When the market price of corn and soybeans rise, what else marches in lockstep upward with commodity prices? That’s right, the cost of inputs. Input prices somehow know when gross revenue is going up and they go up right with them. Why is that?
Think back to the summer when commodity prices were not very exciting. But in July they began to climb all the way into harvest. And during that same time, input prices began to rise also, and have kept going higher as inputs for 2011 are being booked. Iowa State University ag economist Mike Duffy says in the last 6 months of 2010 while commodity prices were rising, the cost of producing a bushel of corn following corn rose 34¢ per bushel and the cost of producing a bushel of corn following beans rose 22¢ per bushel. No wonder your profit margin did not increase along with commodity prices, the variable costs ate it up like a hungry teenager.
Duffy’s analysis says a close examination of production costs is that the trend affects both corn and soybeans, but is a bit stronger for corn. His trend lines are smoother for input costs, since gross revenue can jump a bit from year to year, but there is little doubt of the close relationship. Since the middle part of the decade, both have exploded upward as your checkbook can confirm. Duffy says from 2002 to 2008 gross revenue for corn increased 103% and from 2002 to 2009, production costs increased 102%.
Part of the reason for the relationship determined by Duffy is the price of land, since land values have a strong correlation to costs of production. He says in the past four decades, land costs have averaged 34% of the cost of corn production and 45% of the cost of soybean production, but there has been more than a 10% variation. Compared to variable input costs in that same period, Duffy says they have averaged 35% for corn and 30% for soybeans. Since 2003 variable inputs for corn have risen 111% and for soybeans 87%.
Two other elements of production costs are machinery and labor. Duffy says machinery has been rising at a steadier rate and make up 24% of corn production costs and 18% of soybean production costs. Labor costs are nearly equal for corn and beans, representing 6% for corn and 7% for beans.
Duffy says there should not be a surprise in what is happening, because, “The input costs and other costs will increase when there is excess profit, what is left will be bid into the land in the form of higher rents or land values.”
A significant change in cost structure in the past 20 years has been that of seed costs and performance. Duffy says the integration of pest resistance in seeds has not only saved time and labor for farmers, but has increased the costs for the seed. As a result, the cost increases since 2005 have been 89% for corn and 49% for soybeans. Another significant change has been that of increased prices for fertilizer. Duffy says since 2004, costs have increased 150%, and will be going higher in 2011.
Summary:
Just when commodity prices rise and you think profit margins might expand the cost of production rise just as fast. Gross revenue for corn and soybean production has been increasing substantially, but so have variable production costs, along with land, labor, and machinery.