This year’s unexpected rise in fuel prices is certain to impact farmers in Ohio and across the nation, but the extent of the impact will vary across agricultural sectors and will depend on other variables, such as the weather and the fate of already record-high grain prices.
Barry Ward, production business management leader with Ohio State University Extension, said that the effect of fuel and energy costs on grain farmers — while significant — will be softened this year by the high profit potential expected for row crops in Ohio and the Midwest.
“Projected corn budgets for this year show the highest net profit outlook I have ever done in six years, and safely you could say this is the highest net profit potential in recent history,” said Ward, who is also an assistant professor in Ohio State’s Department of Agricultural, Environmental, and Development Economics (AEDE). “Because of that, the high fuel prices we are seeing now are not going to significantly impact the bottom line of grain farmers this year. Of course, the outcome would have been very different in previous years had fuel prices risen to $4 a gallon then.”
Ward’s calculations of direct energy costs show that farmers will have to spend approximately $10 more per acre to grow corn this year — based on a $1 per gallon increase in on- and off-road diesel and $0.75 per gallon of propane gas for drying grain, compared to 2010.
This represents a 25-percent increase in fuel and energy costs over 2010. Based on an estimated 192-bushel-per-acre corn yield, fuel and energy costs will represent 11 percent of farmers’ cash costs for 2011.
While grain farmers will most likely benefit from high commodity prices despite rising fuel expenses, livestock producers won’t be as lucky. That’s certainly the case for dairy farmers, said Dianne Shoemaker, OSU Extension’s state dairy financial management specialist.
“One of the main challenges dairy farmers face with fuel prices is that they are the last people on the list,” Shoemaker said. “Everybody passes the extra costs — surcharges for milk hauling, feed delivery, delivery of straw or sand, etc. — down to them, but they can’t pass these costs along to anybody else. While fuel and oil costs are usually less than 5 percent of total direct expenses for dairy farmers, an increase in a year of slim margins has a definite impact on their bottom line.”
In addition to fuel prices, Shoemaker said, the record-high grain prices enjoyed by row crop farmers have become another challenge for dairy producers operating on very tight profit margins. “This year is also very challenging because of high feed prices, especially for those who didn’t lock down prices when they were lower.”
The situation, however, is far from a perfect storm. Milk prices are good for dairy farmers right now, creating somewhat of a silver lining, though Shoemaker noted that may not be the case later in the year.
“To put 2011 in perspective, 2007 was an outstanding year for dairy farmers and 2009 was a horrendous year,” Shoemaker indicated. “This year won’t be like either one of those, but it will still be challenging.”
In the case of beef cattle producers, 2011 has so far brought a mixed bag of challenges and bright spots, according to Clif Little, an OSU Extension educator in southeastern Ohio.
“Fuel prices are certainly impacting beef cattle and sheep farmers, but grain prices have risen as well, so the impact is double,” Little explained. “Producers are also waiting to see how this year’s weather might impact grain prices even more, considering the issues of flooding in the Midwest and drought in Texas.”
While a wetter than normal spring has delayed planting of corn and soybeans throughout the Midwest and could impact yield and prices, the abundant rain has helped pasture grow rapidly. This, coupled with relatively low hay prices, is helping beef cattle producers reduce their need for grain and lower their operating costs.
“High fuel prices obviously do impact beef cattle producers, especially when it comes to running hay equipment,” Little said. “But feed prices will hit producers harder because they have risen even higher than fuel. Winter feed represents 75 percent of the yearly feed costs for keeping a cow, and producers can’t get around buying grain for that.”
OSU Extension and AEDE are part of Ohio State’s College of Food, Agricultural, and Environmental Sciences.