How Will Farmers Respond to High Fuel and Fertilizer Prices?

Damona DoyeRegents Professor and Extension EconomistOklahoma State University

Value of production by commodity

Cattle and calves

Poultry & eggs

Hogs & pigs

Winter wheat

Hay

Milk

Corn

Cotton & cottonseed

Soybeans

Pecans

Floriculture

Grain sorghum

Peanuts

Other

Source: Oklahoma Ag Statistics 2004 Bulletin

Average per farm for selected expenses

Livestock/poultrypurchased

Feed

Fertilizer, lime, soilconditioners

Gasoline, fuel, oils

Hired farm labor

Interest expense

Chemicals

Other

Source: 2002 Census of Agriculture for Oklahoma

Oklahoma farmland use

Wheat

Grain Sorghum

Rye

Soybeans

Corn

Cotton

Oats

Peanuts

Hay

Other

Source: 2004 Ag Statistics (acreage planted for crops, acres harvested for hay)

Oklahoma cropland use

Wheat

Grain Sorghum

Rye

Soybeans

Corn

Cotton

Oats

Peanuts

Hay

Source: 2004 Ag Statistics (acreage planted for crops, acres harvested for hay)

Average operating costs for wheat in Prairie Gateway

Seed

Fertilizer

Chemicals

Custom operations

Fuel, lube, electricity

Repairs

I nterest

Other

USDA Economic Research Service, 2002

Impact of Higher Petroleum Costs on an Example OK Wheat Farm$1.80/gal

Anhydrous @ $368/ton

$2.80/gal

Anhydrous @ $442/ton

Conv. Lo-till No-till Conv. Lo-till No-till

Fuel ($/a) 16.43 11.53 7.79 25.55 17.94 12.12

Fertilizer ($/a) 20.37 20.88 27.55 24.46 25.07 33.08

Subtotal ($/a) 36.80 32.41 35.34 50.01 43.01 45.20

Increase ($/a) 13.21 10.60 9.86

% change in total operating costs

16.4% 16.3% 10.7%

Source: OSU enterprise budget software

Impact of Higher Petroleum Costs on OK Wheat Farms Approximately $5/a increase in fuel costs per $0.50

increase in diesel fuel Approximately $2/a increase in fertilizer costs per

10% increase in costs Who is hurt most?

Producers in low yield areas With high fuel prices, conventional tillage operations more

than low- and no-till operations Tenants with cash leases

Impact of Increases in Petroleum Costs on OK Crops ($ increase per acre compared to last year)

Fuel

Fertilizer

$2.30/gal

110%

$2.80/gal

120%

$3/gal

135%

Wheat, dual purpose

8 17 21

Canola 7 14 21

Grain sorghum 7 13 17

Cotton 8 17 21

Corn silage 10 20 28

Soybean 2 4 5

Peanuts 8 15 19

Bermuda pasture

4.5 10 17

Bermuda hay 18 25 33

Number of farms by value of sales

Less than $2,500

$2,500- $4,999

$5,000- $9,999

$10,000- $24,999

$25,000- $49,999

$50,000- $99,999

$100,000- $499,999

$500,000 or more

Source: 2002 Census of Agriculture for Oklahoma

What have farmers done? Anecdotal evidence Put on less fertilizer this fall

Maybe more soil testing More selective use

More productive land Higher response pastures

May put on more fertilizer in spring Eastern OK: more interest in poultry litter Bit the bullet and fertilized as usual More shopping around for fertilizer? On-line

buying? Contracting? No rain, no need for fertilizer

What have farmers done? Anecdotal evidence Less wheat

Soybeans Canola Cowpeas Questions about winter peas Other alternative crops

Alternative tillage systems Minimum till No-till

Legume rotation

What have farmers done? Anecdotal evidence Shop for custom operators Complain about trucking costs Higher cash rents for small grain pasture Still running cattle regardless of fuel prices Will have fewer cattle in spring? Shift from farming to grass Pecan producers raising prices

What happens if farmers don’t topdress wheat in spring?Positive effects Negative effects

Decreased costs Increased costs

Fertilizer: 30 # UAN @ $300/tonApplication: $3

$4.50

$3.00

Increased returns Reduced returns

5 bu x $3.25/bu $16.25

Total $7.50 Total $16.25

Difference $(8.75)

Break even price of N?

PN x 2 lb N/bu = PW/bu

PN = PW/bu = $3.25

2 lb N/bu 2

PN = $1.625/lb

= $3,250/ton

Bermuda grass pastureNo fertilizer 50# N 100# N

Fertilizer 0 17.65 35.3

Pesticide 3.36 3.36 3.36

Custom hire 3.70 6.70 6.70

Repairs 1.87 1.87 1.87

Other 1.20 1.70 2.13

Fixed costs 49.61 49.61 49.61

Total costs ($/a)

47.75 68.90 86.98

Expected yield 1 ton/a 2 ton/a 3 ton/a

Cost per ton $47.75 $34.45 $28.99

Tools and assistance available to producers AgMach$, ag field machinery cost estimation software

http://www.dasnr.okstate.edu/agmach/index.html Or Tennessee machinery cost calculator at

http://economics.ag.utk.edu/mcc.html OSU enterprise budget software

agecon.okstate.edu/budgets OSU IFMAPS program to assist farmers/ranchers with business planning

agecon.okstate.edu/ifmaps Oklahoma Ag Linked Deposit Program (OALDP) to help lower interest rates

for producers http://www.state.ok.us/~sto/rblink.html

Custom rate survey currently being conducted (OSU CR-205) Noble Foundation custom rate operator searchable database

www.noble.org/WebApps/WebListings/CustomHire/Index.aspx

agecon.okstate.edu/budgets

Free and confidential assistance in business planning for Oklahoma producers

Producer initiates contact with IFMAPS Case is assigned to local IFMAPS specialist IFMAPS specialist calls producer Producer gathers and summarizes farm records Specialist and producer arrange a mutually convenient

time to meet Specialist prepares budgets and financial statements Specialist and producer meet to review business plan

1-800-522-3755

www.noble.org/WebApps/WebListings/CustomHire/Index.aspx

Drought monitor

What will farmers do in spring? Depends on

What they did this fall Weather Fuel, fertilizer prices Grain market outlook Cattle market outlook