At a time when much of the overall U.S. and Minnesota economy is struggling, the ag economy remains quite strong, especially in the Midwest. USDA is now estimating total U.S. farm income for fiscal year 2008 (ends Sept. 30) at $95.7 billion, which is about 10% above the 2007 farm income level of $86.8 billion, and 57% above the 10-year average U.S. farm income of $61.1 billion. Net cash income for 2008 is expected to increase by 16% above 2007 levels, due to the higher-than-expected grain prices for carryover 2007 crop inventories. The value of crop production in 2008 is expected to be $188.8 billion, an increase of $38 billion – or 25% – above the record 2007 level of crop production value. Gross cash receipts from crop production in 2008 are estimated to be 60% higher than 2006, while gross receipts from livestock production have only increased by 6% during the past two years.

Part of the strength in the agriculture sector is being driven by very large growth in ag export markets, which have grown by 40% from September 2007. Part of the growth in the export markets is due to a relatively weak U.S. dollar earlier in 2008; however, export markets have remained solid in recent months after the U.S. dollar has strengthened somewhat. The biggest increase for U.S. ag exports has been in China and India, where rapidly improving economies have resulted in a much larger middle-class population, with more spending power. Exports of livestock sector products have increased by 33% in the past year, which has helped stabilize U.S. livestock prices and helped minimize negative profit margins. Most experts expect strong export demand for U.S. ag products to continue into 2009; however, rapidly rising shipping costs could cut into export demand somewhat.

The bad news for Midwest farm operators is that production costs are increasing at a faster rate than gross farm receipts, which could lead to problems down the road. USDA estimates total crop related expenses in the U.S. for 2008 at $52.4 billion, an increase of 36% – $13.7 billion – over total crop expenses in 2007. For the 14 major crops grown in the U.S., fertilizer expenses in 2008 have increased 175% since 2002, while seed expenses have increased by 72% and pesticide expenses have increased by 29% during that same period. Much of the rise in seed costs can be linked to the rapid biotechnology advancements in the seed industry, which have greatly enhanced crop yields. Farm fuel prices are currently 39% above 2007 price levels, which were 15% higher than 2006 fuel price levels. Land rental rates in the Midwest are expected to increase 10-20% for 2009, compared to 2008 rental rates. Land rental rates in most areas have been increasing steadily in recent years, but at much smaller annual rates of increase.

Fertilizer costs have seen the most dramatic increase in the past two years, due to rapidly rising oil prices and strong demand for fertilizer products throughout the world. Anhydrous ammonia, the primary source of nitrogen fertilizer for corn production has risen from about $400/ton for the 2007 crop, to slightly over $500/ton for the 2008 crop, and now to about $1,100/ton for the 2009 crop. Similarly, the prices of both phosphate and potash fertilizer, used provide phosphorus and potassium for crops, have more than tripled in the past two years from near $300/ton in fall 2006 to near $1,000/ton in 2008. In addition, many suppliers have required farm operators to pay for their 2009 fertilizer supplies during summer 2008, forcing producers to borrow funds for crop input costs much earlier than normal, which will increase their 2009 interest expense.

According to the latest USDA data, U.S. livestock producers have incurred an increase of $9.8 billion in feed expenses in 2008, a 25% increase above 2007 feed costs. Over the past three years, total feed costs in the U.S. have increased by $20 billion, or 71%, which helps explains why profitability in most segments of livestock production has been in the doldrums for most of 2008. Profitability challenges are likely to continue in most of the livestock sector in the coming months.

As we look ahead to 2009, U.S. crop revenues are likely to remain strong. However, rapidly rising crop input and land costs will reduce profit potential and add more risk to 2009 crop production. Average breakeven crop prices for many producers for the 2009 growing season are likely to be near or above $5/bu. for corn, and around $10/bu. for soybeans. On Sept. 29, forward cash prices at local grain markets in southern Minnesota for delivery in fall 2009 were at about $4.65/bu. for corn and $9.60/bu. for soybeans. Any significant reduction in grain prices during 2009 could lead to some serious farm profitability problems by next fall.

Editor’s note: Kent Thiesse is a former University of Minnesota Extension educator and now is Vice President of MinnStar Bank, Lake Crystal, MN. You can contact him at 507-726-2137 or via e-mail at kent.thiesse@minnstarbank.com.