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December 22, 2005 As Expected, Crop Budgets Show Sharply Higher Costs for 2006
Projected production costs will be significantly higher for 2006. Most notable are nitrogen fertilizer and fuel prices, up 30 percent, and interest rates, up 20 percent, compared with last year’s budgets. Machinery prices and repairs also have increased. Of particular concern to producers is that the increased costs projected for 2006 are not a one-year event. In the previous three years, 2003 through 2005, total direct costs of North Dakota crop production have increased about three times faster than the general rate of inflation. Again, the main culprits were fertilizer and fuel. Now producers also are faced with higher interest rates. On a positive note, retail seed prices are relatively flat and companies are offering incentives that are more aggressive. Flax seed costs about 30 percent less because of a sharply lower market price relative to a year ago. Also, nitrogen soil tests are higher, on average, except in the west. This will slightly temper the higher fertilizer bill because less nitrogen will be necessary for the same yield goals. Higher nitrogen and fuel costs have affected the profit comparison of crops. Crops that use little or no nitrogen, such as soybeans, dry beans, field peas and lentils, have gained an advantage on the cost side. However, usually expected prices and yields combined with safety net factors, such as loan rates and crop insurance, are considerations that are more important. Currently, no crop offers pricing opportunities that are historically high, such as existed last year with sunflowers. Therefore, crops that need less nitrogen, are well-suited agronomically to an area and have a decent safety net will be the acreage winners in 2006. In 2005, soybean acreage dropped for the first time in 12 years. It was a producer reaction to poor yields in 2004. However, soybean acreage will be a record in 2006 because it is one of the few crops for which producers in eastern North Dakota can pencil in a profit. Because of the extreme financial risk producers face in 2006, prices should be locked in, at least on a portion of projected production, when a profit exists. In the west, lentils,
mustard and safflowers show the best opportunity for profit, although
these crops, for various reasons, typically do not have large plantings.
Crops that show a slight loss, but compare favorably to others, It is a fact that producers enter the 2006 crop year in a high-risk scenario because of the need for good yields and prices to cover high costs. Average yields and prices could lead to financial loss for many producers. Our largest crop, spring wheat, projects a loss in every region, with the largest losses, around $30 per acre, in the Red River Valley. Other major crops, such as durum, barley, corn and canola, show a loss in every region. Oil sunflowers only is around break-even in the central regions of the state. The budgets do not include federal aid that is decoupled from production (direct and counter-cyclical payments). These payments are based on historic crop bases and yields, not on current crop selection or production, but can be important to whole-farm profit. Direct payments generally increase from west to east. For example, when averaged over all crop acres, the direct payments will be about $6.25 per acre in the southwest region and about $13 in the south Red River Valley. Counter-cyclical payments occur if the national average prices of program crops are below a certain level. Payments are expected with the price levels used in the budgets. Historic yields and base acreage, which vary by farm, are used to calculate the amount. Expected payments, averaged over all crop acres, would be about $2 in the west regions and about $7 in the southern Red River Valley region. Unlike direct payments, which are fixed, counter-cyclical payments will dissipate if prices rise. In summary, the budget projections are just that. Commodity prices and yields are extremely difficult to predict from one year to the next. It is critical to evaluate crop insurance and consider the financial downside risk, as well as the upside potential, of the crop rotation. The budgets are available on the Web at www.ext.nodak.edu/extpubs/ecguides.htm. ### Source:
Andrew Swenson, (701) 231-7379, aswenson@ndsuext.nodak.edu |
Market Advisor: |
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North Dakota State University |
