Illinois Ag Connection - Farm Input Costs Soar in Reaction to Several Factors

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Farm Input Costs Soar in Reaction to Several Factors
Illinois Ag Connection - 03/21/2008

The unavoidable costs of planting corn this year will be markedly higher than last year, and continue the significant cost escalation that began in 2003, reports the Illinios Corn Growers Association.

And production costs will be considerably higher in 2008 as compared to 2007 levels, according to Gary Schnitkey and Dale Lattz, with the Department of Agricultural and Consumer Economics University of Illinois. Non-land costs for high-productivity farmland are estimated to be $370 per acre for corn, an increase of near $50 over 2007 levels. Soybean costs for 2008 are projected at $220 per acre, an increase of near $20 per acre over 2007 levels.

Since 2003, corn non-land costs have increased over $120 per acre while soybean costs increased over $50 per acre. These production cost increases are negating some of the gains associated with higher commodity prices. Things are so out of whack, according to Latz and Schnitkey that a return to historic commodity levels would lead to low or negative net incomes.

Over 50 percent of the cost increase is associated with fertilizer. For corn, fertilizer costs are projected near $120 in 2008, an increase of over $30 per acre from 2007 levels. And it may get worse.

Russia will set export tariffs on certain mineral fertilizers and raise existing duties on others in a move that could raise at least $300 million to buy fertilizers for local farmers, their government said on Tuesday. Nitrogen fertilizer exports will be subject to a tariff of 8.5 percent of the customs value and potassium fertilizers will have a 5 percent tariff.

Neither type of fertilizer is currently subject to duty. The government also said it would raise the export tariff on fertilizers containing nitrogen, phosphorus and potassium in any combination of the three in packages not exceeding 10 kg (22 lb) to 8.5 percent, from 5 percent currently. The tariffs will become effective one month after the official publication of an order setting them and will remain in force until April 30, 2009, the government said in the statement.

Fertilizer costs this year will vary across farms depending on the timing of fertilizer pricing, according to the Schnitkey-Lattz tandem.. For the 2008 production year, fall 2007 fertilizers prices were lower than projected spring prices. Many farmers purchased anhydrous ammonia in the mid to high $500 per ton range in the fall of 2007. Spring anhydrous ammonia price likely will exceed $700 per ton. Similarly, potash prices were in the low $300 per ton range in the fall. Potash is projected at the mid and high $400 range for the spring. Overall, per acre fertilizer costs for corn could average $30 higher given spring pricing rather than fall pricing. For soybeans, fertilizer costs will average approximately $10 higher given spring pricing rather than fall pricing.

The above cited estimates are for non-land costs. Land costs, such as cash rent, need to be added to non-land costs to arrive at total production costs. Adding a $180 per acre cash rent to $370 of non-land costs for corn gives total costs of $550 per acre. The $550 per acre production costs is significantly above actual costs from five-years ago when gross revenues in the middle $400 range were considered good. These higher costs lead to higher break-even prices to cover costs. Given total costs of $550 per acre and a 180 bushel corn yield, the break-even price of corn to cover costs is $3.06 per bushel ($550 total costs / 180 bushel yield). This break-even price level is well above the 1974 through 2005 average corn price received by U.S. farmers of $2.36 per bushel.