What are you spending on tractors for your farm? What about the cost of energy, such as electricity for the farmstead and fuel for your powered equipment? What are you spending for repairs for farm equipment? And the big question, what are you spending on your pickup truck? Yes, the last question is unfair because your spouse is always asking about that. But when you total up those checkbook entries and divide by your total acreage, what is that number and how has it changed in the past five years?
Cornbelt grain farms with good soil have probably seen their power costs rise since 2005, possibly in a substantial incremental move upward. That is the calculation of University of Illinois ag economist and farm management specialist Gary Schnitkey, who says he’s seen a $26 increase in the past five years to an average of $94 per acre. In his analysis Schnitkey says the big increases were in depreciation and repairs. Depreciation costs increased $14 per acre up to $33 for an average and that is a 73% increase. Why do depreciation costs go up; because you have been busy at the local dealership buying, bartering, trading and otherwise hauling home new and more machinery. Capital purchases more than doubled from 2005 to 2009, rising from $40 to $85 per acre.
Schnitkey’s numbers are an average of several thousand farmers in the northern two-thirds of Illinois, but are probably equal to similar farms in Iowa, Indiana, Missouri, and the rest of the Cornbelt, unless you are still farming with four row equipment and raising oats for the horses.
In the past five years a new combine may have found a home in your machine shed, and if you compare 2005 and 2010 prices, there was a 35% price increase on a 305 hp combine with an 8 row corn head and a 30 foot grain platform. With a price rise from $217 thousand to $293 thousand, your additional 6% cost for the combine per year will add to your cost of power.
The five years studied by Schnitkey included the high commodity income years of 2007 and 2008, and when commodity prices are high, equipment gets traded up. And when that happens your depreciation cost per acre increases.
Repairs of equipment also increased. One would think that with newer equipment repairs costs would diminish. However, Schnitkey says with newer equipment, repair costs have increased substantially. He’s calculated a $17 per acre average for repairs in 2005 to $24 per acre in 2009, which is a 41% increase over that period.
Fuel costs, while volatile during the five years, have not changed much from 2005 to 2009. An initial $9 per acre increase has faded by $8 per acre, with a net increase of only $1.
Among the farms sampled by Schnitkey, 32% had power costs from $60 to $80 per acre, 28% recorded costs of $80 to $100, and 32% were over $100, with 4% paying more than $160 per acre just for power costs. The smaller the farm the higher the power costs, with a $97 per acre average for farms less than 500 acres and $88 per acre for farms exceeding 3,500 acres. But Schnitkey says there are small farms with costs lower than the larger ones and tillable acres do not guarantee lower costs.
But he says the key is the relationship between power costs and profitability. As costs rise, profits decline. He says returns to management and returns to land decrease as power costs increase.
Summary:
Power costs have increased in the past several years, partially due to increasing machinery prices and partially due to higher farm incomes. A portion of the power cost increase signals a buildup in machinery capacity that may be drawn down in future years if farm incomes decline. This draw down could then lead to lower machinery depreciation and power costs in future years. It is not likely though that power costs will decrease to 2005 levels, as new machinery prices have increases substantially.
Stu Ellis