Here we are in the harvest season, prices are floating in the range of $5 for wheat, $3 for corn and $7 for beans, not bad for a time of year when prices usually head south because of the seasonal surge in supply. Besides, many crop producers locked in even better prices earlier in the year. And the price train figures to keep on rolling.

In fact, some predict that 2008 will be even more competitive, as soybean supply will have declined and the soybean market will need to bid acres back from corn. Meanwhile, other crop markets like wheat, canola and sunflower will also need to be competitive in price to maintain or prevent acreage slips in 2008.

But let’s not assume that farmers are now living high on the hog and rolling in dough.
First off, high prices mean nothing if there’s no crop to sell. In the Northern Plains, crops have been pockmarked or zeroed out by too much water in some places and not enough in others. People are still talking about an unusually large hailstorm — about 12 miles wide by 50 miles long — that flattened thousands of acres in southeast North Dakota in mid July. Farmers will tell you that crop insurance will cover about what it cost to produce the crop, with no return to family living. Covering a lost crop with insurance is about a break-even deal at best.

Crop prices are higher than they were five years ago, but so are interest rates. According to Andrew Swenson, North Dakota State University Extension Service farm management specialist, interest expense as a percent of gross revenue was 6 percent in 2005 and 7.2 percent in 2006 for more than 500 farms enrolled in the North Dakota Farm Business Management Education program.

Interest as a percent of gross revenue is a figure that lenders often consider when determining borrowers’ credit risk. To better understand the effect of credit interest on the bottom line, consider: In 2003 and 2004, a farm with gross revenues of $300,000 required 5.6 percent, or $16,800, of those revenues to cover its interest costs. Last year it took 7.2 percent, or $21,600. This additional $4,800 causes an equivalent reduction in net farm income.

Machinery and input costs including fuel and fertilizer remain near or at historical highs, and these higher costs offset crop revenue gains. Total non-land costs for corn production are projected at $314 per acre in 2008, an increase of $57 per acre from the 2001-2005 level, according to the University of Illinois. The largest increases come from fertilizer at $27 per acre, seed at $11, crop insurance at $5, fuel and oil at $5 and crop insurance also at $5, according to U of Illinois Extension economist Gary Schnitkey.

Total non-land costs for soybeans are projected at $199 per acre in 2008, an increase of $28 per acre, with the highest increases coming in seed ($9), fertilizer ($8), fuel and oil ($5) and interest ($5).

Lower projected government payments also cut into the projected revenue. Exact commodity programs will not be known until the new farm bill is passed, so economist Schnitkey assumes a continuation of the 2002 farm bill levels of support. Due to the way that program operates, he expects government payments to decline by $27 per acre in 2008.

“Farmers will face additional risk for three reasons,” he says. “First, price variability likely will be higher over the next several years. Second, risk will increase because federal commodity programs will not provide as much downside price protection. Finally, revenue for crop insurance must fall more in periods of high prices before insurance programs are received.”

Then there’s the increasing price of land, which in the Northern Plains is driven in large part by the increasing value of land for recreational use (mostly hunting) as well as higher crop prices spurred by the boom in biofuels.

Ninety percent of the 214 respondents providing forecasts for the 2007 South Dakota Farm Real Estate Market Survey expect land values to increase in the next 12 months, the highest proportion of respondents forecasting land value increases in the 17 years of survey reports.
Statewide, cropland and rangeland values per acre have doubled since 2002 and tripled since 1996, and cash rental rates have nearly doubled since 1993, according to the South Dakota State University survey. Land value increases from 2006 to 2007 (10 percent or more) are the third highest annual rate of change in the past 16 years, exceeded only by higher annual percentage rates of change from 2003 to 2005.

Similar increases in land value are occurring elsewhere in farm country, affected in part by the increasing value and buy-up of land for hunting, but also because of crop prices. This is good news for land owners, but not for land renters. About half of planted cropland in 2002 was rented, according to the USDA. A good share of these cropland renters are younger farmers. I don’t want to be a wet blanket. Crop prices look rosy, but farming as a business remains as thorny as ever. Policymakers, the media and the general public need to understand that while crop prices are better than they have been in years past, farming remains rife with risks. Those risks must be recognized and managed accordingly through farm policy and by farmers themselves.