Production Price Up

Corn’s value has retreated, but the costs of fertilizer, seed, land and machinery remain high. Have inflated expenses reset the break even point for American growers?
By Chris Hanson | February 14, 2014

An old adage about commodities promises that nothing cures high prices like high prices. If it’s true, American farmers must wonder if and when the inflated costs of fertilizer, seed, land and other corn inputs will come down. Sustained high corn prices have driven production costs up and, some say, reset the crop’s breakeven point north of $4.20 a bushel. The outlays of producing corn, however, remain high, justified by the $6 and $7 corn of the past two years.       

 “When you have high sustained prices, the factors of production get valued higher,” says Edward Allen, agricultural economist for the U.S. Department of Agriculture’s Economic Research Service. 

Iowa State University agricultural economics professor Bruce Babcock agrees, saying the demand by corn farmers for seed, fertilizer and equipment have all risen sharply in recent years. “When demand goes up, the price at which these companies can charge goes up, and so they did,” Babcock says.  

In fact, the increased costs of producing corn on a per-acre basis since 2005 are dramatic and well documented, says Gary Schnitkey, a professor and farm management specialist at the University of Illinois at Urbana-Champaign. Schnitkey’s analysis shows that the rising cost of fertilizer, seed and land rents, in addition to greater agricultural machinery depreciations, are the top drivers of higher corn production costs. In fact, many experts say, the bloated costs of those and other inputs have ushered in a higher breakeven point for corn producers. 

Fertilizer Should Follow  
In central Illinois, the average cost of fertilizer was $78 per acre in 2005. That number grew more than 150 percent to $200 per acre in 2012. Fortunately, the cost of fertilizer is elastic and responsive to the price of its own inputs. “You’ve had some developments that suggest fertilizer prices are going to come down,” Babcock says. “There is no reason anhydrous ammonia prices should be as high as they are.”

Anhydrous ammonia prices should follow natural gas prices, which—despite this winter's spikes—have decreased over the past three years, Babcock contends. New fertilizer and anhydrous ammonia plants sprouting up in the Corn Belt should take advantage of relatively low natural gas costs and start to draw down prices for corn growers, he adds. 

Fertilizer prices tend to also follow both corn acres and corn prices. “The last couple of years, you had high acreage planted, so the demand for fertilizer is particularly strong,” Allen says. “You’re trying to maximize your yields and not be worried about savings and costs. When prices drop significantly, the demand for things like fertilizer can drop off because producers are more careful on how they use it, and they apply it more sparingly.” 

Fertilizer prices do appear to follow corn prices, agrees Darrel Good, a professor of agricultural and consumer economics at the University of Illinois at Urbana-Champaign. When corn prices increase, the cost of fertilizer trends upward to possibly reflect increased demand, he explains. “This year, we’ve seen fertilizer prices moderate quite a bit from what they were a year ago,” Good says. “So, I think that’s the one category where you would probably see quite a bit of fluctuation over time.”

The other big expenditures of corn production, however, may be less likely to quickly adapt to changing market conditions. Seed costs and land rents are “sticky,” Good says. “They’ve escalated and will probably stay at those higher levels.”

Lavish Land Rents 
The high costs of rents for productive farmland is the second leading factor behind higher corn production costs. In 2005, the average cost of land rents in central Illinois was $147 per acre annually, Schnitkey shares. Within seven years, that figure rose more than $120 to $270 per acre. Since last year’s returns were high and followed several strong seasons, land values and rent increased, Allen says. “This is a fundamental thing that gets factored into the cost of production,” he adds. 

“I know there was quite a few land rents that were $300 an acre,” Babcock says. “If you take $300 an acre and you have 170-bushel corn, that’s $1.76 a bushel. So when you add $1.76 a bushel—and if you are accounting for that land price—and you’ve calculated $4 as breakeven, almost half of that [total cost] is land price.”  

The breakeven point typically varies between farmers who own land versus those who rent. For owned land it depends on if there is outstanding debt, and how much, as well as other factors, Schnitkey says. “But [for] most farms, particularly grain farms, the majority of the land is cash rented. So that’s a pretty big indicator of where breakeven levels are.” 

Seed Prices Shoot Up, Depreciation Quickens 
Schnitkey says greater seed costs and machinery depreciation are the third and fourth leading drivers of a higher breakeven point for corn production. The average cost of corn seed in central Illinois was $43 per acre in 2005, Schnitkey says. Since then, the cost has more than doubled and climbed to an average of $108 per acre in 2012. 

“Seed prices are a function of what you are trying to acquire,” Allen explains. “The seed companies have been successful at developing seeds that have a real, significant economic benefit, and they’re able to charge for those seeds.” 

The development of genetically modified corn is expensive but it yields crops with traits farmers are willing to pay for, Allen says. If the price of corn declines, farmers may decide to select a seed that is not as expensive. It becomes a matter of price expectation, and a question of how much a farmer is willing to do to maximize yield versus producing corn as efficiently as possible, Allen adds. “On average, the lower price expectations should at some point limit the increases in the price of seed, he says. “But … there are good reasons why the price of seed might be expected to go up.” 

Babcock agrees that low corn prices—especially below $4—should have a moderating effect on the cost of corn seed and also start to discourage machinery expenditures. “Farmers probably won’t be buying so much of the equipment they’ve been splurging on over the past five years due to the good times in agriculture,” he says. “You would see some pulling back.” 

Farm equipment depreciation has risen substantially since 2005, meaning that equipment has been losing its value faster. Rising depreciation levels are due to increased machinery costs and greater numbers of machinery purchases, Schnitkey says. “We’ve seen some pretty healthy purchases of machinery on farms as a result of higher income,” he explains. 

Brushing With Breakeven 
While the experts agree on what’s made corn production more expensive, they have different viewpoints about the current breakeven mark for the average American corn farmer. The $4.20 to $4.50 per bushel range seems to primarily relate to farmers who are cash renting land as opposed to owning it. 

“We recognize there is a lot of variation between farms,” Good says. “Everybody has a bit of a different cost structure. It depends on your actual yields—$4.25, I think, is a nice round, ballpark number that kind of catches the average situation, but recognize that there is a lot of variance around that.” 

Schnitkey essentially agrees, saying, “It’s sort of that $4.20 to $4.40 range for corn, particularly if the land is cash rented at average cash rents. So yes, that is the new breakeven level.” 

Babcock says he thinks the breakeven point for U.S. corn production is technically lower than $4.25. He understands why many growers now think of $4-plus corn as a necessity, however. “Well, if nothing changes in regard to land costs, fertilizer costs, and seed costs—and if you are not a high -yielding farmer—you can’t argue [with] people [who] count up all those costs and say, ‘Oh, well, their total cost is about $4,’” Babcock says. 

Allen maintains that it’s hard to slap an average breakeven number on American corn farmers because, in addition to geographical differences, each producer has unique resource endowments and financial situations. “So speaking of a general breakeven point is not very valid,” he says. “It varies tremendously.”

Some forecasters expect corn prices to oscillate in the $4.25 to $4.40 range through 2014 and into 2015, but Allen says that doesn’t mean prices won’t climb higher. “There’s no reason to expect that prices will stabilize at that level,” he says. 

While $4.25 is a possible breakeven point for most American corn farmers today, both Babcock and Allen feel that input costs should sink, pulling the breakeven mark down somewhat. “I reject the whole model that says those costs are going to stay the same,” Babcock says, explaining that the corn industry has a vested interest in portraying the costs of production as fixed, while they should fundamentally track with the movement of corn.   

Allen adds that current costs are reflective of corn growers trying to maximize yields when corn prices were more than $6 per bushel, as opposed to producers trying to utilize expensive inputs as efficiently as possible. And he says every corn farmer runs a unique business with different profit parameters. “Each producer has a different breakeven,” Allen says. “It depends on what expenses you’re trying to cover with your corn and how you try to account for those expenses.”

Author: Chris Hanson
Staff Writer, Ethanol Producer Magazine