How Will Farmers Respond to High Fuel and Fertilizer Prices?

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1 How Will Farmers Respond to High Fuel and Fertilizer Prices? Damona Doye Regents Professor and Extension Economist Oklahoma State University Value of production by commodity Cattle and calves Poultry & eggs Hogs & pigs Winter wheat Hay Milk Corn Cotton & cottonseed Soybeans Pecans Floriculture Grain sorghum Peanuts Source: Oklahoma Ag Statistics 2004 Bulletin 1

2 Average per farm for selected expenses Livestock/poultry purchased Feed Fertilizer, lime, soil conditioners Gasoline, fuel, oils Hired farm labor Interest expense Chemicals Source: 2002 Census of Agriculture for Oklahoma Oklahoma farmland use Wheat Grain Sorghum Rye Soybeans Corn Cotton Oats Peanuts Hay Source: 2004 Ag Statistics (acreage planted for crops, acres harvested for hay) Oklahoma cropland use Wheat Grain Sorghum Rye Soybeans Corn Cotton Oats Peanuts Hay Source: 2004 Ag Statistics (acreage planted for crops, acres harvested for hay) 2

3 Average operating costs for wheat in Prairie Gateway Seed Fertilizer Chemicals Custom operations Fuel, lube, electricity Repairs Interest USDA Economic Research Service, 2002 Impact of Higher Petroleum Costs on an Example OK Wheat Farm $1.80/gal $368/ton Conv. Lo-till No-till $2.80/gal $442/ton Conv. Lo-till No-till Fuel ($/a) Fertilizer ($/a) Subtotal ($/a) Increase ($/a) % change in total operating costs 16.4% 16.3% 10.7% Source: OSU enterprise budget software Impact of Higher Petroleum Costs on OK Wheat Farms Approximately $5/a increase in fuel costs per $0.50 increase in diesel fuel Approximately $2/a increase in fertilizer costs per 10% increase in costs Who is hurt most? Producers in low yield areas With high fuel prices, conventional tillage operations more than low- and no-till operations Tenants with cash leases 3

4 Impact of Increases in Petroleum Costs on OK Crops ($ increase per acre compared to last year) Fuel Fertilizer $2.30/gal 110% $2.80/gal 120% $3/gal 135% Wheat, dual purpose Canola Grain sorghum Cotton Corn silage Soybean Peanuts Bermuda pasture Bermuda hay Number of farms by value of sales Less than $2,500 $2,500-$4,999 $5,000-$9,999 $10,000-$24,999 $25,000-$49,999 $50,000-$99,999 $100,000-$499,999 $500,000 or more Source: 2002 Census of Agriculture for Oklahoma What have farmers done? Anecdotal evidence Put on less fertilizer this fall Maybe more soil testing More selective use More productive land Higher response pastures May put on more fertilizer in spring Eastern OK: more interest in poultry litter Bit the bullet and fertilized as usual More shopping around for fertilizer? On-line buying? Contracting? No rain, no need for fertilizer 4

5 What have farmers done? Anecdotal evidence Less wheat Soybeans Canola Cowpeas Questions about winter peas alternative crops Alternative tillage systems Minimum till No-till Legume rotation What have farmers done? Anecdotal evidence Shop for custom operators Complain about trucking costs Higher cash rents for small grain pasture Still running cattle regardless of fuel prices Will have fewer cattle in spring? Shift from farming to grass Pecan producers raising prices What happens if farmers don t topdress wheat in spring? Positive effects Decreased costs Fertilizer: 30 # $300/ton Application: $3 Increased returns $4.50 $3.00 Negative effects Increased costs Reduced returns Total 5 bu x $3.25/bu $7.50 Total Difference $16.25 $16.25 $(8.75) 5

6 Break even price of N? P N x 2 lb N/bu = P W /bu P N = P W /bu = $ lb N/bu 2 P N = $1.625/lb = $3,250/ton Bermuda grass pasture No fertilizer 50# N 100# N Fertilizer Pesticide Custom hire Repairs Fixed costs Total costs ($/a) Expected yield 1 ton/a 2 ton/a 3 ton/a Cost per ton $47.75 $34.45 $28.99 Tools and assistance available to producers AgMach$, ag field machinery cost estimation software Or Tennessee machinery cost calculator at OSU enterprise budget software agecon.okstate.edu /budgets OSU IFMAPS program to assist farmers/ranchers with business planning agecon.okstate.edu/ifmaps Oklahoma Ag Linked Deposit Program (OALDP) to help lower interest rates for producers Custom rate survey currently being conducted (OSU CR-205) Noble Foundation custom rate operator searchable database 6

7 agecon.okstate.edu /budgets Free and confidential assistance in business planning for Oklahoma producers Producer initiates contact with IFMAPS Case is assigned to local IFMAPS specialist IFMAPS specialist calls producer Producer gathers and summarizes farm records Specialist and producer arrange a mutually convenient time to meet Specialist prepares budgets and financial statements Specialist and producer meet to review business plan

8 Drought monitor What will farmers do in spring? Depends on What they did this fall Weather Fuel, fertilizer prices Grain market outlook Cattle market outlook 8