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Agronomy Day 2009

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Tour B

Volitility Continues in Energy Prices and Production Costs

Gary Schnitkey
Gary Schnitkey
Professor
Department of Agricultural and Consumer Economics
University of Illinois
217 244-9595
schnitke@illinois.edu

Production costs for corn and soybeans are highly correlated with energy prices.  In recent months, energy prices have exhibited variability.  This variability likely will continue into the near future.  As a result, 2010 production costs are difficult to predict accurately.
 
Cash prices for crude oil reached a high in August 2008 of $118 per barrel.  Due to financial instability and economic concerns, crude oil prices declined, reaching a low of $49 per barrel in April 2009, a 58 percent decline from its August 2008 high.  Since April, crude oil prices have increased, influenced by continuing growth of oil use in Asia.   In the middle of June, crude oil prices were slightly above $70 per barrel. 
Similar to crude oil, natural gas prices declined since mid-year 2008.  In July 2008, U.S. commercial customers paid $15.45 per thousand cubic feet for natural gas.  Natural gas prices then declined by 34 percent to a price of $10.10 per thousand cubic feet in March 2009.   Natural gas is an input into the manufacture of nitrogen fertilizers.  Hence, declines in natural gas price should lead to lower nitrogen fertilizer prices.
Partially as a result of declining energy prices, crop production costs in 2010 likely will decline from 2009 levels.  Current energy prices, along with initial budgeting, suggest that non-land costs in 2010 will be near 2008 levels.  This would represent roughly a $50 per acre decline in costs for corn grown in central Illinois.  While this decline would be substantial, corn production costs would be still at high levels compared to historical averages.

 Since energy use is related to economic activity, economic recovery likely would result in higher energy prices.  Prospects  for  economic recovery are highly uncertain.  Moreover, global unrest could result in higher energy prices.  All this suggests uncertainty about energy prices, leading to uncertainty about crop production costs.

U.S. Price of Natural Gas Sold to Commercial Consumers

Per Acre Non-Land Costs to Produce Corn

Crude Oil Prices

change and challenge