According to folklore across the Plains, high prices and high yields come together within the same year only two, maybe three times in a producer’s lifetime. Last year was one of those times and 2008 appears to be equally properous.

Rising commodity prices started buoying producers’ expectations early in the year as increasing demand for corn as an ethanol feedstock sent corn prices higher. As farmers responded by increasing corn acreage, production shortages in other crops led to commodity price increases across the board.

“However, many producers weren’t able to capitalize on this higher price environment in 2007 because large portions of the crop were contracted earlier,” says Cole Gustafson, North Dakota State University agricultural economist. But, these producers will have ample opportunity to partake in 2008.”

While past periods of prosperity in the Plains were fleeting, there are expectations that this period of euphoria will last for some time.

“In addition to high commodity prices, producers feel new technology is going to increase their competitiveness,” says Andy Swenson, NDSU Extension Service farm management specialist. “Good availability of crop varieties tailored to the region; introduction of crops with new traits, such as glyphosate-resistant sugar beets; and increasing demand for biomass crops fuels much of the optimism.”

Another significant cause is depreciation of the U.S. dollar. This is especially true with the Canadian dollar. It has appreciated more than 40 percent in the past five years. As a result, U.S. crops appear cheaper to foreign buyers, which stimulates export demand and U.S. crop prices. Given present macroeconomic policies (high federal budget deficits, rising inflation and low interest rates), it is likely foreign exchange rates will remain high into the foreseeable future.

While farm gross revenues are increasing rapidly, rising farm expenses are not far behind. Fertilizer, seed, crop insurance and land rent prices are among the leaders. Fertilizer prices are up more than 50 percent from 2007.

“What is more painful for farmers is that soil test reports are lower due to more abundant rainfall and crop production,” Gustafson says. “With higher crop prices, seed prices for the next year also are skyrocketing. Seed for some crops has more than tripled. The Federal Reserve Bank of Chicago reports that land prices have increased 15 percent during the past year. Farm machinery prices also have increased more than 15 percent and production of many new machines has been sold out.”

In addition to rising farm incomes and profits, it appears that farm risks also are increasing. Rising costs will raise the entire cost structure of agriculture. In addition to reducing future profit margins, the competitiveness of U.S. agriculture also will deteriorate when exchange rates normalize. Unless costs decline, U.S. producers will not be competitive in foreign export markets.

Supply risk shortages also are likely as farmers expand production and replace assets. Seed supplies especially are low because high crop prices last fall motivated many farmers to sell their crops in lucrative cash markets instead of storing and conditioning their crops for sale as seed.

Fertilizer is another input that experienced significant shortages last fall. In the past, farmers could purchase and prepay fertilizer for the coming year to minimize income tax consequences. However, fertilizer manufacturers were reluctant to offer such prices until late December. Farmers desiring to apply fertilizer last fall experienced both fertilizer supply and price risk.

“Farm family living expenses increase every year and are a contributing force driving farm consolidation,” Swenson says. “The annual increase in North Dakota has been more than $1,800 per year during the past decade. Excluding any income or self-employment taxes, living expenses have gone from $30,500 in 1997 to more than $47,000 in 2006. This leaves farm families with one or a combination of options, such as increasing profit margins, farm size or nonfarm income.”

A major concern to farm families is the cost of health care. Since 2001, medical care and health insurance have been the largest expense item and now represent nearly one-fifth of total living expenses. Prior to 2001, food and dining were the largest expense item on the household spending plate. Health-care costs have been an incentive for at least one farm spouse to seek nonfarm employment with benefits. However, such employment opportunities are limited in the Plains states.

“Overall, North Dakota farm family living expenses increased 3.6 percent from 2005 to 2006,” Gustafson says. “This is similar to the 3.2 percent increase in the U.S. Consumer Price Index. However, the net income on an individual farm typically varies more than 50 percent from one year to the next, which has a destabilizing impact on household spending, especially for durable goods.”

The average percent increase in the CPI during 2006 and 2007, although somewhat modest, does represent the largest increase during a two-year period that has occurred in the past 15 years. The concern to family households, rural and urban, is whether this becomes a long-term inflationary trend.

NDSU Agriculture Communication