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Missouri FAPRI Forecasts Harvest Energy Costs Again on the Rise

For 2006 the agricultural sector is looking at a fourth consecutive year of double-digit percentage increases in diesel costs for harvesting and hauling as well as increases for propane and electricity costs for drying grain, according to a new report released by Missouri's Food and Agricultural Policy Research Institute.

The report, Fertilizer and Fuel Outlook for Fall 2006, highlights production costs related to energy based resources with a particular focus on variable costs for fuel and fertilizer.

FAPRI analysis indicates the prices paid by producers for fuel for 2006 will be more than 10% above 2005 prices and will be double the level experienced in 2002.

With farm diesel prices anticipated to hover in the $2.60 to $2.70 per gallon range throughout fall harvest, no immediate relief is evident, the report states.

"Approximately 60% of the fuel costs associated with corn production result from fuel used to harvest the crop, which places producers in a tight spot when prices spike or remain high around harvest time," writes FAPRI author Lori Wilcox. Based on USDA cost of production data, direct fuel costs comprise 14% to 21% of the variable costs of production for most major crops.

"Livestock producers are also facing increased fuel costs for hauling livestock and other transportation related activities," Wilcox adds.

Last year's mild winter helped natural gas and electricity demands, but then were offset by a hotter summer. FAPRI anticipates 2006 natural gas prices at 10% above costs experienced in 2005. In combination with the past four years this increase results in natural gas prices that are 70% higher than in 2002, the report states.

Variability still seen in input costs

The current outlook for 2007 indicates variable costs should be flat to slightly declining as lower fuel, natural gas, and fertilizer prices are anticipated. This is supported by the short-term August 2006 outlook provided by the Energy Information Administration and by futures markets and spot cash markets.

However, the volatility of energy related markets will continue to be a concern in the coming months and could alter the outlook for 2007. In addition, the actual costs experienced by individual producers can vary from the U.S. average considerably, offering the opportunity for efficiencies to be gained.

Expected increases in U.S. variable costs of production for major crops

"The next year should provide some needed relief as costs begin to alleviate. However it will take some time before the impact of the past four years is fully absorbed and overcome for many in the agricultural sector," Wilcox writes.