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Price is right for farmers to spend more on inputs

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Written Friday, March 02, 2007  

Farmers might part with more of their money this coming crop season to cash in on the biofuels revolution, said a Purdue University agricultural economist.

With corn and soybean prices climbing higher and faster than agricultural input prices, producers likely will spend more to ensure high yields, said Alan Miller, a farm business management specialist.

"Last year we were in a cost-price squeeze and the story really was cost," Miller said. "This year the prices of crops have far outpaced input prices and have changed the whole picture. In general, what we'll see is that input prices overall probably will be flat but that we'll still see a rise in crop costs in 2007. With higher prices for corn and soybeans, producers are going to go back to thinking top yield and may be more willing to pour on the inputs."

An online resource could help farmers calculate their crop production costs. The 2007 Purdue Crop Cost and Return Guide can be downloaded at http://www.agecon.purdue.edu/extension/pubs/ID166_2007.pdf .

Demand for corn to feed the growing ethanol industry has pushed December 2007 corn futures prices above $4 per bushel, roughly $1.30 a bushel above where December 2007 corn was trading as recently as this past September. Over the same time period, November 2007 soybean futures prices have risen about $2 per bushel, fueled in part by an expectation that more corn acres likely means a reduction in soybean acres.

The biofuels boom could affect how much fertilizer and pesticides farmers apply to their crops, as well as the hybrid varieties they plant, Miller said.

Nitrogen fertilizer prices dropped about 17 percent between early spring 2006 and midyear because of a reduction in natural gas prices, Miller said. Since then, fertilizer prices have risen steadily and should continue their march upward if farmers commit more acres to corn, he said.

"I think we're going to continue to work back toward where we were with prices last spring, when the USDA reported an average price for anhydrous ammonia of $543 per ton in the north central region," Miller said.

Farm chemical prices also are likely to inch up, Miller said.

"For quite a while in the early 2000s you could just about say that chemical prices were flat," he said. "They really weren't, because the generics were going down in price and the new products and formulations were going up in price, and the two offset each other.

"About a year and a half ago chemical prices actually turned up, in terms of the U.S. Department of Agriculture's index of prices paid. I would expect that average annual increase of 1-2 percent to continue. There are still a lot of opportunities for farmers to shop around and try to hold those prices in line, however."

Because crop production volumes could be critical, farmers also might be more inclined to spend a little extra on seed able to tolerate certain herbicides and withstand some crop-damaging insects, Miller said. The genetically modified hybrids likely will displace some chemicals farmers would have purchased, he said.

"The demand for corn for ethanol is certainly going to change farming practices in Indiana," he said. "One of the concerns in the past has been, do we grow genetically modified corn? Well, that kind of corn works just fine for ethanol plants.

"I think we're seeing a fairly rapid adoption of corn seed of the genetically modified varieties. For example, some observers think we'll have a big increase in herbicide-tolerant genetically modified varieties this year, because of the convenience and being able to get the crop planted in a shorter window of time, and control weeds in the process."

Other factors could affect crop production costs, as well, Miller said. They include:

* Land rents. The amount farmers pay landowners to grow crops on their property is expected to increase.

"In the last few years the contribution margins -- the return above variable costs that are available for farm operators and landowners to share -- were as low as I'd seen them since I have been involved in estimating costs and returns for Indiana corn and soybean production," Miller said. "This year Purdue's estimates indicate there's been quite a jump in the contribution margin. So it is reasonable to think that the farm operators and landowners are going to have to adjust existing rents to share those increased margins."

* Farm machinery prices. "Even during the cost-price squeeze we saw machinery prices march steadily upward, at an average annual rate in the 4-5 percent range," Miller said. "I don't think we're going to see that change anytime soon."

* Weather and pests. Too much or too little rain, crop diseases and insects could reduce yields, or destroy crops altogether.

"We could have soybean rust, we could have a drought -- who knows what could happen," Miller said. "Producers and farmland owners alike need to be careful not to go too far overboard in adjusting their expectations and production plans."

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