The Question of Rising Farm Production Expenses
The above graph from a new Federal Reserve Bank of Kansas City report shows us that net farm incomes are advancing, but so are production costs.
The report had a number of interesting remarks about high input costs, which you may find below. Note that some of the high production expense references are to high feed prices for livestock producers.
Despite higher crop prices, crop profits were limited by higher costs (in 2012). USDA reported that near double-digit gains in seed costs and rising cash rents pushed planting costs higher. As summer progressed, increasing energy costs raised fuel and irrigation costs. While gross crop revenue rose 4 percent in 2012, net crop profits held at last year’s historical highs.
The drought affected U.S. farm profits significantly in 2012. Although farm profits remained high, profit opportunities were highly varied. For crop farmers, crop insurance and high crop prices largely offset rising input costs and yield losses. Livestock operations, however, faced significant losses due to surging feed costs.
The recent wave of booming farm profits continued in 2012. In November, the U.S. Department of Agriculture (USDA) projected 2012 U.S. net farm income would reach $114 billion, the third-highest level on record, and more than 50 percent above the average of the previous decade. Net farm income dipped 5 percent below last year’s mark, though, as production expenses rose faster than gross revenues. Despite low crop yields, high prices pushed gross farm income 2.8 percent higher in 2012. Production expenses rose more sharply, 5.7 percent above 2011 levels, as the drought caused input costs to soar.
Furthermore, crop production costs are expected to rise slightly in 2013. Although fertilizer and fuel costs are not currently projected to increase, there are risks that prices could jump if abnormally low water levels on the Mississippi River eventually lead to temporary closures. With lower revenues and potentially higher costs, crop-sector incomes could be noticeably lower than the 30-year highs observed each of the past two years. For example, in May 2012 USDA projected average revenues of $764 per acre of corn, which was revised upward to $905 per acre in December. If 2013 unfolds as 2012 was projected to unfold during planting season, crop incomes could fall significantly.
In drought-stricken regions, the struggle to pay for rising input costs also contributed to lower loan repayment rates. During the third quarter of 2012, repayment rates fell dramatically in the Kansas City, St. Louis, and Chicago Federal Reserve Districts, but generally remained above year-ago levels. Some bankers expressed concerns that high crop prices would cut repayment rates in industries such as the livestock and ethanol sectors, where crops are a significant input cost.
The report states that next year’s profits hinge on weather as well as commodity prices, but overall, it takes a cautious outlook because future’s markets have suggested that 2013 may bring a drop in prices for farm commodities. Importantly, fuel and fertilizer expenses are not expected to rise much in the next growing season.