Budgets show higher production costs for 2005

Cattle Market & Farm Reports, Editorials
Jan 14, 2005
by WLJ
Total direct costs of production in 2005 will increase more than 10 percent for most crops because of higher fertilizer and fuel expenses, according to Andrew Swenson, North Dakota
State University Extension Service farm management specialist.
Fertilizer is typically the largest and most volatile direct cost of crop production. Fertilizer prices are higher because of energy costs and global demand. Unfortunately, this coincides with low levels of soil nitrogen throughout the state, except for the southwest region. This means more of the expensive fertilizer is necessary for the same yield goal of a year ago. Fuel costs are also sharply higher for 2005, and interest rates will edge up for the first time in several years.
Higher costs and poor prices will make it difficult for producers to find a crop rotation that is agronomically sound and provides a profit. Spring wheat, durum and canola project a return to labor and management of minus $10 to minus $30 in most of the nine crop budget regions. Malting barley is close to breaking even only in the west regions and the south-central region.
Swenson cautions that the budgets are based on the average yield from 1997 to 2003, with the low and high yield years omitted. Although it may be considered more risky, winter wheat shows either a profit or small loss in all regions outside of the Red River Valley. Oats and rye once again are on the bottom of the profit picture, with losses ranging from $30 to $70 per acre.
Soybean acreage has increased for 11 consecutive years, but Swenson believes that streak will end in 2005. Soybeans still will be strong in the east-central, southeast and Red River Valley regions, although the price of genetically modified seed took a substantial jump. However, soybeans are not expected to be profitable in other regions. Corn acreage also will decline because of significantly higher costs and lower prices.
Dry edible beans and confectionery sunflowers have the best profit potential. These crops are considered to have more production risk than many, but with average yields, both will provide excellent returns. Because of strong prices, oil sunflower profit is projected at $15 to $40 per acre, depending on the region. Swenson says if a price is attractive, producers should contract and consider an 'act-of-God' clause for protection from a production shortfall. Lentils, safflower and large garbanzo beans are projecting a profit of about $30 in the west regions. However, garbanzo beans are costly to grow and have a high disease risk. A modest profit is projected in most regions for the minor crops of buckwheat and millet. More profit is projected for mustard.
Flax and field peas do not project a profit, but Swenson expects acreage to increase because small grains project a lesser return. In addition, the marketing loan rate for flax and field peas provides better price risk protection.
Swenson notes that the budgets do not include federal aid that is de-coupled 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 the 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 $3 in the west regions and about $9 in the south Valley region.
Unlike direct payments, which are fixed, counter-cyclical payments will dissipate if prices rise. Swenson emphasizes that 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," he says.
The budgets are available on the Web at www.ext.nodak.edu/extpubs/ecguides.htm. — WLJ