Ag inputs and credit costs headed higher

American agriculture made a big comeback in 2010. Net farm income was about $81.6 billion, up 31% from a year earlier — the second-largest on record.

Key Points

Near-record grain prices have already planted high input demand.

Lock in inputs now. Waiting until spring may be a poor move.

Fueled by grain prices, land prices are sure to rise.


Except for the dairy sector, Northeast farmers shared in that bounty. In general, ag income should continue to grow in the year ahead. But production costs are going to increase.

Equipment: Combine and tractor purchases by farmers are up sharply in the fall. As farmers expand grain production, they’ll be looking to buy more equipment.

Prices of that equipment will rise as manufacturers face higher expenses. 2011 equipment sales may increase 10% to 12%.

Fertilizer: Demand will be strong this year as producers push for increased yields on more acres, and fertilizer costs will rise. Some ingredients will be in shorter supply, reflecting strong U.S. demand and more fertilizer use in developing countries, such as India. Ingredients are being provided by fewer but much larger firms than in the past. These firms will exert more market control.

Ag chemicals: As with fertilizer costs, we expect crop protection chemical costs to rise in 2011. There’s no point in delaying purchases until late spring. Demand will be strong. There are no indications that there’ll be excess supplies.

Spring seed: Farm planting intentions for corn and soybeans won’t be surveyed until March. But acreage increases for both should be expected based on 2010 profitability. Seed costs will be higher. Some of the most sought-after varieties will sell out early. Genetic improvements in seed add to costs, but improve yields and reduce the need for some chemicals.

Dunn and Moore are ag economists for Penn State’s Department of Ag Economics and Rural Sociology.

What’s ahead for credit, land prices?

Interest rates are historically low, and are likely to increase only slightly for agricultural loans during 2011. All banks will be facing increased federal regulation in the years ahead. But the Dodd-Frank Act will be especially hard on small banks having no compliance departments.

Banks continue to tout low interest rates, but will evaluate loan requests critically. Farmers with good records, a history of being above average and who have a good relationship with their banker will find credit readily available. Average and marginally profitable farmers will find it more difficult to qualify.

Farmers with Marcellus Shale gas income are paying down their loans. They’re getting a new lease on life and, maybe, farming.

Land values stable to higher

Ag land values haven’t been affected by the recession and the housing bust. Upward price pressure is increasing from a number of factors in the Northeast.

Some of it is coming from the rising grain prices and their influence on croplands.

Take the western Corn Belt, for example. During third-quarter 2010, prices of irrigated crop land were up 6.4% from a year earlier. Nonirrigated cropland prices increased 4.3%.

Most of the demand for cropland is coming from farmers. But interest among nonfarm investors who’ve been disappointed with current investment returns is growing.

As crop revenues grow, land prices should follow. In areas like Pennsylvania’s Lehigh Valley, where there’s a lot of cash grain farming, higher grain prices should increase land prices. The increase would almost certainly be less than in the Corn Belt. Our lands have many factors besides farm profit driving prices. However, $6 corn and $12 beans will certainly drive land prices higher.

An improving economy also would certainly boost land prices, especially where agriculture and development compete. We expect this to progress more slowly than in the past, as investors are shell-shocked by the last few years. But another 5% annual rise seems likely.

A Marcellus ‘ripple’?

We’ve heard that a number of Lancaster County people have hunting camps in Marcellus Shale areas, and are buying land in Lancaster. One would hypothesize that as the gas payments become more significant, we’ll see more of that.

This is currently stabilizing land prices. Whether it’ll buoy land prices in Tioga County and other areas where there’s ag activity and shale revenue, you’d think that those prices would already have increased because of the shale effect.

— Jim Dunn and Lou Moore


This article published in the January, 2010 edition of AMERICAN AGRICULTURIST.

All rights reserved. Copyright Farm Progress Cos. 2010.