farmgate: Your Cost Of Production And Your Efficiency Depends Upon Your Address.
The Cornbelt, which the USDA officially labels “Heartland” is the primary agricultural production area of the US. On all the seed that is planted from Western Iowa to Eastern Ohio, there is a great volume of fertilizer and pesticides that are applied. But for a year like 2009, when the cost of those inputs has increased, will the “Heartland” be able to hold its competitive edge, or will other sections of the US become the low cost producer and enjoy greater profitability?
For years, the US has been the world’s low cost producer for nearly all grains when yield and total production are considered. But within the US, the dynamics may be shifting with higher costs of production in regions where more inputs are used. That is the premise offered by University of Minnesota economists Kent Olson and Lena Zakharova in their research on geographical differences and increasing crop production costs. It is all based on USDA’s resource regions.
The economists say the higher input prices have cast a shadow over the enthusiasm for higher grain prices. Fertilizer and fuel have seen the largest cost increases with seed following in third place. For purposes of the research, input price increases during 2008 were used as the yardstick. Fertilizer prices were up 73%, fuel prices were up 60%, seed prices were up 30%, and machinery prices were up 10%, all compared to 2007. While recent data indicates lower fertilizer and fuel prices, there is still uncertainty about when they will stabilize. In addition to the variable costs, the economists say overhead costs for corn are about 50%, wheat is 60% and soybeans are 65%, but the sharpest increases have come in operating costs.
Price trends were used to forecast 2009 prices, based on the 2008 data, and the economists found that fertilizer prices would double from 2007. That is about the level it reached before the economic melt down over the past several months. The economists also used a conservative method based on a four year average annual growth rate, and fertilizer prices were 76% higher than 2007 using that method. A more pessimistic prediction was also developed, using December 2008 prices, which forecast a seven fold increase in fertilizer cost.
Based on USDA’s national estimates of production costs in 2009, the Minnesota “trend” method raises production costs from $3.01 per bushel in 2007 to $4.09 per bushel in 2009, which is a 36% increase. The Minnesota “conservative” method forecasts a 32% increase in production costs from 2007 to 2009, settling at $3.83 per bushel. The Minnesota “pessimistic” forecast of production costs shows a 216% increase from 2007 to 2009, with a 2009 cost of production of $9.16 per bushel.
The same exercise was done for soybeans, with an expectation of $8.52 per bushel in 2009, based on the trend increase. The conservative estimate was for $8.17, and the pessimistic estimate was $13.90 per bushel. For wheat, the trend estimate was for $6.82 in 2009, the conservative estimate was for $6.47, and the pessimistic method was for $13.19 per bushel.
The economists say once the national production cost estimates are calculated, they compared them to seven US regions, which feature differing production practices in growing corn, beans, and wheat. “For example, it is reasonable to expect that the regions that use more fertilizer will see their total costs rise more in response to an increase in fertilizer prices than would regions that use less fertilizer.”
For corn, the economists say the Heartland (center of the Cornbelt) will maintain its competitive edge, but the Northern Great Plains (Dakotas, and northern Nebraska) and the Prairie Gateway (southern Nebraska through Kansas, Oklahoma, and into central Texas) will increase their competitive advantage due to less fertilizer and chemical use.
For soybeans, the Heartland is expected to maintain its competitive edge, but the Eastern Uplands (Appalachia and the Ozarks) will increase its competitive advantage due to less fertilizer and chemical use.
For wheat, the Prairie Gateway (southern Nebraska south through central Texas) was expected to have the greatest increase in competitive advantage, but all other regions will lose some advantage because of production costs.
Summary:
Increased production costs for grains have caused some efficiency shifts in various parts of the US because of varying production practices. While the heart of the Cornbelt keeps its advantage in corn and soybeans, wheat production is more expensive than for other regions. The states with the greatest borders on the Great Lakes have become less efficient overall. Although individual farms have differing costs of production, their trends will be related to their geography, but their profitability will be more unpredictable.
Posted by Stu Ellis on January 1, 2009 12:33 AM to farmgate