Agony of the Wheat

Fuel price increases and higher cost of petroleum products overall are having a negative impact on operating margins at the farm level, according to an industry observer. The spike in diesel prices alone raises the costs of farm products 167 percent.
“As to how much, it depends on variables such as farm size and crop mix,” said Roger Sahs, extension assistant in the Oklahoma State University Agricultural Economics Department. A Kansas State University study suggests that for every 50 cent increase in fuel prices, machinery costs would increase by at least 5 percent to offset higher fuel bills.
At the same time, poultry, beef and pork producers can’t raise prices fast enough to keep up with the rising cost of expenses. Oklahoma ranks 10th in the nation, producing 1.3 billion pounds of poultry annually, said Jackie Cunningham, director of community relations for the Poultry Community Council.
And, ethanol mandates and subsidies, along with tariffs on ethanol imports, are causing a world food crisis. Shortages and higher prices mean many people around the world are spending the majority or all of their income on food.
The potential price increase is alarming, he said. Fertilizer, chemicals and electricity are made from petroleum and hikes in petroleum prices ultimately affect the price poultry, pork and cattle producers pay for these products.
Diesel prices at the pump in 2003 averaged around $1.50 per gallon. Today, if diesel prices hit $4 per gallon, the cost per acre of producing wheat increases $11 to almost $23 per acre depending on the tillage system, Sahs said. On a 1,000-acre wheat farm, that’s $11,000 to $23,000 more in fuel costs. Producers who rely on custom operators to do field or harvest work can expect higher fuel prices to impact custom rates.
In the short run, producers will be forced to make some hard decisions to control costs. Both short run and long run repercussions of decisions to reduce field operations or fertilizer application must be evaluated carefully. In the longer run, shifts to reduced tillage production systems, machinery that is more fuel efficient, and crop rotations to include legumes are possibilities.
In farming, one management strategy either being used today or being considered is no-till, said Jay Franklin, OSU Extension Agent in Vinita.
“No-till eliminates the number of tillage passes and thus saves on fuel costs,” he said. “Fuel prices have given producers extra incentive to switch to no-till.”
There are other benefits but fuel prices have given producers incentive.
Major producer Tyson Foods saw corn and soybean meal expenditures double from $1 billion to $2 billion since 2006, said Richard L. Bond, Tyson president and CEO in a recent earnings report.
“We can’t raise prices fast enough to keep up with the rising cost of our inputs,” he said. “Consumers are concerned about the prices they’re paying now, but the costs we and other producers are incurring are only beginning to be passed on to consumers. It’s going to get much worse if we continue down this path of diverting corn to ethanol production.
For the second quarter, Tyson reported that chicken losses reflected significantly higher input costs. Fiscal 2008 increase in grain costs were estimated at $600 million.
Higher food costs is one of many unintended consequences of the corn-based ethanol mandates and subsidies the U.S. government put in place in 2007, Bond said.
“The intentions were good – reduce our dependence on petroleum and encourage the use of environmentally beneficial fuel,” he said. “Unfortunately, that isn’t what’s happening.”
U.S. farmers can’t grow enough corn to make a dent in the nation’s petroleum dependency, he said. It takes a bushel of corn to produce 2.75 gallons of ethanol. The government mandated the use of 9 billion gallons of ethanol in 2008. That will take 3.2 billion bushels of corn, or close to 30 percent of the expected crop. The entire world’s grain crops could replace only 5 percent of global oil products.
And, ethanol production last year only replaced 3 percent of U.S. oil imports.
Diverting corn to ethanol doesn’t make economic sense, Bond said.
“The cost to produce a gallon of ethanol is twice what it costs to produce a gallon of gas,” he said. “Ethanol has created over $12 billion in U.S. household income, but it cost the rest of the economy $24.5 billion – a $2 cost for only $1 gained.
A recent report explained how U.S. biofuel policy has failed on two major criteria of public policy: Efficiency and equity.
It is inefficient because it raises the prices on feedstocks to artificially high levels, which increases costs for other uses, such as food. It is inequitable because higher food costs disproportionately affect the people who can least afford it. Essentially, it’s a regressive tax on the poor – and not only on the poor in America.
The number of people suffering from hunger had been predicted to decline from 800 million to 625 million by 2025. But because of our current ethanol policy, it is now expected to climb to 1.2 billion. ?

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