Ask a room filled with grain farmers if their costs are rising and most will reply in the affirmative. Some producers who track their financials very carefully will tell you that despite historically strong grain prices, margins are tight in their 2013 crop budgets. There’s a cost – price squeeze.
But most of the traditional inputs have not actually seen a price increase. Nitrogen and phosphate prices usually rise between the fall and spring, but that hasn’t been evident this time. Buying last fall hasn’t produced the normal saving.
And the major nutrients are somewhat less expensive than last spring.
According to the Farm Input Survey conducted by Alberta Agriculture, phosphate was $50 a tonne less expensive in February than it was a year previous. And the average price in February was $100 a tonne lower than the price recorded for April of 2012.
The survey pegged urea (46-0-0) at $625 per tonne in February. It was $640 a tonne in March of last year and skipped to $825 in May. Producers who waited until seeding time to buy their nitrogen paid a lot more last spring.
Nitrogen fertilizer is certainly more expensive than it should be based on the cost of natural gas, but the cost of this major input is down, not up.
The Alberta Farm Input Survey does show that the price of Liberty Link canola seed is up by $50 a bag, but the herbicides in the survey are trending downward.
Interest rates remain amazing low. That isn’t a cost showing any increase. Fuel hasn’t changed a lot and it’s a cost that has become relatively minor compared to other inputs.
So why do producers say that costs are increasing? One of the reasons is that most of us are using higher rates than ever.
Strong grain prices encourage more fertilizer use, particularly nitrogen. With the increasing threat of herbicide resistance in weeds, multiple modes of action are being employed. Rather than just a glyphosate burn-off before seeding, another product is often being added to the mix.
Fungicide use has increased dramatically in recent years. Whether it’s for fusarium in wheat or sclerotinia in canola, fungicide application is a new cost of doing business. The sprayer never sits very long during the growing season.
It’s probably fair to assume that farm equipment costs have also been rising. Producers have used these relatively buoyant economic times to upgrade tractors, combines, sprayers, seeders and trucks. Those are big ticket items.
However, for many producers, the biggest increase is in land costs. Rental rates that may have been $40 or $50 a few years ago may now be $70 or $80. There are even deals at $100 an acre and above.
On land that’s owned free and clear, the budget should include an opportunity cost – what you could get if the land was sold and you had the money invested. With higher land prices, this opportunity cost is also rising. If you’ve borrowed money to buy land recently, you’re payments are up.
The economics are all very rational. Producers are using more inputs and upgrading their equipment while competing harder to increase their land base.
Investors may be playing a role in farmland price increases, but you can’t really blame them for the increase in cash rents.
Costs are up, but there’s no convenient boogeyman to blame. The biggest villain is staring back at us when we look in the mirror.