Time to Adjust Your Budget

November 29, 2011 06:04 PM

It will cost more to grow a crop in 2012

Growing an acre of corn, soybeans and wheat in 2012 will cost producers a lot more than it did this year.

Farmland rental costs and volatile fertilizer prices are the two primary drivers of increasing production costs, says Purdue Extension ag economist Alan Miller. Seed prices also will be up 5% to 10% in the coming year. Pesticide prices will vary by product.

"Preliminary budgets show variable costs for rotation corn increasing by 16%, soybeans by 15% and wheat by 12% compared with our January 2011 budgets," Miller says.

Time to adjust your budget

While input prices are up, markets are still signaling that they want more corn in 2012, which could influence producers’ planting decisions. It also means producers might need more fertilizer, says Ohio State University Extension ag economist Barry Ward.

"The way fertilizer prices have been moving, it’s been purely demand driven," Ward says. "With worldwide crop prices being high, fertilizer prices are staying relatively correlated with commodity prices."

Profit Management. Ward and Miller suggest farmers begin to manage profit margins now. One way to do that is by pricing 2012 fertilizer this fall because prices are expected to increase by the spring.

Another area that farmers can re-evaluate is cash rents. Iowa State University Extension economist Mike Duffy released early estimates for 2012 crop costs in July to assist farm operators and landlords in cash-rent negotiations. Iowa has a Sept. 1 farm lease termination deadline, much earlier than most states.

Duffy expects that non-land costs for 2012 will increase approximately 15% compared with 2011.
"It’s hard to figure out a fair amount of cash rent, especially in an environment with so much potential for quick commodity price declines and input price surges," Purdue’s Miller says. "We don’t want to see another 2009 where grain prices drop, costs increase and profitability disappears."

He urges farmers to be cautious, despite higher farm incomes, and to minimize costs by thinking through all of their purchases.

"Commodity producers need to still be working toward being low-cost producers on a cost-per-bushel-produced basis," Miller advises. "Growers need to manage the expected margin between the selling price of the crop and their costs."

For cash rents, Miller says, flexible lease agreements could help farmers and landowners in a volatile period.

"Try to help landowners understand the market and the volatility," he suggests. "Look at flexible lease agreements instead of locking in cash rents, in case inputs increase and commodity prices fall."

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