Production costs are rising faster than commodity prices, making it harder to break even
Like any other business, farmers and ranchers are constantly changing their budgets. For farms, constant attention to detail becomes especially important in times of high volatility, such as the one we are experiencing today, and relates to both revenue and business costs. Regular assessment of budgets helps farmers anticipate expected profits or losses and consider risk management tools in the event of crop damage or reduced income. This Market Intel article is part of a series that delves deeper into the rising prices of agricultural production expenses like fertilizers, seeds and pesticides, energy, machinery and land that drive farmers away from farming. balance and wondering how they will make ends meet for the 2022 growing season and even into the 2023 season.
The farmer income equation is quite simple: the price of the commodity multiplied by the quantity of the commodity produced. When estimating a farmer’s income per acre, simply multiply the expected yield per acre by the harvest price of the crop produced. For a herder, income is generated for each head of cattle produced multiplied by the price received at the point of sale. Market revenues for farmers and herders vary with price fluctuations. At the very heart of economics, a commodity is an economic good that has full or substantial interchangeability, meaning that it is fundamentally the same no matter who produced it or where it is produced. Given the nature of commodity markets, the price is entirely dependent on the amount of supply in the market and the amount of demand that intersects that point of supply. Thus, individual farmers have no control or say over the price they receive for their produce; farmers and herders are price takers.
While the revenue side of a farmer’s balance sheet may be simple, the expense, or cost of production, side is far from simple. For farmers, production expenses cover everything from input costs, such as operating costs and variable costs, to fixed costs. Input costs are the costs of operating a farm that require initial purchases needed to begin production. These are items such as fertilizers, pesticides, seeds, weaned animals, animal feed and any other production input. Variable costs are costs that will change based on the amount of consumption on a farm or ranch and include items such as fuel and oil, electricity, labor (hired and custom), repairs and maintenance, water use and storage. Fixed costs are costs that must be paid but do not depend on the level of production. These include operator labor, machinery, taxes, depreciation of assets/capital consumption, rent and interest expense. Chemicals and fertilizers continue to represent the largest share of on-farm expenses, up to 17.5%, while fuels remain the lowest share, accounting for 3% of total on-farm expenses.
When the USDA estimates net cash income, the net difference between income and expenses, cash expenses include purchased food, labor, livestock and poultry, fertilizer and lime, seeds, net rent to landlords, pesticides, property taxes and fees, fuel and oil, interest on real and non-real estate, electricity and other intermediate expenses. “Other intermediate expenses,” usually the largest category of expenses, include unforeseen costs, which often makes them the most difficult to budget for. For example, although you can expect a few unexpected events during the planting season, it is difficult to estimate and budget for planter failure in the middle of a field and to know what the longer repair costs might be. workforce. This “other intermediate expenditure” category also includes items such as machinery rental and custom work, product marketing/storage/transportation, repair and maintenance, insurance premiums, irrigation and miscellaneous expenses associated with operating a farm.
Digging deeper, USDA data indicates that production expenses continue to increase through 2022. From 2021 to 2022 alone, the USDA estimates that total production expenses will increase by 5%; this is after a 9% increase from 2020 to 2021. Taking a closer look at intermediate production expenses, such as agricultural and manufactured inputs, as well as others, this category is projected to increase by 6% from 2021 to 2022, after a 12% increase from 2020 to 2021. The largest projected increase in production expenses in 2022 is for fertilizers, increasing by 12% from 2021 to 2022, following a 17% increase from 2020 to 2021. Interesting note is a potential shift away from renting land, as rents fall by between 2021 and 2022 by 6%, and farmers shift to real estate ownership, as shown by an 11% increase in real estate interest expenditure by 2021 to 2022.
2022 – A season like no other
As the 2022 growing season approaches, farmers are facing supply chain challenges like never before. And that’s why it hits their wallets like never before.
For starters, there is an increased global demand for planting a crop. The global outlook for commodity production continues to rise, according to March global agricultural supply and demand estimates. Russia’s recent military action in Ukraine has significantly increased the uncertainty of agricultural supply and demand conditions in the region and far beyond. With these most recent events, there is increased pressure on all other commodity producing countries to deliver all, if not more, of the expected production in 2022 to make up for any potential production lost and cut off from the market in Ukraine and Russia. With the increase in planted area comes an increased demand for agricultural inputs like fertilizers, seeds, pesticides, and machinery, to name a few. Not only is the demand for these inputs increasing, but government spending linked to the COVID-19-related budget deficit and accommodative monetary policy by central banks around the world have put more money in circulation; these efforts to stimulate economies have also contributed to the rise in global inflation. So expect to pay a bit more for everything, including much-needed farm inputs.
COVID-19 has also disrupted labor markets and interrupted the production of goods, including agricultural inputs, resulting in production lagging behind demand, and the price increases that usually follow. Consumers, and farmers and ranchers in particular, used to thrive on a just-in-time delivery system. This was intended to keep inventory and overhead costs low and to ensure efficient economies of scale. But now, due to these disruptions in production and congested delivery channels, when farmers need their inputs just in time to put a crop in the ground, availability is no longer guaranteed and the price for l ‘get keeps increasing.
Since 2013, farmers have seen almost all of their production expenses increase. Specifically, livestock and poultry origin expenses increased by 46% and marketing, storage and transportation expenses increased by 59%. Overall, the intermediate expenditure category, which includes the majority of agricultural production inputs, has increased by 18% since 2013.
The ever-changing farm business budget continues to be on the minds of all farmers and ranchers this growing season. In times of heightened volatility, farmers and ranchers continue to try to find ways to ensure that they can afford all of their necessary agricultural inputs, even as the price of those inputs continues to rise. This Market Intel article is part of a series that will explore the rising cost of production expenses like fertilizers, seeds and pesticides, energy, machinery and land.
While crop revenues may increase this year, as the USDA predicts, crop production expenses are growing just as rapidly and could potentially outpace revenues. This leaves many farmers questioning their ability to break even this year, despite high crop and livestock prices. While increased investment and capacity can help in the long term, in the short term farmers are concerned to ensure they have the inputs they need to plant a crop, especially at a time when the pressure to do so increases. The question is, will they be able to afford it or will it cost too much to farm?