Historically, high diesel prices get farmers to thinking about no-till practices. But two Kansas State University agricultural economists studied the diesel price outlook and possible long-term impact on machinery and whole-farm costs.
Based on data supplied by Kansas Farm Management Association, those members can expect their total fuel costs (excluding irrigation) to increase by more than $3,000 compared to what they paid in 2004, says Kevin Dhuyvetter, Kansas State Extension farm management specialist.
Two different economic models suggest that diesel prices will drop slightly from current levels, but will still remain historically high through 2005 and 2006, says Terry Kastens, crop production specialist.
The economists used data submitted from 1,900 Kansas Farm Management Association members for the years 2000 through 2004, along with a southwest Kansas diesel price. They found that producers' whole-farm fuel costs are almost entirely influenced by fuel prices. In other words, farmers do not drastically alter their fuel consumption from year to year, based on the price of diesel.
The economists arrived at a 2005 forecasted whole-farm fuel cost of $15,791 by taking the 2004 value ($12,758) multiplied by 123.8 percent (2005 projected diesel price as a percent 2004's price).
The projected price of diesel in southwest Kansas for March through October of 2005, says Dhuyvetter, is $1.70 per gallon, up 33 cents a gallon (24 percent) from 2004.
"In the long run, higher production costs will lead to either higher prices for commodities or a decline in land costs," Kastens says. "Market forces will make adjustments to account for these higher costs. However, they will likely reflect a direct reduction in net income in the short run because producers are limited as to the changes they can economically make."
The economists also studied situations in which producers would hire someone else to do some or all of their farming.
"Custom operators likely will increase the rates they charge to pass the higher cost on," Dhuyvetter says. "But how much should custom rates increase due to the higher fuel costs? There are two ways to find that answer."
The first is to look at the fuel required per acre for an operation and multiply that value by the increase in fuel prices from a year earlier. In southwest Kansas, that would be 33 cents a gallon, he notes.
The second way to estimate how custom rates might increase is to multiply a historical custom rate - for example, what was charged last year - by the percent increase in fuel prices and by the percent fuel costs are of total costs.
"By looking at historical custom rates," Dhuyvetter says, "we are taking into account depreciation, interest, repairs and labor as well as fuel costs."
Using KFMA data and the second method, Kastens and Dhuyvetter found that at a fuel price increase of 33 cents per gallon, custom rates would need to increase by 3.3 percent to offset this higher fuel price. If fuel prices continue to rise, the custom rates will rise.
For details of the study, go to http://www.agmanager.info and click on "Impact of Increasing Diesel Prices on Machinery Costs."
Kansas State University