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Fuel costs cut net on average acre of corn 45%

October 11, 2005|by JEFF SEMLER

Following my theme of farm profitability, I will touch on an area this week that is something all of us can relate to and that is the cost of fuel.

Whether you are plowing or commuting, the rising cost of fuel is going to influence your personal spending or profitability if you are in business.

The price of diesel fuel has increased substantially during the past year, with no indication that fuel prices will decline in the near future. This has resulted in increased machinery costs for farmers.

The question arises as to how much machinery costs per acre have increased due to the higher fuel costs.

Since this is harvest season, we will use harvesting corn as our example. On average, it takes 3.75 gallons of diesel fuel to harvest an acre of corn. At $2 per gallon, the fuel cost to harvest an acre is $7.50 but if the cost per gallon goes to $3, the cost to harvest an acre rises to $11.25.

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This does not include the increased cost to haul the corn once harvested.

Neither does it include the increase in costs to plant next year's crop.

What does this increase in production cost mean to the farmer?

Well, quite simply, it means there will be a reduction in profit - and profit to the average farmer equals take home pay. For those in other job sectors, your company's profits don't impact your take home pay in the short term.

Before you rush off to call Mail Call, I know that company profits do affect your job stability and can affect your wages if your company makes wage cuts, but they are long term and something you can prepare for.

It is not often you wake up one morning to such things unless, of course, you worked for Enron or WorldCom.

Another difference is your company can pass along the increase in fuel cost to the end user. Transportation companies often have a fuel surcharge. Other industries write contracts that have increases included if production costs rise by set percentages.

The farmer does not have that luxury. Farmers sell commodities and thus, they are price takers - not price setters - for the most part.

The current price of corn is the same as last year, yet fuel prices have almost doubled.

So let's take a look locally.

In Washington County, the average field will yield 100 bushels of corn. At $2.20 per bushel (board price 10/05/05), the income from one acre of corn is $220.

According to the USDA it costs $150 per acre to plant the corn crop. If you take the average rental rate for crop land in Washington County, which is estimated at $54 per acre we have reached a total of $204 per acre of input costs before harvesting.

If your machinery cost for harvesting with diesel fuel priced at $3 per gallon equals $11.25 per acre, then you are netting approximately $4.75 per acre on your corn.

Thus bringing us to the point: The $3.75 increase per acre in machinery cost has reduced the profit of an acre of corn by nearly 45 percent.

I will not even begin to try and predict the increase in cost of planting next spring's corn.

Another cost that is unknown to many non-farmers is the cost of fertilizer.

Fertilizer costs are heavily influenced by the price of natural gas so, yes, fertilizer will be more expensive.

Fortunately, as I write this article, the long anticipated rain is falling. While many may think this article is as gloomy as the weather, take heart - farmers are a hearty lot and some of the most optimistic people on the face of the planet.

What else could explain the hundreds of acres of wheat and barley that have been planted during the driest September on record?

Working in the agriculture industry helps me to appreciate the words of one of our founding fathers, Thomas Jefferson.

"Cultivators of the earth are the most valuable citizens. They are vigorous, independent, virtuous and they are tied to their country and its liberty and interests by the most lasting bonds."

By the way, if you would have asked Jefferson to describe himself according to his own writings, he would have said he was first a farmer.

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