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 (U of I) 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."

That is the conclusion of Schnitkey's report, "Impacts of Rising Crude Oil Prices on Corn and Soybean Production Costs," that is available on Extension's farmdoc Web site. The report's co-author is Anuj Gupta, a former undergraduate student in the U of I Department of Agricultural and Consumer Economics.

"Crude oil prices, corn production costs and soybean production costs have tended to move together over time," Schnitkey explained. "Recently, for example, crude oil prices and production costs have increased dramatically.

"Between 2003 and 2007, crude oil prices increased by $39/barrel – a 138% increase, corn production costs in central Illinois on high-productivity farmland increased by $100/acre – a 42% increase, and soybean costs increased by $45/acre – a 28% increase."

Looking at the relationship among these prices since 1972, Schnitkey and Gupta found that each $1 increase in crude oil price increases corn production costs by $1.51/acre and increases soybean production costs by 90¢/acre.

"Between 2003 and 2007, crude oil price increases accounted for 58% of corn cost increases and 79% of soybean cost increases," said Schnitkey. "From 1972 through 2007, inflation accounted for an average yearly increase in production costs of $3.78/acre for corn and $4.26/acre for soybeans.

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

The report also notes 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.

"For example, a $120 crude oil price implies a $78 increase in corn costs, a 23% increase over 2007 corn costs. Soybean costs would increased by $47/acre given the $120 crude oil price, a 23% increase over the 2007 soybean costs. A $150 crude oil price results in a $124 corn cost increase per acre – 36% over 2007 – and a $74/acre soybean cost increase – 36% over 2007 levels."