Looks like more of the same next year for U.S. grain producers. Good prices and strong demand for grain will likely continue, but input costs are expected to trend higher too, particularly for fertilizer and fuel, says an industry analyst.

Globally, the news is worrisome, too, as several developing countries concerned about food security are paying out huge subsidies to help offset the high cost of fertilizer to their growers.

On the other hand, these developing countries are now driving global economic growth,” said Erin FitzPatrick, an industry analyst with Rabobank, speaking at a webinar.

“Along with this economic growth have come rising incomes and higher demand for grain products, elevating the amount of food production needed.”

As this demand increases, “we're seeing grain stocks diminish across the board. Ending stocks and the stocks-to-use ratios for wheat, corn and soybeans are at historic lows, which are dramatically raising prices for these crops.

“Other factors for higher prices include lower levels of capital investment over the past few years and a higher amount of speculative investment into the commodity markets.”

Unfortunately, as grain prices have risen so have key inputs for farmers. For example, diesel fuel prices have skyrocketed due to cost and supply of crude oil, tight refining capacity, high global demand driven by emerging markets, supply-demand imbalances, seasonality and increasing cost of shipping from refineries.

The fundamental driver of diesel prices — crude oil — has risen from $11 barrel 10 years ago, to $70 one year ago to around $110 today, FitzPatrick said. “Even if crude oil drops to $100, it's still $30 over what it was only a year ago. It's having an impact on the cost of fuel, which is trickling down to the cost of fertilizer, the cost of shipping fertilizer and the production of many other raw materials used in the commodities markets.”

Fertilizer had the highest increase in cost over the past year, driven primarily by emerging markets in Asia. “It's just been tremendous,” FitzPatrick said.

Projections from the International Fertilizer Association indicate that demand for fertilizer is not going to waver, especially for potash. In the 2007-08 crop year, potash sales are expected to outgrow the sales of phosphate and nitrogen.

According to FitzPatrick, global demand for potash is so strong because of historically low levels of proper nutrient applications in emerging markets. “In the United States, farmers apply a very strong balance of nutrients and have very sophisticated methods of testing soil and applying nutrients in appropriate levels. In countries like India and China, this has not been the historical norm, and they have some catching up to do in terms of bringing soil fertility levels to par with the rest of the world.”

As fertilizer prices have risen, government subsidies for fertilizer application in developing countries has come into play in a big way, according to FitzPatrick, particularly in China and India, “as they recognize the need for food security.”

Eleven of the top 25 fertilizer-consuming countries in the world are subsidizing fertilizer costs for their growers, according to FitzPatrick. In 2007, China's government paid $3.7 billion to support fertilizer use, while India paid $5.3 billion in subsidies. “The result is that farmers in China are less sensitive to fertilizer price increases than U.S. farmers.”

In India, the government is essentially paying for half the cost of nitrogen and potash to farmers and 41 percent of phosphate.

Fertilizer is not the only input with rising costs. Over the last 10 years, seed costs have taken a larger share of the U.S. farmer's seed and chemical budget, FitzPatrick noted.

In 1998, 43 percent of each dollar spent for soybean seed and chemicals was spent on seed. By 2009, the figure had grown to 77 percent.

In corn, the figure has grown from 52 percent to 72 percent.

In wheat, the numbers are not quite as dramatic because wheat is not a biotech-dominated seed source. Still seed has grown from 51 percent of seed and chemical costs to 57 percent over the last 10 years.

Over the last four years, for corn, fertilizer jumps out as the biggest factor for increased production costs. Chemicals are the only input costs showing a decrease.

Ten years ago, fertilizer represented 27 percent of the total operating expense for corn. “In 2009, we expect to see fertilizer represent 49 percent of the total operating expenses for corn farmers. We're also seeing a reduction in chemicals as a percentage of that dollar.”

FitzPatrick says variable input costs for corn are expected to rise to around $360 per acre in 2009. Seed costs are expected to rise to $68, fertilizer to $176 and fuel to $21. Allocated overhead costs are projected at $238 per acre, driven by higher land values.

For soybeans, seed is the primary expense, at a little over $53 dollars per acre, while fuel and fertilizer are expected to increase to around $28 each in 2009. Total operating costs are expected to be around $147 per acre. Allocated overhead is expected to be around $207 for soybeans, driven primarily by taxes and insurance and land value.

Wheat has also experienced a dramatic increase in the price of fertilizer. For 2009, seed prices are expected to be $13 per acre, fertilizer $63, chemicals, $10 and energy expenses, $30. Operating costs are expected to total $142 per acres for soybeans.

Land cost is a signigicant driver for allocated overhead expenses in wheat, along with capital recovery and labor. It adds up to an allocated overhead cost of $153 per acre.

“To offset some of these costs, we expect U.S. farmers to start looking at more efficient methods of farming, such as precision agriculture and other technologies that allow for more prudent nutrient applications and more efficient soil testing,” FitzPatrick said.

“It could also demand a reassessment of tillage practices, perhaps looking at no-till. We could also expect farmers to seek out fertilizer as the markets dips throughout the year — not just when they need fertilizers.”