August 15, 2008

For the first time in 30 years, grain farmers received a raise, but they might not see as much of it as they would like, according to a University of Kentucky agronomist. Cattle producers are facing declining revenues. Vegetable growers are feeling squeezed both on the farm and beyond the farm gate. Blame it on the soaring price of inputs.

Nitrogen prices are close to $1 a pound, which can amount to $80 to $120 per acre depending on the crop. Seed prices are going up. Fuel costs are sky high. According to Chad Lee, associate professor in agronomy with the UK College of Agriculture, everything's coming together at the same time.

"Demand for commodities is high but so is demand for inputs," he said.

The perfect storm.

World demand for fertilizer, driven by record crop prices and emerging economies, has rapidly increased over the past few years. Fuel costs make it more expensive to transport fertilizer, and since the United States imports half of its nitrogen and more than half of its potash, those fuel prices are contributing to the overall fertilizer price.

For participating farmers in the UK College of Agriculture's Kentucky Farm Business Management Program, farm costs rose 41 percent from 2005 to 2007. From 2006 to 2007, fertilizer costs rose 25 percent; seed went up 25 percent, and crop insurance had a 55 percent increase.

The big concerns of many grain farmers are that input costs are going to go sky high and commodity prices will start trending downward.

"Prices are cyclical. They always have been," Lee said. "And when these commodity prices come back down, then we're going to see some real challenges. For the next six to seven months, these farmers should be in good shape if they get a good crop and have a contract. But you start looking at a longer term, and there is reason to be concerned."

The U.S. Department of Agriculture just released figures predicting this year's corn crop will be 12.3 billion bushels, the second largest corn crop in history. Commodity prices have already settled back to $5.09 a bushel from a high around $8.

Everything indicates inputs prices will continue to climb. Seed companies are hinting that they're going to raise the price of corn seed next year by $30 to $50 a bag. That would translate to about $10 to $20 more per acre. Lee said farmers are anticipating the price of fertilizer will be about $200 to$250 an acre next year, and the price of all inputs will be close to $550 per acre.

"If corn sells for $5 a bushel, a farmer would need a yield of at least 110 bushels per acre to break even on inputs alone. That doesn't cover land, salaries or machinery costs," he said.

The livestock industry is feeling pressure from both sides. Diammonium phosphate (DAP), a nitrogen fertilizer commonly used on pastures is now sitting at $1,000 per ton. Hay production costs are climbing along with fuel prices. In Kentucky, a cow-calf operator typically can spend $200 per cow on forage production alone, including hay production and pasture maintenance. Feed costs reflect the trend in soaring grain prices.

"The cow-calf operators have been hit the hardest, because they've also seen a decrease in revenue," said Greg Halich, UK associate extension professor in the Department of Agricultural Economics.

Typical cow-calf operators will sell the bulk of their calves soon after weaning. But feedlots are now dealing with the high price of commodity feed. As a result, demand for smaller calves has substantially decreased, with feedlots preferring yearling calves that can be finished in a shorter period of time. The end result is lower revenue for the cow-calf producer.

"A common misperception is that farmers can simply pass on increases in production costs through the supply chain to the consumer," Halich said. "In commodity markets, farmers are ‘price-takers,' and individual farmers have almost no control over the prices they receive for commodities. In the long run, if profits are low then producers will decrease production, thereby reducing supply and increasing price."

And that's what cow-calf operators presently are doing as they gradually decrease the size of their herds in response to lower demand from feedlots. In the long run, this will rebalance the supply and demand equation and ultimately push calf prices back up. But it won't happen overnight. This year, it is unlikely livestock producers will see the same profits they saw over the past few years.

Horticulture crops are high input crops, but they are also high value crops. Due to their fertilizer requirements, grain crops are much more energy intensive on a per acre basis and a per unit cost basis than horticultural crops. And because there's a relatively lower value per unit sold per acre as compared to vegetables and fruits, the proportional energy costs to the value of the product is higher for grain crops than for produce. On the other hand, the absolute cost for produce is higher.

"A lot of the inputs that they use, not just with fuel, but with pesticides, plastic and plasticulture, which is used for a lot of our annual vegetables, are all substantially driven by petroleum costs," said Tim Woods, UK extension professor in agricultural economics.

The cost of distribution for horticultural crops, even to modestly distant markets, is a big factor as well, he said.

"These are highly perishable products that are shipped by refrigerated truck. There's a cold chain that typically has to be preserved from farm gate to the supermarket or restaurant, and the energy costs associated with that have pushed the cost of that whole value delivery system way up," he said.

In a free market economy, many of those costs can be passed on to the consumer, but there is a limit.

"Folks have less and less disposable income available to them, not so much as a result of the energy impact, but with the slowdown in our economy in general," he said. "There's only so far up you can go with prices before it's going to impact how much product you can sell."

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