Price Ratios: What Are They, and Why Do We Care?

A number of fertilizer recommendations are adjusted according to the “Price Ratio”. However, many growers don’t really understand what is meant by the term, or why it is important. The calculation of the price ratio involves dividing the price of nitrogen (N) fertilizer by the value of the grain. Since we generally buy nitrogen fertilizer by the tonne and sell grains by the bushel, there is some additional math to get them into the same units (cents per pound of N divided by cents per pound of grain). The easiest way to understand price ratios is to think of them as the amount of yield you need to buy a pound of nitrogen fertilizer.

The reason this relationship is important is that crop response to nitrogen generally follows the “Law of Diminishing Returns”. The first pound of added nitrogen produces the largest yield increase, and each additional pound of N generates a slightly smaller yield increase up to the point where a maximum yield is reached. After this point, adding more N has either no impact on yield or causes yield to decline. At some point below the maximum yield, the value of yield increase from the last pound of N that was applied is exactly equal to the cost of that N. This point is called the Maximum Economic Rate of N (MERN). Applying higher rates of N will generate more yield, but the value of that yield will be less than the cost of the fertilizer, so the net return to added fertilizer will be negative.

The fertilizer rate that corresponds to the MERN will depend on how many pounds of grain it takes to pay for a pound of fertilizer - in other words, the Price Ratio. At higher price ratios, you need more yield to pay for each pound of N, so the MERN will be less. This was the case in 2006, when N fertilizer prices were high but the price of corn was very low. In 2008, the prices of both corn and fertilizer have gone up, so the price ratio is much closer to normal. The practical challenge in calculating the price ratio is the uncertainty about the selling price of grain that should go into the equation. This will involve a combination of guesswork based on market trends, and fixed values based on crops that have been pre-sold.