizer costs were soaring before the war in Iran, he said. The switch to add 3 million corn acres in 2025 meant farmers were going to use more anhydrous ammonia that year. As farmers looked to 2026, many appeared to have bought fertilizer in advance, so the impact will be less pronounced this year.

Once farmers have gone through their prepurchased fertilizer, suppliers are going to have to restock fertilizer quantities, Ibendahl said. “That’s why we’re seeing more volatility now, because they’re scrambling to locate some fertilizer sources.”

It also reflects the traditional economic pressure farmers face when weighing costs, he said.

“Whenever there is high corn prices, you’re going to see some shift to corn acres, which is going to increase the demand for anhydrous, and higher corn prices encourage farmers to apply nitrogen at a higher rate, so all those things together lead to really a higher use for anhydrous,” Ibendahl said.

Other fertilizers also track closely with the price of anhydrous, so they often go up when anhydrous increases in cost, he said.

He also receives questions about the price of urea. China, Russia and India account for nearly half of urea fertilizer production.

It costs more to produce urea because it is a more refined product than anhydrous.

“Urea is not overpriced now, but going forward, that could be a different situation,” Ibendahl said. “I think going forward, you’re going to see a situation where anhydrous prices are probably going to come down quicker than what would happen with urea prices, because we had to get a lot of our urea from overseas. All those distribution facilities and ports and transportation things have been damaged.”

Those factors, he said, will widen the price differential between the two inputs and make anhydrous more cost-effective.

That all likely means 2027 is going to be much more expensive than 2026 for farmers.

“Not only is 2026 potentially very expensive, but 2027—where farmers haven’t had a chance to book any fertilizer yet—could be very expensive for farmers going into next year,” Ibendahl said. “You’re very likely to pay over $1,000 a ton for anhydrous going into the next planting season.”

Diesel

Since the Iran war started, the price of diesel has climbed to about $5.50 per gallon and in some cases reached $6 per gallon, he said, but those levels and price volatility have been felt before.

In 2008, fuel costs soared until the global financial crisis dramatically brought down oil costs as consumer demand for gasoline and diesel waned, he said. As the U.S. economy started to recover in 2009, demand began to return, but stagnant production meant prices were increasing, and in real-dollar terms diesel in 2014 was close to $5.50 a gallon.

As he looked at oil production, the adoption of fracking practices about 15 years ago made a significant change in the United States. In 2014, the U.S. imported 80% of its oil, but today that is down to 20%.

Oil generated from fracking practices is considered very light and easy to refine, but other countries refine it more efficiently, he said, noting the U.S. uses different grades.

Much of the focus of U.S. refinery capacity is geared toward making greases and lubricants, although one byproduct is diesel fuel.

One lingering impact from COVID-19 five years ago was that refineries, while they continue to run at a high level of efficiency, still have not returned to peak output capacity. The U.S. has not built a new refinery in 50 years, he said.

Right now diesel is running about $1.50 per gallon higher than gasoline, and while he expects that margin to be trimmed, there will still be a premium of 90 cents to $1 per gallon that he expects to stay in place through next year and even longer. His model indicates that oil prices, even when the war ends, will remain in the $90-per-barrel range.

When oil prices per barrel rapidly increase during global conflicts, it always takes much longer for them to return to pre-conflict prices, he said.

He could see diesel prices drop 50 to 75 cents a gallon over the next year, but that will not provide much relief when usage is high during planting and harvest cycles.

“I think farmers should plan on having high diesel fuel prices for at least the next year, if not longer,” he said.

Dave Bergmeier can be reached at 620-227-1822 or [email protected].