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Government payments to play key role in 2006 farm survival

If farmers had any doubts about the importance of government payments to their ability to survive higher fuel and fertilizer prices this year, all they have to do is look at Chuck Danehower's numbers.

Danehower, farm management specialist with the University of Tennessee Extension Service, has calculated the yields growers in his area would need to break-even under the scenario of higher input costs anticipated for 2006.

Assuming increases of 13 and 62 percent for fertilizer and fuel and a farm-gate price of 55 cents with no government payments, West Tennessee cotton producers would have to harvest 887 pounds of cotton per acre to break-even in 2006. (West Tennessee growers have averaged 811 pounds per acre annually since 2001.)

If you factor in government payments and raise the price received to 64 cents per pound, the break-even drops to 791 pounds per acre, a yield that would be much more doable for the majority of the state's growers, assuming average weather conditions.

The numbers follow a similar pattern for the region's corn, soybean and wheat producers, according to Danehower, an area specialist based in Ripley, Tenn., who works in a number of West Tennessee counties.

“Government payments will play a crucial role in 2006,” he said, speaking to the Memphis, Tenn., Agricultural Club. “Without government payments, all the numbers are negative. With increasing costs, it will be difficult to break-even at average yields.”

Danehower displayed a chart showing the dramatic rise in crude oil prices since futures bottomed out below $20 a barrel in early 2002. As most consumers know all too well, crude oil futures topped $70 a barrel after last summer's back-to-back hurricanes hit the Gulf Coast.

Diesel prices have tracked that rise, climbing from 90 cents per gallon in the fall of 2002 to $1.68 a gallon last spring and a high of $2.80 per gallon after Hurricane Rita disrupted oil platform operations in the Gulf in late September.

Helped by the relatively mild winter enjoyed by much of the country in January and February, fuel prices have declined to as low as $1.80 per gallon. But most land-grant university budgets are projecting an average of $2.10 per gallon for the 2006 season.

Danehower compared the impact of the higher diesel prices in the aftermath of the hurricanes with prices and week before and a year before. Harvesting costs were $3.26 per acre higher for corn, $2.48 per acre for soybeans and $4.50 per acre for cotton one week after the hurricanes and $7.17 higher per acre for corn, $5.46 for soybeans and $9.91 for cotton vs. a year earlier.

Fertilizer prices have followed a similar trend, in part, due to higher natural gas prices. The monthly chart for natural gas futures closely tracks that for crude oil with spikes to $16 per 1,000 cubic feet occurring last November and December.

From $175 per ton for ammonia nitrate and $190 per ton for urea in the fall of 2002, nitrogen prices have climbed to $275 for ammonia nitrate and $340 for urea in the fall of 2004 and $310 and $328 per ton last September. The University of Tennessee budgets are projecting prices at $325 per ton for ammonia nitrate and $400 for urea for 2006.

Since those budgets were published, fertilizer prices have fallen — to $300 for ammonia nitrate and $340 for urea — after the higher natural gas futures expected for this winter softened during the record-breaking warm temperatures in January.

“Demand for natural gas has been growing strongly,” says Danehower. “U.S. consumption has been increasing 3 percent per year while our production capacity has only been growing 1 percent to 1.5 percent.”

Another negative factor is that, unlike crude oil, the United States does not have the terminal and pipeline facilities needed to import large quantities of natural gas.

Danehower says a crop-by-crop analysis indicates higher diesel and fertilizer prices could have significant impacts on farmers' bottom lines in 2006.

For cotton, the University of Tennessee's crop budgets are showing farmers will pay another $10.45 per acre for or 13 percent more for fertilizer (from $81.48 to $91.93) and $8.82 per acre or 62 percent for fuel (from $14.32 to $23.14) in 2006. This is in a state where farmers practice a high percentage of no-till farming.

The higher costs could push variable costs for cotton farmers $17.42 per acre or 6 percent higher (from $293.75 to $311.17 per acre) and total costs $20.70 per acre or 6 percent higher (from $355.03 to $375.73).

Fertilizer costs for wheat could be $8 per acre or 14 percent higher and for fuel $6.02 or 62 percent higher in 2006. The difference in variable costs could be $15.86 or 12 percent and total costs $20.49 per acre or 11 percent, primarily due to the higher fertilizer and fuel prices.

Fertilizer costs for corn could be up $17.52 per acre or 15 percent ($114.63 vs. $133.15) and fuel up $3.90 or 62 percent ($6.34 vs. $10.24). Variable costs could rise by $21.32 per acre or 11 percent and total costs by $25.94 or 11 percent.

For soybeans, fertilizer costs would be only slightly higher at $2.15 per acre or 9 percent and fuel, $3.55 per acre or 62 percent. Variable costs would increase $7.55 per acre or 7 percent and total costs $11.16 per acre or 8 percent.

Danehower said fuel and fertilizer prices remain volatile, citing the rise in gasoline prices that occurred in early March after reports of an attempt by terrorists to blow up an oil refinery in Saudi Arabia.

“There are a lot of unknowns out there,” he said. “As we've seen a mild or harsh winter can swing prices 10 percent higher or lower.”

For many producers, higher fuel prices are becoming the rule rather than the exception. “A lot of our growers had good crop yields last year, but they had an expensive crop,” he said.

“Some of them have had to make changes like cutting back on marginal land, and some have had to go out of business. Others will have to make some difficult decisions this year.”

Danehower urges producers to stay in contact with suppliers for volume discounts, pre-pay discounts and other price breaks. “Many growers will be operating with bare bones budgets this season,” he said. “They need to watch their costs and follow basic agronomic practices to produce the highest economic yield.

“And government payments, especially counter-cyclical payments, will have a strong impact on farm profitability — especially at low prices.”

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