KNOW YOUR COST

Over the last year, costs have risen substantially in the agriculture industry.  Most of us now realize how much this year’s crop cost to put into the ground. Producers had their planting budgets blown apart by the almost daily price increases of fuel, fertilizer, chemical, and equipment parts.

Now we need to sharpen our pencils once again and re-budget our expenses at harvest and not continue to use the figures we have used in the past. MinnStar Banks, out of Minnesota, recently wrote an interesting article that highlighted how fast costs are increasing. They sent out a survey in which 599 different professional farm operators responded with information to determine how costs have risen. They found that the cost increases from spring 2021 to 2022 were coming in at a 7% increase  year based on $3.33 diesel fuel.   As you are aware the cost of diesel has surged to nearly $5 per gallon, thus increasing our costs even more. Their survey found that for every $0.50 per gallon increase in fuel costs increased operation costs by 5%.

Let’s look at what this alone does to the cost of harvest. In 2021, producers were reporting an average combine harvest rate at $37.00 per acre.  If we just add fuel alone that would raise the 2022 rate to $42.55 per acre.  Support vehicles and drying costs will also have increased by this margin, making the expense of harvest much greater this year. The increase in fuel costs has also affected the commercial trucking business where rates have increased from $0.59 per running mile to as high as $1.026 per running mile, thus increasing the costs of moving harvested grain to market.

Below are a list of custom farming rates based on the 2022 Iowa custom farming rate survey.

Notice the effect of the increase in diesel fuel price on the costs of production. It’s almost a 17% increase in costs. For a producer who had budgeted a specific return over cost based on $3.33 diesel and selling corn at $5.90 would now need to raise his corn price to $6.88 to achieve that same rate of return.  Inflation will be with us for the foreseeable future in agriculture. After many years of very low inflation, we will need to check our costs closely to see that we are not operating at a loss.  As landlords, don’t be surprised if your tenants need to raise costs to reflect their costs of production.  Failure to do so could adversely effect landlord tenant financial relationships.