Variable costs on Illinois grain farms are projected to be $55 per acre higher for corn in 2006 than they were in 2002, according to a University of Illinois Extension study.

"Variable costs for soybeans will be $20 per acre higher in 2006 than they were in 2002," said Gary Schnitkey, U of I Extension farm financial management specialist and co-author of the report with fellow Extension specialist Dale Lattz.

"In percentage terms, cost increases are 33 percent for corn and 19 percent for soybeans over the four-year period. Increases of this magnitude have not occurred in recent history and will cause reductions in farm profitability."

The full report, "Variable Cost Increases for Corn and Soybeans in Historical Perspective", can be accessed on line at the farmdoc website at http://www.farmdoc.uiuc.edu/manage/newsletters/fefo05_18/fefo05_18.html .

Data from farms enrolled in the Illinois Farm Business Farm Management (FBFM) record-keeping program was used for the study. About 1,500 grains farms are included.

"Variable costs include fertilizer, pesticides and seed, drying and storage, and machinery-related--fuel, repairs, machine hire--items," said Schnitkey. "These variable costs do not represent all costs faced by grain farms, which also include farmland rent, depreciation, overhead, interest and labor."

The study noted that large declines for pesticides and seed, drying and storage, and machinery-related costs for either corn or soybeans have not occurred during the study period which began in 1981.

"This experience suggests that it is not likely that decreases in these categories will occur," Schnitkey said. "If variable costs decline in the near future, it will likely be caused by a reduction in energy prices, leading to lower fertilizers and fuel prices. At this point, energy prices do not appear likely to decline."

These cost increases will have a detrimental impact on profitability in 2006 for Illinois grain farmers, he added.

"High crop revenue in 2006--caused by high yields, high prices, or some combination thereof--could cause 2006 to be a profitable year," he said. "However, even if revenues in 2006 are as good as in 2003 and 2004, two exceptional years in terms of crop revenue, 2006 will not be as good as either of those years because of cost increases."

Schnitkey noted that costs have increased more for corn than soybeans.

"This suggests re-evaluating cropping decisions, perhaps shifting to more soybeans," he said.