Cost of ProductionWhere Are We At And Where Are We Going

By Duane GriffithMontana State University Extension

April 2008

As We Discuss Cost Related Issues, Keep Volatility in Mind

Types of Costs

Operating Costs (Variable Costs) Seed, Fertilizer, Chemicals, Crop Insurance Fuel, Oil, Repairs Vary with the level of production Usually on a per acre basis but can be

lumpy Ownership Costs (Fixed Costs)

Taxes, Interest (Opportunity Costs), Insurance, and Depreciation

Feeling the Pressure

Production response to high prices = Downward pressure on prices Prices will remain relatively high

Increased acreage planted = Upward pressure on production inputs Fuel, Chemicals, Fertilizers, Insurance

etc. Upward pressure on land rents

Energy and FuelWhere is it headed

World Energy-Figure8World Energy Consumption

Quadrillion BTU

0.0100.0200.0300.0400.0500.0600.0700.0800.0

1980

1985

1990

1995

2000

2004

2010

2015

2020

2025

2030

Energy Use by Fuel TypeWorld Energy Use by Fuel Type

Quadrillion BTU

0.0

50.0

100.0

150.0

200.0

250.0

300.0

1980

1984

1988

1992

1996

2000

2004

2008

2012

2016

2020

2024

2028

Oil

Natural Gas

Coal

Renewables

Nuclear

NYMEX Light Crude OilDollars Per Barrel, April 30, 2008

$98

$100

$102

$104

$106

$108

$110

$112

$114

$116

Ju

n 0

8 S

ep 0

8 D

ec 0

8 M

ar09

Ju

n 0

9 S

ep 0

9 D

ec 0

9 M

ar10

Ju

n 1

0 S

ep 1

0 D

ec 1

0 M

ar11

Ju

n 1

1 S

ep 1

1 D

ec 1

1 M

ar12

Ju

n 1

2 S

ep 1

2 D

ec 1

2 O

ct 1

3 J

un

14

Dec

15

Refinery Acqusition Costs - ImportsDollars Per Barrel

DOE - Energy Information Agency

$50

$60

$70

$80

$90

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Dolla

rs P

er B

arre

l

Short Term Projections-DOE-Energy Information

AgencyPrice Summary

  Year

   2006   2007   2008   2009 

WTI Crudea ($/barrel) 66.02 72.32 100.61 92.5

Gasolineb ($/gal)  2.58 2.81 3.36 3.24

Dieselc ($/gal) 2.7 2.88 3.62 3.39

Heating Oild ($/gal) 2.48 2.72 3.46 3.3

Natural Gasd ($/mcf) 13.75 13 13.83 14.15

a West Texas Intermediate.   b Average regular pump price.

c On-highway retail.               d Residential average. 

Diesel & Gas Price ProjectionsWeighted Avg. All Grades

Diesel & Gas Price Projections- Weighted Avg.All Grades, Inlcudes Fed. & State Taxes

2.00

2.20

2.40

2.60

2.80

3.00

3.2020

05

2007

2009

2011

2013

2015

2017

2019

2021

2023

2025

2027

2029

Dol

lars

Per

Gal

lon

Diesel

Gas

Chemicals

Many chemicals are petroleum based Expect prices in the long run to rise

Fertilizer

Natural Gas and Urea Prices

$0

$50

$100

$150

$200

$250

$30019

7319

7519

7719

7919

8119

8319

8519

8719

8919

9119

9319

9519

9719

9920

0120

0320

0520

07

$0.00$1.00$2.00$3.00$4.00$5.00$6.00$7.00$8.00

Urea $ Per Ton

Natural Gas $ Per Thousand Cubic Ft.

Prices Expected to Decrease

CBOT, KCBT, MGE Futures PricesApril 30, 2008

600650700750800850900950

10001050110011501200

5/1

/08

8/1

/08

11/1

/08

2/1

/09

5/1

/09

8/1

/09

11/1

/09

2/1

/10

5/1

/10

8/1

/10

11/1

/10

CBOT MGE KCBT

USDA Corn and Wheat Baseline

$0.00$1.00$2.00$3.00$4.00$5.00$6.00$7.00

2006/07

2007/08

2008/09

2009/10

2010/11

2011/12

2012/13

2013/14

2014/15

2015/16

2016/17

2017/18

Corn Wheat

Summary for Costs

Some costs may ease in short run Long term picture is upward pressure

on production inputs Move more towards the “Cost – Price

Squeeze” we are familiar with in the long run

Managing Costs of Production

Energy Use Input Use Crop Mix Tillage Systems

http://www.montana.edu/extensionecon/software/CropMixTillageSysEnergyPrice.swf

Current Cost of Production Estimates

http://www.montana.edu/extensionecon/cropdownloads.html