Monday, August 05, 2013
You or Dad: Who Was More Profitable Raising Corn?Tweet
When you eliminate inflation, does an acre of corn cost more to produce now than it did for the prior generation on your farm? In other words, who is making more revenue from an acre of corn, you or your dad, when constant dollars are considered? If he is still around, make a bet with him before you read on, then enjoy the tales he has to tell.
Agriculture has gone through many changes since 1975. For one, corn yields have doubled, and prices have skyrocketed for seed and fertilizer. Yes, land costs have multiplied many-fold, or have they? And the price of corn was in the $1-2 range in 1975, but many farmers made money selling it for $8 in 2012. But when you get to the bottom line and see what was left over, the comparisons between 1975 and 2012 are fascinating, according to Kansas State University economist Brian Briggeman. Collaborating with an information specialist, Briggeman researched the costs and revenues from corn production over the 37 years prior to 2012. He says, “While costs of production have surged breaking down total costs into operating and overhead costs highlights some differences between today and the past.” Calculating all costs and revenues in constant 2012 dollars, Briggeman says production costs were quite high in 1975, dropped about one third by 2002, and have returned to 1975 levels. “A big reason for the recent increase in the cost of production is because seed costs per acre have more than doubled ($40 per acre in 2002 to $90 per acre in 2012) and fertilizer costs per acre have more than tripled ($53 per acre in 2002 to $158 per acre in 2012).”
While the reason for the rise in costs over the past decade has been technology, Briggeman says current costs of production are surprisingly equal to 1975, and is just 2% higher today than it was in 1975. However, costs for various inputs have not remained equal, “From 1975 to 2012, seed costs per acre soared 182 percent. Other technological costs also shot up, such as the cost of machinery and equipment increasing 92 percent.” While those costs are much higher, they represent technological improvements and have benefited producers in terms of yields and efficiency, such as a doubling of corn yields since 1975.
Subsequently, higher yields have boosted profitability, and, “According to USDA data, the 1975 total profit per acre of corn was $120 in constant 2012 dollars. In 2012, that same profit per acre is $162. Furthermore, from 2007 to 2012, the average corn farmer has experienced positive profits, the longest such stretch since 1975.”
Compared to 1975:
- Total costs have increased 2.2%
- Seed cost has increased 182.3%
- Fertilizer has increased 18.4%
- Interest on operating capital has decreased 97.1%
- Other operating costs have decreased 10.9%
- Other allocated overhead costs have decreased 5.8%
- Capital recovery of machinery and equipment has increased 92.3%
- Land rental rates have decreased 25.2%
Land rental rates have remained below their historic highs, says Briggeman, and adjusted land rental rate charges are 25% less today than in 1975. And he says is it not clear why inflation-adjusted rates are nearly $50 per acre lower today. But that is where he says today’s and tomorrow’s farmers might experience an increase in their cost structure. “Support for this assertion stems from the continued growth in global economies and a fairly positive outlook for farm incomes. So, if these positive factors for farm incomes persist, then farmland rental rates may rise to their mid- to late-1970s highs. Why? Farmland owners would adjust their rental agreements to capture some of these additional farm incomes.”
Briggeman says today’s costs of production, which equate to 1975, but are one-third higher than in 2002, do not appear to be too burdensome for producers as revenue is also elevated and the profit outlook is positive. But he says history has shown that profits in agriculture can disappear quickly, consequently cost control and efficiency are paramount.
In terms of constant, inflation-adjusted dollars, production costs for corn are about the same as they were in 1975, along with revenue. Between then and now there was a one-third cut in production costs that bottomed about 2002. One factor that has not caught up with the overall cost scheme is land rent, which could become caught up if and when land owners press the issue. To remain profitable, operators will have to remain efficient.
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