Business of Farming

BY WENDIAM SAWADGO

Rising prices have been a challenge to all of us. Higher gas prices to start the year, along with the increased food prices that began in 2021, have constrained our families’ budgets. One measure of inflation is the Consumer Price Index (CPI), which is released by the Bureau of Labor Statistics and measures changes in prices paid by consumers for goods and services. The CPI for all items increased by 0.8% between January and February 2022, marking a 7.9% increase over the past year. This was in part driven by high-profile increases in food prices by 7.9% and energy by 25.6%. These price increases have largely been due to the prolonged supply-chain disruptions due to the COVID-19 pandemic and labor issues. The high prices affecting our household budgets are also having a large impact on the Alabama farms in 2022.

Similar to the CPI, the USDA National Agricultural Statistic Service computes the average price that producers are receiving and paying for various items nationwide. The past year has seen rising agricultural prices, for better or worse, as shown in figure 1. On the one hand, prices received by producers have increased by 24.3% over the past year. Prices for several commodities, such as cotton, corn, soybeans, and wheat, are expected to reach their highest levels in about a decade, and cow-calf prices are at their highest point since 2016. On the other hand, producers have been squeezed by input costs and are paying 11.6% more for inputs than they were a year ago.

Prices for each of the major input categories have risen over the past year, as shown in figure 3. The largest price increase has been for fertilizer, which is up 68.5%. The spike in fertilizer prices has occurred in part due to global rising costs of natural gas, a feedstock of nitrogen fertilizer. Chemical prices have increased by 12.4% and fuel by 21.8%, although these figures do not reflect the recent oil price increases that occurred during late winter and early spring this year.

Figure 1: Agricultural Prices Received and Paid Index by Month Source: USDA-NASS; Updated February 28, 2022

The increase in input costs has hit all types of farms in the U.S. (figure 2). Crop farms are paying 11.0% more for inputs than they were a year ago. The higher input costs have had different effects by crop too, as the Alabama Cooperative Extension System enterprise budgets estimate a 20% increase for cotton production costs but just a 5% increase for peanuts from 2021 to 2022. Livestock farm input costs have increased by 12.3%, on average. The high grain prices, while good for crop producers, have meant increased feed costs for livestock producers.

Figure 2: Agricultural Prices Paid Index by Farm Type and Month

Figure 3: Agricultural Prices Paid Index by Input Category and Month

The increased input prices are going to challenge producers’ opportunities to make a profit in 2022. Therefore, knowing costs of production and reducing those costs whenever possible without significantly impacting yield will be especially important. For example, soil testing to avoid applying more fertilizer than is needed can help reduce unnecessary fertilizer expenses. With the high input prices, opportunities for producers to profit in 2022 will rely heavily on taking advantage of the high commodity prices and using marketing strategies to manage price risk.