Growing an acre of corn, soybeans or wheat in 2012 will cost producers a lot more than it did this year, say Purdue and Ohio State Extension experts. Farmland rental costs and volatile fertilizer prices represent the two primary drivers of increasing production costs, and, according to Purdue Extension agricultural economist Alan Miller and Ohio State Extension agricultural economist Barry Ward, seed prices also will be up 5-10% 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% as compared with our January 2011 budgets," Miller says.
But 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 may need more fertilizer, says Ward, leader of the Production Business Management program in the Department of Agricultural, Environmental and Development Economics at Ohio State.
"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 well correlated with commodity prices."
Because of those commodity prices, Ward says increases in production costs are to be expected. He and Miller both say farmers can and should 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 growers can reevaluate is cash rents.
"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," Miller says. "We don't want to see another 2009 where grain prices dropped, costs increased and profitability disappeared. It's a challenging risk-management environment for the farmers."
He urged farmers to be cautious, despite a feeling of high farm incomes, and to try to hold down 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 says. "Growers need to manage the expected margin between the selling price of the crop and their costs."
While many farmers may want to take a "wait and see" approach toward marketing the 2011 crop, that may not be a good idea. Instead, Miller and Ward suggest locking in profit margins and not giving up marketing strategies, because even if crop prices recover, demand for inputs and input prices are likely to increase.
For cash rents, Miller says flexible lease agreements could help both growers and landowners in a volatile period.
"Try to help landowners understand the market and the volatility," he says. "Possibly look at flexible lease agreements instead of locking in cash rents, in case inputs increase and commodity prices fall."
Both universities offer resources to help farmers budget for the coming crop year. Ohio State's Department of Agricultural, Environmental and Development Economics has a series of free farm management enterprise budgets that can be downloaded. The "2012 Purdue Crop Cost and Return Guide" is available for free download via Purdue Extension: The Education Store. The publication number is ID-166.