February 28, 2005

Ag economist: 2005 crop production costs to go up

WEST LAFAYETTE, Ind. - Hoosier producers who stick with long-term rotation of crops, despite the possibility of additional costs to treat soybean rust infestation, should still come out ahead, according to a Purdue University expert.

"If soybeans need one treatment to control rust, the estimated return would still be well above the estimated return for continuous or second-year corn," said Alan Miller, a farm business management specialist and co-author of the "January 2005 Purdue Crop Cost and Return Guide."

A single application of fungicide to control rust in soybeans would cost from $18 to $22 per acre, Miller said. With the cost of one treatment, the estimated return for soybeans would be $107 per acre. A second fungicide treatment would reduce the estimated return to $87 per acre.

"This is still greater than the $68 estimated margin per acre for second-year corn," he said.

The estimates are based on an assumed yield reduction for second-year corn of 10 percent and an $18-per-acre charge for insecticides for second-year corn that aren't included for rotation corn. Producers are encouraged to refigure the estimates in the 2005 crop guide if these assumptions don't match their own expectations.

Chemicals used to treat soybean rust are not the only area where producers will see price increases this year.

"For the average corn and soybean grower, the variable costs of production have increased 7 to 8 percent since 2004," Miller said.

Increased fertilizer prices, seed price hikes and fluctuating fuel prices account for the largest per-acre crop production cost increases this year.

For fertilizer, the price of nitrogen has increased by 6 percent to 12 percent, phosphate by 6 percent to 8 percent and potash by 12 percent to 30 percent. Miller pointed out that the U.S. Department of Agriculture's index of prices paid by U.S. farmers for fertilizer has increased 40.9 percent since fertilizer prices last bottomed out in January 2002.

"Potash price increases, which have lagged behind nitrogen and phosphate in recent years, have more than caught up in recent months," Miller said.

Seed prices also have increased as much as 5 percent to 10 percent for genetically modified varieties, Miller said.

"Farmers have had an opportunity to see the benefits of biotech traits, and the seed industry will continue to try to recover the cost of developing new varieties through higher prices," he said.

Varieties carrying multiple biotech traits will be among the price leaders, along with seed used to deliver chemical treatments to the field.

One potential bright spot in the input picture may be the costs of some farm chemicals.

"Competition from generic products is a key factor in the downward trend for certain chemicals," Miller said.

However, he said that products, such as fungicides used to treat soybean rust, may be in high demand and are likely to increase instead. Prices paid by farmers for all chemicals basically have been flat the last few years, and Miller expects this trend to continue.

Also, higher crop production costs and higher short-term interest rates will increase the amount of interest expense paid to finance crop production.

"The Federal Reserve Board has been trying to head off fears of a resurgence in inflation by taking action to increase the federal funds discount rate in recent months, which has translated into higher short-term interest rates," Miller said.

Another factor affecting crop production costs is the continuing volatility of energy-related prices.

Unseasonably warm weather during December led to lower natural gas consumption for heating and higher inventory, Miller said. Natural gas futures prices were more than $2 per 1 million British thermal units (MMBtu) lower in January 2005 than in November 2004. Prospects for increasing domestic production also have contributed to the moderation in natural gas futures prices.

"This is good news for crop farmers because natural gas is the raw material usually used to produce anhydrous ammonia," Miller said. "The bad news is that nitrogen fertilizer prices aren't likely to decline from their current levels anytime soon because natural gas prices are still too high to encourage more domestic anhydrous production."

Ending inventories for the major types of nitrogen fertilizers were smaller than usual at the end of 2004, which also lends support to current price levels. However, the lower stocks may be, in part, a response to the higher cost of carrying inventory and greater reliance on imported nitrogen, Miller said.

The price of crude oil remains high.

"Growing demand and the tiny amount of excess production capacity worldwide will continue to make price volatility and prices that are relatively high by historical standards the norm," Miller said.

Diesel prices in the Midwest are up roughly 25 percent from a year ago. The price of propane fuel also climbed markedly from January 2004 to January 2005.

More information is available in the "January 2005 Purdue Crop Cost and Return Guide," which can be accessed online. Copies of the crop guide also are available at Purdue Extension county offices throughout Indiana.

Writer: Olivia Maddox, (765) 496-3207, maddoxol@purdue.edu

Source: Alan Miller, (765) 494-4203, millerwa@purdue.edu

Ag Communications: (765) 494-2722;
Beth Forbes, forbes@purdue.edu
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