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Iron, fertilizer hold key to profits
There have been a lot of recent outlooks calling for a downturn in farmland prices. But what about the other costs associated with raising a crop?
Recent data from Illinois Farm Business Farm Management show non-land costs are still rising; those costs for 2012 were $50 higher than in 2011, topping out at a record $581 per acre for corn and $353 per acre for soybeans on high-productivity land in central Illinois. The trend has moved higher, with a couple of exceptions, for about the last eight years, essentially tracking the run-up in corn and soybean prices.
"The increases in 2013 continued a string of large increases that began in 2005. In 2005, nonland costs for corn averaged $287 per acre. Costs then increased to $302 per acre in 2006, $341 per acre in 2007, $428 per acre in 2008, and $534 per acre in 2009. High costs in 2009 occurred because of high fertilizer prices and high drying costs due to a wet crop in 2009. Costs then declined to $452 per acre in 2010. After the decrease in 2010, nonland costs again rose to $503 per acre in 2011 and $581 per acre in 2012," says University of Illinois Extension ag economist Gary Schnitkey. "A similar trend exists for soybeans. Nonland costs increased each year from 2005 to 2009. Nonland costs were $187 per acre in 2005, $190 per acre in 2006, $207 per acre in 2007, $253 per acre in 2008, and $290 per acre in 2009. Costs then decreased in 2010 to $273 per acre. Costs then increased to $303 per acre in 2011 and $353 per acre in 2012."
The direction of these costs depends entirely on where commodity prices go from here. But there are a few specific key indicators in the general category of nonland costs that could shed more light on whether or not the upward trend will be bucked, Schnitkey says. Whether fertilizer, seed, and machinery depreciation (the factors that have comprised 75% of the increase in nonland costs since 2005) continue to trend higher could have a lot to do with profit potential and risk moving forward, especially if grain prices slip.
"Because higher nonland costs require higher prices to cover costs, these higher costs place farms at risk when commodity prices decrease. There is potential for some costs to decrease when commodity prices decrease," Schnitkey says.
So if the grains are trending higher, what reason is there to believe these specific inputs will slide in price? For fertilizer, it may be a simple supply/demand issue.
"Fertilizer costs increased from $78 per acre in 2005 to $200 per acre in 2012, an increase of $122 per acre. There are some reasons to believe that fertilizer costs could decrease. Nitrogen fertilizer capacity is being built, which could lead to lower nitrogen fertilizer prices," Schnitkey says. "Between 2011 and 2012, fertilizer costs increased while fertilizer costs remained relatively stable between 2011 and 2012. This may indicate farmers built up phosphorus and potash soil levels, which could be drawn down in future years."
Though seed costs aren't likely to decline, the opposite is true for machinery depreciation. If grain prices slip and farm incomes start to slide, depreciation automatically will follow suit and decline.
"Machinery depreciation increased from $20 per acre in 2005 to $55 in 2012, an increase of $35 per acre. Larger machinery purchases lead to increases in depreciation costs," Schnitkey says. "A period of lower incomes could lead to lower machinery purchases. Lower machinery purchases would then lead to slowly declining depreciation."