As an Iowa State University Extension economist, one of Mike Duffy's jobs is to produce the estimated costs of crop production each year. Over the years he says he's had the opportunity to work with some wonderful students and has received information from many people around the state. "In spite of all this help, sometimes I feel like I need to use a Ouija board because things are changing so fast," says Duffy.
We are currently in one of those times. "I did a preliminary cost estimate in July," he explains. "Since then the estimated costs have increased 34 cents a bushel for average yield of corn following corn. For corn following soybeans, the cost estimated has increased 22 cents per bushel for the average yield."
In the following article Duffy discusses some of what he's seen with respect to cost of production estimates. In preparing the estimates, he divided the costs of producing crops into four broad categories; machinery costs, costs for land, labor costs and general input costs. It could be debated whether this is the best way to think of production costs, but that is another discussion. Within these categories, he will cover in this article where we have seen the most change over the years.
Costs of production closely correlate to gross revenue for crop
One of the first things you notice when examining the costs of production is that they are very closely correlated with the gross revenue for the crop. This is true for both corn (Figure 1) and soybeans (Figure 2). The relationship between gross revenue and costs of production is stronger for corn, but there is still a very strong relation between the gross revenue from soybeans and the cost to produce them.
Gross revenue changes in a more erratic manner than the costs of production. But, there are very definite patterns which produces a high degree of correlation between the costs and revenues. Notice in Figures 1 and 2 how the revenues and costs were increasing at a fairly steady rate during the 1970s. Then they were flat to declining slightly in the 1980s and early 1990s.
The past few years have seen an explosion in both costs and returns. From 2002 to the peak in 2008, gross revenue for corn increased 103%. From 2002 to the peak in 2009, costs of production for corn increased 102%. Since that time both costs and revenues have fallen back, but we are in a situation where they are both rising again.
Land value is related to gross revenue and production cost
Part of the reason for the strong relationship between gross revenue and costs of production is the relationship between gross revenue and land values. Land values have a strong correlation with costs of production. Between 1972 and 2010 land represented an average of 34% of the costs of producing corn and 45% of the costs of producing soybeans in Iowa.
The percentage of total costs attributed to the land has varied by over 10%. During the late 1970s when land values were at record highs, that remains as the period when land as a percent of total costs of production was at historical levels.
How input costs for corn, beans have changed over the years
The general input cost category includes seed, fertilizer, pesticides, insurance, interest and other such items. Overall since 1972, inputs have averaged 35% of the total cost of corn production ranging from 25% to 50% of the total costs. Soybeans have shown a similar pattern, although not as dramatic. Since 1972, inputs have averaged 30% of total costs ranging from 17% to 41%. Inputs as a percent of total costs have been increasing in the past few years. The individual cost components will be discussed in the next section.
Figure 3 shows the level of expenditure for inputs for both corn and soybeans. Notice that the recent rapid change shown in Figures 1 and 2 is again shown in Figure 3. Corn input costs rose 111% from 2003 to 2010. Soybean input costs show an increase of 87% over the same time period.
Machinery costs have shown two major periods of increase. In the 1970s, machinery costs were increasing at a fairly steady rate every year. Then the machinery costs remained relatively stable but in recent years costs have risen dramatically. Figure 4 shows the increases in machinery costs per acre. Machinery represents 24% of the total cost for producing corn and 18% of the total cost for producing soybeans.
Labor has become less of a factor in total cost of production
Labor, as a percent of total cost, is almost exactly equal for corn and soybeans. Labor represents 6% of the total cost for corn and 7% of the total cost for producing soybeans. Current technologies have substituted capital for labor and as a result labor is becoming less of a factor in terms of costs of production.
In general the figures show a period of rapid increase for both costs and revenues in the 1970s. This was followed by a period of relative stability and for the past seven or eight years we have again seen a rapid increase in both the revenue and the costs.
This observation is consistent with economic theory. In a competitive market when there is an increase in revenue (higher yields and/or higher prices) the costs of production will tend to follow. Land is the residual claimant after the increase in costs and the increase in the gross revenue. In other words, the input costs and other costs will increase when there is excess profit, and what is left will be bid into the land in the form of higher rents or land values.
Specific input category changes, genetically modified seeds
The cost of production data illustrate some of the major changes that have occurred in production agriculture over the past few years. One of the major changes has been in the use of genetically modified seeds. These seeds, both corn and soybeans, contain traits that have altered production practices and costs in a variety of ways.
One of the major changes is using capital for a prophylactic treatment of pest problems. By having pest resistant traits contained in the seed the farmer pays more for the seed and foregoes the need to scout or estimate pest pressures.
The total impacts of this approach can be debated elsewhere but what is clear is the change in the cost structure that has occurred as a result. Figure 5 shows the cost per acre for both corn and soybeans since 1984. Notice that the costs begin increasing in the mid 1990s as the GMO seeds were being introduced. The costs in the past few years have increased substantially. Since 2005 the cost per acre for corn seed has increased 89% and the cost per acre for soybean seed has increased 49%.
Another category that's had big changes recently is fertilizer cost
One of the major traits in seeds today is the resistance to certain herbicides. Figure 6 shows the change in herbicide costs for farms in the Iowa Farm Business Association record keeping program. There was a substantial rise in the 1990s but for corn the increase leveled out and for soybeans there was actually a substantial decrease in herbicide costs per acre in the mid-1990s. Both corn and soybean herbicide costs increased in the past year.
The other major category that has shown substantial changes over the past few decades is the fertilizer and lime costs for corn. Figure 7 shows the cost per acre for fertilizer and lime for farms in the Iowa Farm Business Association. The costs remained relatively flat until the early 2000s and since then there has been a dramatic increase in costs. Since 2004, costs per acre are up almost one and a half times. Unfortunately, it appears quite likely that the costs for fertilizer will increase substantially in 2011.
Cost of production reflects changes occurring in Iowa agriculture
Summing up: Changes in the costs of crop production reflect the changes that are occurring in Iowa agriculture today. Gross revenue has increased substantially, new seed technology has increased costs for seeds but has slowed the costs for herbicides and increased yields, and fertilizer costs reflect the cost of manufacturing and mining the material; but more importantly they reflect the changing world conditions where the demand for the fertilizer nutrients has increased significantly.
These changes make it all the more important for farmers to be mindful of their costs. The rapid increases in prices can mask the tremendous increases that have been occurring in costs of production. Farmers must carefully evaluate the traits being offered in their seed and judge whether or not the added benefits of each trait are worth the higher seed price.
Fertilizer use should be based on need rather than a set practice. Trips across the field need to be carefully evaluated. The list of opportunities could go on but the point is that given the way agriculture is changing today, the costs to produce a bushel is just as important as the price per bushel or how many bushels you can produce. Being cost-efficient isn't anything new but it takes on new importance in the world we live in today.
How to figure your own costs of production for corn and beans
For information on how to figure costs to produce corn and soybeans on your farm, go to ISU's Ag Decision Maker site at www.extension.iastate.edu/agdm. Look under the heading "Ag Decision Maker Updates, Crops Cost and Returns" and click on Estimated Costs of Crop Production in Iowa - 2011-- A1-20. Estimated annual Iowa production cost budgets for the various crops are presented in that file. The budget tables are also presented in the accompanying PDF file that you can access by clicking here.