We all know that energy costs are the primary driver of higher food, livestock feed and obviously fuel prices.  And we also know that rising crude oil prices are impacting our farm operations everyday by raising our costs of production and increasing the level of financial risk we face.

What we may not know is exactly how much these rising oil prices are impacting our production costs.  Recently we’ve been researching this topic and have written a paper that provides an overview and analysis of the impacts of crude oil prices on the production costs of several Kansas crops.  Surprisingly it’s entitled, “Crude Oil Price Impacts on Kansas Crop Production Costs,” and can be found on our Ag Advisory Committee web page at http://www.kfb.org/commodities/advisorycommittees.htm .

We looked at the fifteen year period from 1992 to 2007.  Over that period of time the correlation coefficients between crude oil prices and the variable costs of dryland corn, and crude oil prices and the variable costs of dryland wheat were both .92.  Correlation coefficient is a statistical value ranging from 0 to 1 that shows the degree to which two variables move together, with the greater the coefficient meaning the more closely the variables are related.  With coefficients of .92, it means that when oil prices go up, it’s not good news for our bottom lines.

Another thing we did was “model” this relationship so that we could measure the impacts that changes in crude oil prices and possibly energy policy would have on the average crop production costs of Kansas farmers.  What we found was that given our data set, for each $1.00 increase in crude oil prices, the variable costs of production for dryland corn and wheat increased roughly $1.00 and $0.60 per acre respectively.  So, on a year-to-year basis if crude oil prices jump $30 per barrel, we can expect the average cost to produce an acre of dryland corn in Kansas to increase $30, and the costs to produce an acre of dryland wheat to increase roughly $18.

While the year 2008 is not complete and all costs of production have not yet been incurred, we can use the models we put together to estimate this year’s annual variable costs.  Through April, crude oil prices have averaged $95 and are continuing to climb with April prices to refiners reported at $106 per barrel and oil futures rising further in both May and June.

Assuming that crude oil prices continue to increase, averaging $120 per barrel for the year, our analysis would suggest that 2008 dryland variable costs of production in Kansas will likely increase 25%, ranging from $25 to $55 per acre over the costs of 2007 depending on the particular crop, higher for feedgrains and lower for wheat and soybeans–all largely due to the rapidly increasing cost of oil.  For an average Kansas farm with 500 acres of planted crops, this is an increase in crop production costs of nearly $19,000 in 2008.

Obviously irrigated crops aren’t immune; we estimate that 2008 irrigated crop costs in Kansas will likely see increases ranging from $36 to $47 more per acre for the average operation over last year.

Going further on a weak and creaky limb, if crude oil prices continue still higher and in 2009 average $145 per barrel, your 2009 variable costs of production would likely be another 10% higher, tacking on an additional $14 to $28 per acre, or for that average 500 acre Kansas farm, an added $9,500–all largely due to increasing crude oil prices.

Clearly crude oil prices are impacting our farm operations everyday by raising our costs of production and increasing the level of financial risk we face.  It has never before been as important for you to stay informed on the issues and engaged in your Farm Bureau organization.  Over the next several years, energy issues and energy policies will be discussed, debated and enacted.  Working together, we can better ensure that these policies not only protect our environment but protect our livelihoods and rural communities too.