As crop producers make plans for the season ahead, many are experiencing sticker shock on production inputs.

The rising tide of input costs is being fueled largely by higher energy prices -- and it illustrates how wide the ripple effect of energy costs can be. Fuel, fertilizer, crop protection chemicals, seed and traits are all expected to cost more in 2005. Optimizing inputs and yields for maximum profitability will be very important in the season ahead.

“Innovative producers will find ways to work through this scenario,” says Dr. Terry Kastens, Kansas State University (KSU) Extension ag economist. “Strategies may include negotiating higher rates for services you provide to others (for example custom application or harvesting), or lower cash rents, or tying these rates to economic indicators that rise and fall based on energy costs.”

Dr. Gary Schnitkey, Extension ag economist at the University of Illinois, generally sees variable costs rising by $6 to $9 per acre for corn, and $4 to $5 per acre for soybeans. He expects net returns in 2005 to look more like those in the late 1990s than the last couple of years.

Fuel

Higher fuel prices aren’t a new story in 2005 -- but they’re still a big story. KSU expects diesel fuel prices this March to be 30 percent higher than last spring. It’ll especially impact irrigation, tillage, harvesting, and other fuel-intensive operations.  

Dr. Steve Amosson, economist with Texas Cooperative Extension in Amarillo, says the highest water-use crops -- corn and alfalfa -- are the ones most impacted by energy costs on the High Plains. “Over the past two years, the average per-acre fuel cost to irrigate an acre of corn has increased from $80 to $140,” he says.

Natural gas prices have climbed above $6 per million BTU, compared to $2.50-$3.00 just three years ago. This directly impacts any operation that uses natural gas or propane as a fuel. But crude oil and natural gas are also key feedstocks in the production of many crop production inputs (i.e., fertilizers and chemicals) that boost yields and protect crops from weeds, insects and diseases, and will put pressure on those costs, as well.

Fertilizer

Prices for anyhdrous ammonia reflect the higher cost of natural gas, and aren’t expected to return to historical norms anytime soon. It’s an issue of supply and demand in the natural gas market, according to Robert Mullen, Ohio State University Extension specialist.

“Forecasts predict that domestic natural gas prices will remain high over the next few years,” Mullen says. “This is due to the fact that natural gas is a more attractive alternative to oil and coal for energy production. Unfortunately, this means that high nitrogen prices will be with us for at least a couple of years.”

It also translates into higher costs for phosphorous fertilizers that contain nitrogen, especially DAP, MAP and APP, he adds. 

What’s more, just as there’s global competition to produce and sell crops, there’s global competition for fertilizer supplies. Mullen says the price of potassium is on the rise as China and Brazil continue to import large quantities of the material.

Crop Protection Chemicals

Just like farmers, farm chemical manufacturers are facing higher costs for energy and raw materials. Rob Neill, vice president of marketing for Syngenta Crop Protection, says natural gas and close derivatives of it account for about one-third of Syngenta materials purchases in North America. Petroleum and basic chemicals derived from it are also used in large quantities, and their prices have increased just as gasoline and diesel fuel have.

Syngenta and other crop protection manufacturers have said they expect to increase prices of some products for 2005. But Neill says that where prices do go up, the increases are likely to be around 5 percent at the most. This comes after years of flat to declining prices for farm chemicals, during which the industry absorbed rising costs for not only energy and raw materials, but insurance, health care, security and general inflation.

Mergers have provided some companies with opportunities for cost savings. Syngenta, for example, was formed from the November, 2000 merger of the Novartis and Zeneca ag businesses, which Neill says saved $600 million over three years and helped the company hold the line on prices. But while major ag chemical producers continue to look for cost savings, they’re becoming more difficult to find. Cost increases are giving these companies little choice but to raise prices in some markets.

Growers do look beyond just price to the value a product delivers, Neill adds. He emphasizes that, “even with price increases we believe the return on investment from pesticides is extremely high.  But the grower is the ultimate judge -- if the value isn’t clear, a price increase won’t hold.  It’s a very competitive market.”

Strategies for Success

How can growers best cope with rising input costs?  The experts offer these pointers:

Know your costs and returns. Rarely if ever does it pay to shoot for the highest possible yields - or for the lowest possible costs.  Maximizing profit is the key. Understand marginal returns on inputs and where they start to diminish, and manage accordingly. When input costs or crop prices change significantly, this will require new calculations.

Evaluate your crop mix. “In recent years, corn returns generally have been above soybeans in northern and central Illinois,” Schnitkey points out. “As a consequence, some farmers are considering planting more corn and fewer soybeans.” The threat of Asian soybean rust in 2005 also changes the potential economics of soybeans, especially toward the southern and eastern Corn Belt.  Or the cost of pumping irrigation water may lead some producers to opt for dryland crops or lower-water-use crops.

Shop wisely. Look for opportunities to purchase in bulk or take advantage of early-order discounts wherever possible. Compare prices, but also consider suppliers’ reliability and services -- including expertise and advice that may pay off in lower costs, better utilization of inputs, or higher profitability.

Don’t skimp on diagnostics. As costs escalate, using inputs precisely becomes even more important. Soil testing and field mapping, for example, might become more important than ever with higher fertilizer costs.

Time applications for greatest impact. For example, higher prices for N fertilizers may make it worth splitting applications for more efficient utilization, or taking other steps to minimize volatilization or leaching. In corn, applying herbicides early -- so that weeds never exceed 2 to 4 inches high -- is critical to protecting yield potential. Weeds that reached 6 inches tall reduced yield by an average of 7 percent in a multi-state trial -- that’s $24/acre on a 150-bu. yield goal with corn at $2.25/bu. Twelve-inch weeds cut yield by 21 percent. 

Look for application efficiencies. Trips over your fields cost money -- whether it’s custom application charges or your own labor, equipment and fuel costs. A preplant weed-and-feed application, for example, could save $5 per acre compared to making separate application trips.