Oil to blame for high production costs

URBANA, Ill. — Between 2003 and 2007, the majority of corn and soybean production cost increases can be attributed to crude oil price increases, according to a new University of Illinois Extension study.

“If crude oil prices continue to rise, production costs for corn and soybeans likely will continue to rise,” said Gary Schnitkey, a University of Illinois Extension farm financial management specialist.

“Rising energy costs have brought into existence an era of high production costs for corn and soybeans.

“These higher costs necessitate higher corn and soybean prices for farmers to be profitable.”

Report

That is the conclusion of Schnitkey’s report, Impacts of Rising Crude Oil Prices on Corn and Soybean Production Costs.

“Crude oil prices, corn production costs and soybean production costs have tended to move together over time,” Schnitkey explained.

“Between 2003 and 2007, crude oil prices increased by $39 per barrel — a 138 percent increase; corn production costs in central Illinois on high-productivity farmland increased by $100 per acre — a 42 percent increase; and soybean costs increased by $45 per acre — a 28 percent increase.”

Crude’s impact

Looking at the relationship among these prices since 1972, Schnitkey found that each one-dollar increase in crude oil price increases corn production costs by $1.51 per acre and increases soybean production costs by 90 cents per acre.

“Between 2003 and 2007, crude oil price increases accounted for 58 percent of corn cost increases and 79 percent of soybean cost increases,” said Schnitkey.

“From 1972 through 2007, inflation accounted for an average yearly increase in production costs of $3.78 per acre for corn and $4.26 per acre for soybeans.

“Due to crude oil price increases, corn costs in 2008, are expected to be $48 per acre higher than in 2007, and soybean costs are expected to increase by $29 per acre.”

Predictions

The report also noted that model results can be used to predict corn and soybean costs based on anticipated crude oil prices.

“Forecasts of costs should be viewed with caution as oil prices are outside the range of prices used to estimate the model,” Schnitkey said.

“Often, poor forecasting experience occurs in these cases. Given this caution, our model suggests that large increases in crude oil prices could lead to significantly higher corn and soybean costs.”