Over the last month or so, many farmers have asked me whether or not they should buy fertilizer for this coming fall and next spring already. They are concerned about prices going up even further, and for many, their interest was spurred by a fertilizer dealer suggesting they prepay now. First of all, I don't know for sure what will happen with fertilizer prices, but I do know that they are artificially inflated because our commodity prices are high. Fertilizer prices are also high because of a weak U.S. dollar, strong worldwide demand, and high fuel costs. If any of these factors changes by fall, fertilizer prices could go down, rather than up, but certainly there is upside risk, too.

If you do decide to prepay now, here are my top 4 concerns:

1. Is your money safe? Many grain elevators are currently borrowing substantial sums of money to cover margin calls. I'm sure most of them will turn out OK in the end, but since you will be prepaying with no collateral, this is something you need to look at closely. Is your cash really going toward fertilizer or is it going toward margin calls?

2. Is your best investment spending cash on next season's fertilizer, or could you earn a better return by placing your money in something else? For example, let's say you spend all your operating capital on fertilizer, so you don't have the money to buy insecticide to control soybean aphids or fungicide to stop tan spot in wheat. Let's say you estimate fertilizer prices will go up 20% in the next year (keep in mind, they could go down, too), and you're borrowing money for 5%. That's a net APR gain of 15%...not bad. However, stopping aphids or diseases in your crops, for example, could return several bushels for an investment of $6 or less. In other words, you may be passing up returns of 500 to 1000% on an APR basis for one that returns 15%. This is an unusual year on the farm, because I can easily name 20 things you could do on your farm for each crop that would give you way more than 15% back on your money on an APR basis. When commodity prices are this high, raising incremental bushels can provide lots of extra profit dollars.

3. Are you getting a good deal? We had the opportunity to buy anhydrous for this fall at a price 50% higher than what we paid last fall. Now, I realize things could go up year over year, but 50% seemed exorbitant to me, especially when I would have to prepay 8 months before I needed the product, compared to paying for it 30 days after I used it last year. Anyway, we decided to pass. Don't get me wrong, maybe I missed a good deal, but at that price I figured "how much higher can it go?"

4. Do you have enough available cash for other things? One thing I always tell people is before you spend your profits on things that don't make you money, improve your balance sheet. Same thing here. If purchasing inputs for 2009 leaves you too tapped out, that's not good. Remember, the more you need the bank, the worse your interest rate usually is. If you have very good credit, you should be able to borrow money for prime or less. Good luck!