WHILE grain prices remain near historically high levels, crop production input costs have marched in tandem inexorably higher.
In fact, according to two university economists, the prices farms receive for crops have increased far less than the prices farms pay for the inputs necessary to produce those crops in the first place.
The concept of a cost/price squeeze in agriculture is not new: President John F. Kennedy was quoted as saying the U.S. farmer is the only actor in the economy buying everything at retail, selling everything at wholesale and paying the freight both ways.
With grain prices reaching nominally unprecedented levels in recent years, however, some might have incorrectly assumed that production margins in the grain sector had improved.
According to research from Ohio State University professor Carl Zulauf, crop prices received by farmers in 2009 were roughly 318% of the prices received for those same crops in 1948, while input prices were roughly 882% of the 1948 benchmark (Figure 1).
Meanwhile, Iowa State University economist Don Hofstrand looked at specific price and cost increases since 2000 as the modern corn ethanol industry really started taking shape across the Corn Belt. The average Iowa corn price in 2000, he noted, was $1.78/bu., and by 2012, it had reached $6.67/bu.
"However, a significant portion of this increase has been offset by higher production costs," he cautioned. "Seed cost per acre has more than tripled. ... The cost of fertilizer and lime per acre has also tripled."
Hofstrand tracked costs for seed, fertilizer, crop protection products, labor and other critical inputs from 2000 through 2012 and found that per-acre production costs in Iowa have grown more than 121%, reaching $777 per acre last year. Seed costs, he noted, grew from $30 per acre in 2000 to more than $100 last season.
Similarly, diesel fuel costs have increased, as has the cost of liquefied propane necessary for grain drying. Cash rents in Iowa have, not surprisingly, more than doubled since 2000.
The two economists found that while production costs have trended almost uniformly higher, farmers have been able to offset some of those increases through increased productivity.
Gauging costs on a per-bushel basis, Hofstrand pointed out that the cost per bushel of production was relatively low in both 2004 and 2009 due to extremely large average corn yields. Costs of producing last year's drought-drained crop, on the other hand, exceeded $5/bu.
Zulauf also pointed out that farmers can afford to pay more for inputs as the productivity of those inputs increases because more output is generated per unit of input. Improved seed genetics and trait products are one example of this concept: Prices have risen steadily, but the perceived quality of the product and resulting yields have improved as well.
Adjusting crop prices received and input costs paid for historical increases in productivity, crop prices and farm input prices largely track with one another (Figure 2).
"In other words, the increasing productivity of farm inputs largely explains the larger increase in farm input prices relative to the prices paid to farms for crops," Zulauf explained.
Several implications of these findings exist: Among them are potential changes in U.S. farm policy relative to the farm safety net.
Zulauf suggested that the data show that farm policy conceivably could move toward a safety net with temporary supports that are phased out over time as those supports will not translate into higher input prices.
Likewise, Hofstrand concluded that if corn prices continue to climb, input costs will continue to rise as well to "fill the gap between cost and price."
"If production input costs don't rise sufficiently to fill this gap, cash rental rates will fill it due to competition among farmers for farmland," he summarized. "Moreover, the current generous revenue insurance program reduces the need for a risk premium in the profit structure of corn production, allowing corn farmers to bid cropland rents even higher."