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Archive for Monday, November 28, 2005

High fuel costs projected to slash farm incomes

November 28, 2005

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— High costs for fertilizer, fuel and irrigation are expected to take a heavy toll on Kansas farmers next year, with agricultural economists projecting net incomes to plummet nearly 37 percent from 2004 for dryland farms across the state.

The forecast is even more grim for irrigated crop farms, where high energy costs to pump water are expected to cut net farm incomes by nearly 91 percent in 2006, a study shows.

"This is a dire situation facing production agriculture," said Dusti Fritz, chief executive officer for the Kansas Wheat Commission.

"Where production agriculture is unique is that producers cannot pass on these additional costs they are seeing in their inputs to anybody else."

Kansas State University economists worked up the projections on Oct. 31 to show lawmakers in Washington, D.C., the magnitude of the impact of high energy costs on agriculture as more farm states clamor for an emergency farm energy assistance package.

The university's forecast is based on farms in the Kansas Farm Management Assn., typically the state's larger, full-time operations.

The study predicts income will drop $20,430 from 2004 to 2006 for Kansas dryland farms and $50,209 for irrigated farms.

"It is not a pretty picture," said ag economist Kevin Dhuyvetter, one of the study authors.

Across all farms, the impact of higher fuel and other related input prices increased costs $9.28 per acre for Kansas farms in 2005, when compared with the previous five-year average, the study found. An additional $7.24-per-acre increase is expected for 2006.

To absorb the impact from increased production costs, land rent prices would need to decrease $12.82 per dryland acre and $47.59 per irrigated acre, the study found.

"We have told people they need to talk to your landlord to see if they will back down. ... We might not see a lot of rents go down, but I'm pretty sure we are not going to see them go up," Dhuyvetter said.

At the same time, farm states such as Kansas are aggressively lobbying lawmakers to provide emergency assistance to farmers.

One proposal gaining support would make the supplemental appropriation part of a general disaster package that would pay farmers about 52 cents a bushel for the added fuel costs, Fritz said. The proposed mechanism for distribution would be tied to the commodity farm program.

"I think momentum is building in Congress to do something," Fritz said.

With the nation's farmers now finishing harvest of this season's crops, the fear is that many operations will not be able to show the cash flow needed to cover increased fuel costs when they go borrow money to plant next year's crops.

With farmers busy getting the crop into the bin, many have yet to balance their books from this year's farming operations. High fuel and irrigation costs impacted this year's costs, but it is the far costlier fertilizer they will have to put on come spring that will likely be most keenly felt in 2006, Dhuyvetter said.

The impact of the high 2005 fuel prices will probably start showing up in January, when most operating loans come due for the nation's farmers. Those unpaid loans will start showing up as delinquent accounts on lender balance sheets in February.

For now, farm loan delinquency rates at the state's largest ag lender - the Agriculture Department's Farm Service Agency - are at the lowest level in Kansas in the past 15 years, said Arlyn Stiebe, the agency's farm loan chief in Kansas. As of Sept. 30, the agency delinquency rate was 3.4 percent.

But Stiebe and lenders across the state are growing increasingly worried about how they can make cash flows work next year based on the current low prices for commodities and the higher fuel prices.

"That is the concern of everybody. Quite honestly, with energy prices the way they are, we are not going to get the cash flows to work - plain and simple," he said.

Duane Hund, a Kansas State University farm analyst who works with struggling farm families, said some farmers could face tough challenges in the spring.

"By and large most farm families here in Kansas are going to have a respectable year, on average, but most real decent," Hund said of this year's season. "But the real concern is how do we project for 2006. These higher fuel prices, higher fertilizer prices are not going to go away, even though we have seen prices come down from their high."

Limited options

At his farm in Scott City, Richard Randall had just finished harvest and hadn't looked closely yet at next year's plans. He was waiting to see how high diesel and natural gas prices get before deciding what crops to plant or how much irrigation to do.

This season, his production costs for fertilizer and chemicals were locked in before the Katrina disaster drove up diesel and natural gas prices.

"That increase came later in July and August, when we do heavy irrigation. We were locked in to that. There is no way to change that. Once you get the crop planted in April and May, you cannot give up on the crop. You are going to pump the water to raise it. You don't have the choice," he said. "Next year is where we are going to make the changes."

Already, many western Kansas farmers who can switch from natural gas to electricity to power irrigation pumps are doing so, he said.

But like other farmers facing increased production costs, Randall's options are limited.

"Most of us know it. We have a terrible time passing these costs on," he said. "We can only absorb so much."

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