February 6, 2006
While higher fuel prices might have some impact on what farmers plant this spring, it won’t be the lone deciding factor, say University of Georgia Extension economists.
Fuel costs are expected to remain historically high in 2006 although they likely will be lower than during 2005 while higher prices are expected this year for chemicals and nitrogen fertilizers.
“These price trends, however, do not appear sufficient to alter farmers’ acreage decisions independent of other factors,” say Economists Don Shurley and Nathan Smith. “Although cotton and peanuts are high-cost enterprises, the energy cost situation is not expected to result in major shifts in crop plantings. It is possible, however, that marginal acres could be taken out of production and/or production practices altered to result in cost savings.”
Many factors influence a farmer’s decision of what to plant from year to year, say the economists, and short-term profit maximization is rarely the sole criterion considered. “Factors influencing the decision of what to plant would include relative expected net returns (expected yields, prices, government program payments, and costs), desirable longer-term beneficial crop rotations, risk management through acreage diversification, machinery and labor availability, and weather (the impact of weather on field conditions and planting timeliness).”
The major cash row crops in Georgia in terms of both acreage and value include cotton, peanuts, corn, soybeans and wheat. For 2005, Georgia farmers planted 1.22 million acres of cotton, 760,000 acres of peanuts, 280,000 acres of wheat, 270,000 acres of corn (planted for all purposes), and 180,000 acres of soybeans. Only 230,000 acres of all corn planted and 140,000 acres of all wheat planted was harvested for grain.
The state’s cotton acreage peaked at 1.5 million in 2000 but since has declined by approximately 19 percent due primarily to an increase in peanut acres since passage of the 2002 farm bill.
Corn acreage has been fairly stable at about 300,000 acres. Soybean acreage, after increasing in 2004 due to expected higher prices for soybeans, declined sharply in 2005 to pre-2004 levels of fewer than 200,000 acres.
Higher fuel costs have been a factor in Georgia crop production since the 2004 crop season, according to Shurley and Smith. Prices increased substantially during August-October 2005 due to hurricanes in the Gulf. Prices have since declined and appear to have stabilized.
“The farmer price paid for diesel fuel is believed to have averaged $2.25 to $2.50 per gallon during the 2005 growing season, with prices being higher at some times and lower at other times. Currently, the farmer price is $2 or less per gallon. The outlook for the 2006 crop year is for prices to remain near current levels and potentially increase by up to 15 percent due to an increase in demand during the winter months.
“In addition to actual fuel costs, higher oil prices also impact the farmer through subsequently higher prices paid for chemicals, nitrogen fertilizers and other ‘energy-related’ costs such as crop drying and ginning.”
The economists estimate that fuel costs — diesel, gasoline, oil and lube — comprise 8 to 12 percent of total variable costs for Georgia’s major row crops. This is based on non-irrigated production. All “energy-related” costs — fuel, nitrogen fertilizers, chemicals, drying and ginning — comprise 36 to 53 percent of total variable costs. These other “energy-related” costs may not increase at the same rate as fuel and oil prices. Price increases (most notably for chemicals and nitrogen) may lag behind fuel cost increases due to time in the manufacturing process, but these inputs/costs are affected by higher fuel and oil prices.
Higher fuel and related costs could have an impact on farmers’ planting decisions under several conditions, says Shurley and Smith, including the following: (a) if one or a few crops are impacted significantly more than others; (b) if fuel/energy related costs outweigh all other factors in the decision such as expected yields, market prices and other costs; and/or (c) if high costs result in limited financing and credit availability.
In addition to planting decisions, higher fuel and energy costs also could impact the choice and use of production practices and result in marginally profitable land being taken out of farming.
The major costs for cotton and peanut production are seed, fertilizer and chemicals, with fuel costs accounting for roughly 10.5 percent of total costs, state the economists. Nitrogen represents a significant cost in cotton and corn production but is not required in peanuts and soybeans. Fuel and total “energy-related” costs are similar for peanut and cotton production on a percentage basis.
“Estimated net returns for 2006 favor cotton and peanuts based on the prices, yields and costs assumed. Should peanut price approach the loan rate of $355 per ton, expected net returns would favor cotton,” say Shurley and Smith.
Planting decisions ultimately will depend on relative price expectations and costs at planting time, they add. Corn acreage was down in 2005 as acres switched to peanuts. And, although corn appears potentially lower in expected net returns compared to cotton and peanuts, acreage could rebound somewhat this year because it is planted earlier and because its total variable costs are significantly less.
“Lastly, farmers tend to weigh heavily their most recent experience. This past year was a good one for cotton and not as good for peanuts. This could result in some reduction in peanut acres or at least much slower growth than in 2005.”
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