For farmers, the relief of a bull market like the one we’ve been experiencing since the fall of 2020 goes hand in hand with its own worries.

• When is the market going to top?
• When do I sell without leaving too much on the table?
• How much more are my production costs going to increase?

Unfortunately, you may want to add another worry to your list that may remain with you long after the current bull market is a distant memory: how long will the current increase in production costs last?

Production Costs Tend to Lag the Market, Yet Stick Around

Historically, farmers face a formidable business challenge as production costs tend to outweigh what farmers receive at harvest. Chart A, for instance, shows production costs per bushel versus the harvest price of corn from 1996 – 2020*. Over that 24-year time period, harvest price exceeded production costs for only eight years (1996 and 2007 – 2013).

Over the past 15 years or so, it appears that input costs tend to lag corn prices on the way up, and less so on the way down. In other words, production costs have tended to increase after the bull market had already begun, and then tended to decrease with the price of corn, though not to the same magnitude. Once input costs increased, they haven’t fallen at nearly the same rate as harvest prices and tend to stay elevated for an extended period of time.

Take fertilizer, for instance, which has garnered a lot of attention in recent months as one of the largest variables of corn production costs. From 2010 to 2012, harvest corn prices rallied 57% from $4.33 per bushel to $6.79 per bushel.

Over that same time period, the cost of fertilizer nearly doubled, going from a 2010 low of $0.70 per bushel of corn to $1.33 in 2012. Two years after corn’s harvest price peak in 2012, harvest corn prices fell to $3.54, almost $0.80 below 2010 prices. Fertilizer prices, however, took four years to fall back to about $0.70, right where it was in 2010. In other words, corn prices only took two years to fall to well below bull-market prices, while it took twice as long for fertilizer to fall back to a similar pre-bull price.

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Inflation Has the Potential to Make Things Worse

There have been comparisons of the current inflationary market to that of the one in the 1970s. Recall that inflation hit in 1973 as a result of the OPEC oil crisis, leading to volatile harvest prices and driving changes in the cost of production. Chart B compares total production costs to harvest prices from 1975 through 1995 to demonstrate the impact of inflation on that relationship during and after a period of escalated inflation. (Production costs, which include all operating expenses and overhead, are not available prior to 1975.)

Note that production costs exceeded harvest prices from 1981 through 1995, and only from 1975 through 1980 did harvest prices equal or exceed the total cost of production. Does this mean that we are in for many tough years to come after inflation settles down? The answer is that anything is possible, and that discussion will be left for others to debate.

What Actions Can Farmers Take?

Once input costs go up, farmers should be prepared for increased production costs to remain imbedded on their balance sheet to some extent, regardless of their changing income generated by falling corn prices. Fortunately, there are actions you can take to help ensure that you can weather those potentially greater long-term production costs.

• Know your cost of production and make incremental sales when prices are elevated and profitable.
• Lock in price for next year’s and possibly the following year’s crop. After all, extremely elevated prices tend to fall back to “normal” once the uncertainty of short supplies passes, and a couple of bumper crops are harvested.
• Make sure you have a plan in place to make sure you take advantage of the opportunity you’re facing, while still building in protection for future market corrections.

We’re Here to Help

At Total Farm Marketing, our consultants work with farmers every day to help manage the market and its impact on individual operations. Contact us if you have questions on how to best address the issues and conditions that affect you and your business.

Call us at 800.334.9779 to make a difference in your farm marketing.

Author

Scott Masters and Mike Vigneau