Rising grain production costs are attributable to much more than what goes in the tractor's gas tank, according to
"Of the $50 increase in per acre costs between 2003 and 2005, less than half are directly attributable to rising energy prices," says Schnitkey, who co-authored the study with Extension colleague Dale Lattz.
The report examines production costs for grain farms in the northern, central and southern sections of
"Since 1980, no other two-year period has had as large an increase in costs as between 2003 and 2005," he notes. "Of the $50 increase, energy-related items account for $22 per acre, or 44%, of the cost increase. Fertilizer is the leading cost increase category, with a $16 per acre increase between 2003 and 2005. Fuel and oil costs increased by $6 per acre during that time.
"Energy non-sensitive costs have increased by $28 per acre in that period. Costs in this category with large per acre increases include cash rent, seed, pesticides, and interest," he says.
Schnitkey pointed out that northern
The report has a number of implications, he adds.
"Energy-sensitive costs have the possibility of declining in the future if prices for oil and natural gas decrease. At this time, energy price decreases seem unlikely. However, oil and natural gas are commodities, and commodity prices are notoriously sensitive to supply-and-demand changes," Schnitkey says. "In the future, energy prices could decline with findings of new supplies or reductions in demand. Declines in energy prices are not unprecedented, as illustrated by energy prices during the 1970s through the 1990s."
Production costs that are not as energy sensitive such as cash rents, seeds, and pesticides have less chance of declining, he notes. "The increases in the non-sensitive cost categories signal a general, permanent higher level of costs," he says. "This higher level of costs introduces heightened risks, as revenue declines could lead to lower levels of income than in previous years."
To date, Schnitkey says, corn and soybean prices appear like they will be higher in 2006 than in recent years.
"Given cost increases, these higher levels of prices do not necessarily signal higher profitability to grain farms," he says. "Overall, higher revenue caused by rising prices may counter cost increases, leaving per-acre returns near recent levels."
The complete report, "Cost Increases: Its Not Just Energy," can be read online at U of I Extension's farmdoc Web site at: www.farmdoc.uiuc.edu/manage/newsletters/fefo06_11/fefo06_11.html