Increase in costs causing problems for farmers

Grain harvest is under way now in our area with combines running in the earliest planted corn and soybeans fields. We normally expect variation in yields from field-to-field and farm-to-farm, often due to soil differences, rainfall variation, soil fertility and crop varieties planted. This year is no exception, but yield measurements taken and field observations made, tell me that we are comfortably ahead of the disappointing experience in 2007. Be sure to understand that there are grain yields in our area that are low enough to be submitted for evaluation by the crop people.

And now for the rest of the story … The challenge for grain producers this year is the impact that increased costs will have on their bottom line. Costs have always been an issue, with past years showing marginal profits at best from average yields. If yields fall below average then the red ink can flow. Commercial grain production is a volume business that attempts to put together enough small margins from many units of production so that there is something left in the end make a return on equity. This does not always happen. In 2008 we have record increases in costs never seen to this extent before. The cost of producing an acre of corn has increased from around $250 per acre three years ago, up to at around $450 per acre this year. This cost of production is expected to continue rising into next year as world demand for production inputs continues to rise, and likely to keep input prices up. 

Inputs to producing an acre of corn obviously include fertilizer and it is the single biggest expense this year.

Other important expenses, in no particular order, include: seed, crop protection chemicals, diesel fuel, equipment, labor, taxes, land rent and insurance. To put 2008 expenses in perspective, a new combine can cost over $200,000, with good used machines bringing $100,000 each. To control harvest timing, producers feel they must own a combine or else wait for the custom harvester to come. To gain more perspective, remember that fertilizer and fuel have both doubled from previous years levels. A producer alerted me to the fact that they had used $9000 in diesel fuel in just 2 weeks of heavy field work. This cost would normally cover a year’s supply on some farms. 

Costs are eating up the opportunity for profit and high yields will be needed if grain producers are to come out ahead. By no means are our yields this year on pace to set any records, but still, costs are forcing producers to make high yields or face the consequences. At 100 bushels per acre corn growers need around $5 to break even. Some have protected this price or better but others are watching corn drop under $5 this week for the first time all year long. 

The other side of this story comes from the grain users. The livestock producers and the dairy farmers rely on grain as a supplement in their rations. These grain users know that their production methods depend on cheap grain. There is no cheap grain to be found since prices started climbing in 2007. Record highs have been set in 2008, but you had to forward price to fix these levels if you were selling. Buyers on the other hand have been using what they produce and figure it only costs them what they have in it.

Opportunity cost is not always counted when home grown grains are being used.

High costs on all farmers mean that over the long run, we could end up with a food shortage due to less domestically produced food products. Imports might make this up and keep retail prices in line but a shortage usually means prices will go up at the store. 

Carl C. Stafford is the agricultural extension agent for Culpeper County. E-mail .