Production Costs Outpace Commodity Prices for Arizona Farmers
Americans are experiencing everyday items increasing at their fastest rate in more than 40 years, according to economists. Inflation hit 8.5 percent in March over the previous year, according to the latest federal report released in April. In the last 12 months, if you haven’t noticed, your gasoline bill has at least quadrupled.
In the meantime, the rise in inflation has sent production costs on the farm and ranch soaring. In fact, American and Arizona farmers’ and ranchers’ production costs are rising higher than commodity prices, resulting in lower profits. Farmers and ranchers are seeing rising prices on everything needed for production, including increased energy costs that have sent fertilizer prices and diesel soaring. With input costs so high, farmers and ranchers cannot reap the benefits of the current high commodity prices.
A farm study conducted by Purdue University says, “Higher input costs are the number 1 concern of farmers.” Additionally, economists have predicted U.S. farm income may fall to $113.7 billion, down $9.7 billion, or 7.9%, from 2021. This leaves farmers and ranchers with no choice but to innovate to mitigate these production price hikes.
According to the American Farm Bureau Federation (AFBF), “…farm production costs are likely to increase by 6% in 2022, which follows a 12% increase in 2021. This continues a trend stretching back several years. Since 2013, farmers have seen almost all production expenses increase. For example, livestock and poultry expenses have gone up 46% and marketing, storage and transportation costs have increased 59%.”
Also, from AFBF, Farmers are seeing several production cost increases including:
- Rising fertilizer, seed, and chemical prices, which now make up to 17.5% of on-farm expenditures
- Rising fuel and energy prices, exacerbated by uncertainty due to the Russia-Ukraine conflict
- Increased costs of labor, both on-farm and for agribusinesses serving farms
- COVID-19 disruption of labor markets and production
The war in Ukraine should be worrisome enough. According to ING Bank and the U.S. Department of Agriculture, prior to the war, Ukraine was expected to account for 12% of global wheat exports and nearly a fifth of global corn production this year. Analysts are suggesting little or no Ukrainian grain will be available for export. And potential Russian wheat sales may be barred by sanctions. While this will certainly raise wheat prices, good for U.S. wheat farmers, any increased grain prices hurt U.S. livestock producers. This all represents a ripple effect across supply chains struggling to keep up with demand.
“The rising prices for fuel, fertilizer and other supplies create an unwelcome counterforce to higher commodity prices,” said AFBF President Zippy Duvall. “Higher prices for crops are getting a lot of attention right now, and of course, help farmers balance the books, but when expenses are rising just as quickly or even outpacing revenue, the financial gains evaporate. There are serious concerns about whether farmers will be able to access the supplies they need to put a crop in the ground.”
Strategies to Reduce Input Costs
According to ag lending institutions like Ag America Lending and Farm Credit West, while rising costs are significant there are ways to help mitigate their negative impact, even if somewhat limited.
The best way, say our ag lenders, is to monitor and manage your key performance indicators, otherwise known as KPIs. Ag America Lending lists commodity pricing, working capital, debt-to-asset ratio, asset turnover ratio, and price-of-goods in the region as core KPIs (though others can be included depending on one’s operation). With these KPIs tracked, monitored, and adjusted for current settings, farmers and ranchers can help mitigate their costs.
And while our successful farmers typically monitor such KPIs, it doesn’t mean one can adjust for double hits. For example, in Pinal County farmers are already battling a water shortage, and now they have this added problem of rising production costs, making it doubly tough on their operations.
“We’re now faced with higher input costs,” said Nancy Caywood of Caywood Farms in Casa Grande. “Fuel and nitrogen are our highest costs. Plus, it could become an unreliable market due to the war in Ukraine. Because of the lack of water and higher prices, we may have to go back into dormancy on our alfalfa, mainly due to lack of water. The water district also raised our acre-foot price from $50 to $79, a dramatic increase on our water bill. On our barley, we’ll let it mature out and then harvest and hope we can cover costs and make some money. We’re also doing Sudan grass and silage corn on leased land with water that will be cut back. This fall, we hope to increase our income by doing extra agritourism by adding a fall festival. We’re looking into lower water consumptive crops to diversify. We purchased our nitrogen early, prior to when prices got too high. But we’re now low. I keep worrying about how we’ll meet all our costs to farm.”
Another southern Arizona farmer concurs. “Keep an eye on the books and do what’s best for the farm,” said pork producer Rod Miller. “With everything up, labor will be a nightmare, and it’s impacting the bottom line,” Fortunately even with high input costs, there is still a high demand for livestock for now.”
The dairy industry is no exception too. “Despite paying much more for feed, labor, fuel, and fertilizer, dairy farmers in Arizona are still realizing a profit right now due to increases in the milk price that have occurred alongside the increase in production costs,” said Maricopa County dairy farmer Jim Boyle. “However, my concern is that a decrease in demand for dairy products due to these high prices could send milk prices plummeting. With so much of our costs being fixed, a decrease in milk prices would cause severe economic strain on dairy farms during this inflationary period.”
American Farm Bureau Federation and Arizona Farm Bureau are working hard to ensure the administration and Congress understand the complexity and the potential implications of increased production costs and limited availability of supplies.