CROP INPUT COSTS INCREASING

According to some farm management specialists in the Midwest, crop input costs for seed, fertilizer, chemicals, and fuel are expected to rise about 10-15% for 2005, as compared to 2004. There has also been significant increases in the cost of fertilizer, fuel and corn drying costs, all which are directly linked to the worldwide increase in crude oil prices in the past year. There has been a steady increase in seed costs in recent years, with advanced seed genetics for weed and insect control. This reduced chemical costs initially, but these costs have increased slightly in the past couple of years. In the Midwest, the biggest increase in chemical costs is due to most soybean growers budgeting in an extra $15-20/acre for the potential need of fungicides to control Asian soybean rust, and for the possibility of needing insecticides to control soybean aphids in 2005. Both soybean rust and aphids have the potential to greatly reduce soybean yields, if left untreated. In addition to the rising crop input costs, the projected market prices for corn and soybeans in 2005 are much lower than a year ago, making profit margins and cash flow projections for crop producers much tighter in 2005 than in the previous two years.

LAND COSTS ALSO RISING
We continue to hear stories of land sales in Southern Minnesota that are sharply higher than a year ago, with some sales of prime crop land in excess of $3,500 per acre. A regular Land Value Survey by Iowa State University showed an increase in Iowa land values of 15.6 percent in 2004, which followed a 9.2% increase in land values in 2003. Based on actual land sale results, it is likely that land value increases in Southern Minnesota would be very close to the increases documented in Iowa. Cash rental rates on farm land have also continued to increase in the past couple of years; however, most increases have been in the $5-10/acre range, which is far below the percentage increase in land values. Increasing land cost is a major issue to farm operators, especially to operators that have a high percentage of their land in cash rental arrangements, and for younger farmers that are trying to get established.

FARM PROGRAM PAYMENT REDUCTIONS
Most observers feel that Congress will likely reduce the outlay of government farm program payments in the coming years, as part of budget reduction measures to reduce or control the rapidly rising federal budget deficit. These reductions could occur as early as 2006 or 2007, but are almost certain to occur when a new Farm Bill is drafted. The current Farm Bill is set to expire with the 2007 crop year. The farm program budget reductions could be reduced spending on current program payments such as counter-cyclical payments or conservation programs. Spending on the new Conservation Security Program has already been below targeted levels during the first two years of existence for the new program. Some members of Congress would like to tighten the maximum limits on farm program payments for each farm operator or entity in order to reduce to overall Federal spending on farm programs.

According to the Congressional Budget Office (CBO), the projected total Federal budget outlay for USDA farm commodity programs in fiscal year (FY) 2005 will be about 22 billion dollars, which is up significantly from the approximately $16 billion in spending for FY 2004, or $13 billion in FY 2003. When the current Farm Bill was enacted in 2002, the annual USDA cost of commodity program payments was estimated at about $22 billion per year, so there was a substantial savings in Federal spending in 2003 and 2004. This was primarily due to higher than expected grain prices, which reduced the federal outlay for counter-cyclical payments and loan deficiency payments in FY 2003 and 2004. By comparison, the Federal spending through USDA on Food Stamp programs is expected to increase by 12% in 2005, reaching a total of 32 billion per year.

Editors 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.