While farmers are benefiting from positive commodity prices, rising production costs remain a concern, according to economists with the American Farm Bureau Federation.
"These are encouraging times for the U.S. farm economy," says AFBF chief economist Bob Young. "Higher prices for corn, wheat and soybeans are helping farmers, but higher energy prices are impacting profit margins. It's important to remember that farming is still a very capital intensive occupation and that high input costs affect the bottom line, even in good times."
AFBF economist Matt Erickson outlined the impact of high energy prices on farmers in a new white paper "Cost-of-Production Report: the Rising Costs of Inputs." High oil prices will drive up the cost of production of corn, soybeans and wheat in 2011, according to Erickson. Higher fertilizer prices are also impacting net farm income.
"The effects of higher oil prices are reducing profits to the agricultural sector," Erickson says. "From seed to fertilizer, each commodity is projected to experience higher yearly production costs from 2010 to 2011."
USDA is forecasting 2011 total operating costs to climb 18% for corn, 13% for soybeans and 18% for wheat compared to last year. Erickson said a major factor impacting these higher production costs are higher energy prices and higher fertilizer prices.
"One reason fertilizer prices have increased is demand for fertilizer given the current tight supply for grain commodities, primarily corn," Erickson says. "In the current situation of tight supplies for grain, fertilizer is a necessity as acreage production in the U.S. is at a max. Similarly, high grain prices increase the demand for fertilizer in international markets."
Fertilizer demand and supply is a big concern for Michigan farmers because the state's climate and seasons make Michigan one of the last states in the nation to plant crops, says Bob Boehm, manager of the Michigan Farm Bureau Commodity and Marketing Department.
"Michigan farmers are at the end of the line in terms of fertilizer distribution, so any shortages - and related price spikes - show up here," he says.
High diesel prices hit farmers hard at planting because farm tractors run on the fuel and it will also impact the bottom line at harvest because combines also run on diesel, according to Erickson.
"With diesel a byproduct of crude oil, farm diesel prices are expected to continue to increase with projections of increased crude oil prices from the Energy Information Administration," Erickson says.
Michigan produces very little of its own crude oil, so the state is a major importer of petroleum products, making agriculture more vulnerable to potential disruptions in supply, adds Boehm.
"Modern production agriculture is energy intensive and Farm Bureau policy supports the development and implementation of a comprehensive energy policy, which includes conservation, efficiency, exploration and research that also provides for the production of traditional and renewable energy sources," says Boehm.
AFBF's new white paper on the cost of agricultural production can be found at: http://bit.ly/pNlp7R.