Input costs pushing farm risk levels higher

The same corn prices that many experts said would settle in at $4 per bushel or so edged up to near that level as summertime approached. High prices should mean high profits, but for some farmers it may mean getting out of the business.

Roger Oxendine, who farms more than 8,000 acres of cropland in south central North Carolina concedes he has an opportunity to make a lot of money with his 2008/2009 crops. Unfortunately, he says, “I also have the opportunity to lose more money than I’ve ever lost.”

That scenario was repeated time after time in a series of meetings on farm risk. Farmers have ridden the technology wave to record production and are enjoying some of the benefits of high production and high prices for the crops. Except! The price of oil and the cost of greed has driven input costs to equally record high levels.

Dave Kohl, a retired ag economist from Virginia Tech University, says growers are just now seeing some of the rewards of a rapidly approaching technology revolution in farming.

“When I finished my doctorate in 1978, corn yields had remained static at around 70-80 bushels per acre. In 2008, 155-160 bushels per acre are about average across the country,” Kohl says. By 2025, at that level of growth, corn yields will be in the 300-325 bushel per acre range, he adds.

“There is a county (Davis County) in western Kentucky that averaged 260 bushels of corn per acre last year on a fairly large acreage. They are almost to the 300 bushel per acre level already. Give good managers this kind of technology and yield projections may prove to be conservative,” according to Kohl.

“That’s just the beginning, Last fall I saw corn in research plots in Sub-Saharan Africa that averaged over 150 bushels per acre on three inches of water. That’s in research plots, but it’s amazing and think what that technology will become once its in the hands of really progressive farmers, farming with good equipment on good land,” Kohl says.

Large companies recognize the potential of technology in agriculture and investments are up. Kohl says one company actively involved in agriculture raised its research and development budget from four percent of revenues to 10 percent.

The payment for this new technology will be passed along to farmers, who won’t be able to stay in business without it. All that ratchets up the risk involved in farming in the future, according to the former Virginia Tech ag economist.

Lending institutions also see the opportunities for technology-based agriculture. Kohl says he works with three international banks who want to come into the U.S. primarily to finance farming operations. Again, dollars will likely be there for farming, but the risks will be high, especially for grain farmers, Kohl says.

Land values, either to buy or rent, will undoubtedly raise the risks of farming in the future. In some of the Midwest, according to Kohl, the saying is ’10,000 by 2010,’ referring to the value of an acre of farmland. In some areas of the Midwest, farmland that rented for $150 per acre in 2006 went for over $300 per acre in 2008.

“The most dangerous way to look at land prices in the Midwest for growers in the Southeast is to say that’s up there, those kind of price increases won’t effect us.” What happens in other parts of the country will affect risks associated with farming — remember the farm crisis,” Kohl says.

“If you can’t stand a volatile environment, farming in the future won’t be for you. The peaks will be higher and the valleys will be lower in the future,” Kohl adds. “Flexibility and adaptability will be key management strategies in the future — if you don’t have plenty of both in agriculture, you just may be out of business quickly in the future.”

For example, he says, organic crops make up eight percent of the agriculture marketplace today, by 2020, it’s expected to make up 20 percent of the market. Farm managers will have to deal with probabilities and make risk-related decisions based on the most likely scenario of what will happen.

Twenty years ago someone asked me, ‘will the Canadian dollar ever be stronger than the U.S. dollar.’ My response was, there’s about a 30 percent chance. In 2008, that 30 percent chance occurred. Growers who planned for a weak dollar will benefit from the current weak dollar, but few farmers did, according to Kohl.

On the farm, input costs and escalating risks change every day. From January 2007 to January 2008 diammonium phosphate (DAP) prices rose from $252 per ton in January 2007 to $752 (U.S. Gulf price); prilled urea rose from $272 to $415 per ton (Arab Gulf price); and muriate of potash (MOP) rose from $172 to $352 (Vancouver price).

At the same time the price of 1 metric ton of corn rose from $3.05 per bushel to $4.28 per bushel.

By late June corn prices had soared to nearly $8.00 per bushel and input prices continued to keep pace. The continued rise in fertilizer cost is fueled by new demand for grain for biofuel production, higher energy and freight prices, increased demand for grain-fed meat in emerging markets, and increased use of natural gas as liquefied natural gas (LNG).

Farmers in the upper Southeast are exhibiting some of the flexibility that Kohl suggests. Near record wheat acreage in the Carolinas and Virginia and subsequent increases in soybean acreage are an indication of both the high price for soybeans and the lower input costs.

Despite lower nitrogen demands for soybeans, University of Tennessee Ag Economist Delton Gerloff says even the lower input soybean costs still put bean growers at significant risk. For example, he says, DAP, a fertilizer used for beans, as well as corn, pastures and cotton, sold last year for $398 a ton. This year, it sells for $1,000 a ton.

Kohl says farmers should keep a close eye on the price of oil, because it has a direct influence on rural ag economies. Overall, he says, the United States is less dependent on foreign oil than we were in the 1970s. In rural areas and in the farm industry we are more dependent.

Three factors will have a direct bearing on oil prices and subsequently on the level of farm risks: A healthy U.S. and world economy, geopolitical risks and the value of the dollar. Farmers should keep a close eye on these factors when making critical farming decisions.

He says eight out of every 10 dollars spent in agriculture is in some way tied to oil. Technology will help overcome this dependency, but it will be a long time before significant changes comes in the relationship between farming costs and oil prices.

Development of long-term energy sources may have a positive impact on farming risks, but not any time soon. Corn for ethanol, for example, has made a much more significant and long-term effect on agriculture than most experts predicted just two or three years ago.

One thing the current high prices have demonstrated is that raising commodity prices will not reduce the risk in farming. For most growers, the risk is much greater today than it was when corn was selling for $3.00 bushel. Planning, management and projection will likely be key factors in making a business success of agriculture in the future.

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