Putting the Pencil to 2008

When developing marketing plans, it will be important to have a clear picture of what we expect to invest in next year’s crops. 

By Kent Olson, University of Minnesota Department of Applied Economics, and Bret Oelke, Regional Extension Educator, University of Minnesota Extension Service

After a crop has been harvested, it is relatively simple to calculate a breakeven selling price because we know how many bushels per acre have been harvested, and we have a pretty good picture of what it cost to grow the crop. 

Prior to harvest, and in many cases prior to planting, we need to have an estimate of what our cost of production is and what we expect to have for yields, so we can take advantage of pre-harvest pricing opportunities without inadvertently selling for less than what it costs to grow a given crop. 

Most farmers know that costs have increased, and a look at the hard numbers show that to be true. Preliminary estimates from USDA show an almost 25% increase in the national prices paid for input costs from 2002 to 2007, with another projected increase of 4% as they look to 2008. For a more local view, we can go to the cost trends for wheat, soybean, and corn in Northwest Minnesota using the information from Minnesota State Colleges and University’s Farm Business Management records in the FINBIN database at the Center for Farm Financial Management.

In 2002, the average total production costs for wheat in NW Minnesota was $179 per acre. This figure is from actual farm records and includes costs for seed, fertilizer, chemicals, fuel, oil, drying fuel, repairs, capital recovery (depreciation and interest), land, labor, management, and other expenses. Land was the largest component of these costs at $52 per acre. The average fertilizer cost was $25 per acre with chemicals costing $19.

These costs have increased steadily since 2002 (Figure 1). By 2006 (the most recent year of actual records), the total production cost for wheat had increased to $230 per acre. Land and then fertilizer remained the two largest parts of the total.

By using USDA’s national cost index, we have projected the total cost to increase to $260 per acre on cash rented land in 2008 in Northwest Minnesota. Land and fertilizer costs are still the largest part of the total. The largest increases have come in fuel and fertilizer (Figure 2).  Using these projected costs and a 55 bushel per acre yield, we arrive at a projected breakeven price (with a labor and management return built in to the cost structure) of $4.72 per bushel. If the yield projection drops to 50 bushels per acre, the cost of production then is estimated to be $5.20 per bushel. 

Similar patterns can be seen for soybean and corn. Soybean costs have increased from $177 per acre in 2002 to a projected total of $242 in 2008 (Figure 3) resulting in a per bushel cost of production of over $6.00. Corn costs have increased from $277 per acre in 2002 to a projected total of $406 in 2008 (Figure 4) which results in costs in the $3.00 per bushel range depending on expected yields.

For both soybean and corn, land is the largest share of the total, although fertilizer costs almost rise above land costs for corn in 2008. Fuel costs also increased the most for soybean and corn from 2002 to 2008.

When developing marketing plans for next year’s crop, it will be very important to manage input costs and to have a very clear picture of what we expect to invest in producing a crop.  This will help avoid the situation that some producers found themselves in with the 2007 crop, and that was selling a significant portion of their expected production at prices that ultimately will turn out to be below their cost of production, as fertilizer and other inputs increased in cost beyond what was expected.

Wheat growers have had the opportunity of late to forward price 2008 production at levels that historically are very good.  But when we analyze our projected costs using current land, fertilizer and fuel prices, we find that those ‘historically very good prices’ may not necessarily result in high returns.

So as the 2007 growing season comes to a close, start putting the pencil to 2008.  Producers and others interested in learning more about managing costs of production and commodity marketing can contact the closest University of Minnesota Regional Extension Center to connect with a member of the Agricultural Business Management Team. Or go to the U of M Ag Business Management web site, www.extension.umn.edu/agbusinessmanagement.