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Cost of production expected to rise in 2022

Cost of production expected to rise in 2022

With input prices surging and the availability of products for spring unknown, the cost of production will likely be higher in 2022.

Add to that supply chain problems and higher costs for new equipment, those involved in agriculture will be paying close attention to the farm economy as we get closer to spring.

Bryon Parman, NDSU Extension agricultural finance specialist, took a look back – and a look ahead – at the ag economy during a virtual webinar in November.

“Next year may be a year where soil testing is as important as it has ever been,” Parman said. “Obviously, with fertilizer and nutrient prices being as high as they are, it is imperative that we do not apply any more than we absolutely have to.”

Parman does not feel 2022 will be as strong of a farm year as 2020-21 has been with the higher net farm incomes.

“If these (input) costs persist, we are probably looking at a reduced year next year compared to 2020-21 with the production costs we are facing across the board,” he said.

In 2021, Parman said the USDA predicts that net farm income nationally will turn out to have been the highest in seven years.

Many regions of the country had good yields and there were good commodity prices overall, but the cost of production, rising in nearly every input area, will impact 2022 farm income.

Input costs

“As farmers approach the new year, fertilizer costs, for one, are rapidly increasing,” Parman said.

He pointed out that (as of Nov. 8) retail potash started the year at $360 per ton and had doubled by November.

MAP and DAP products are both up 60 percent. Phosphorus is “off the charts higher,” and urea, which started 2021 below $400 per ton, was costing $830, more than double.

“We started 2021 with relatively lower fertilizer and nutrient prices, along with higher commodity prices,” he said. “Looking into next year, there will be sticker shock for producers when they buy inputs to achieve the same yields as they have had previously.”

Other inputs are rapidly growing, as well.

Farm machinery costs in January 2021 were the same as in 2018. Now they are increasing dramatically, along with used equipment prices.

“New equipment is on a sharp march upward,” he said.

Chemical manufacturing, which includes herbicides and pesticides, has increased “remarkably,” Parman said.

In addition, long distance trucking and freight costs have seen a big increase, and a steep climb upward.

“The only one that has not marched upward (in some areas) is cash rents, but we will see in the spring,” he said.

Feed commodities, hay prices higher

For livestock producers, feed commodities like corn and distillers grains are seeing price increases.

“The drought impacted hay prices, which are higher, and feed, supplements, and concentrates are up – but not sharply up – since a year ago,” he said.

Consumer food prices at home and in restaurants are rising and will likely be higher in 2022.

Will input costs come down when producers need to purchase them as we get closer to spring?

Since some fertilizer is imported from other countries, Parman doesn’t think that will happen. China’s manufacturing facilities have shut down and many products are imported from there.

Supply chain problems to obtain products have impacted the cost of production, as well.

Parman pointed out that Northern Plains states are one of the later-planting states.

By the time producers need to apply fertilizer and do side-dressings, other states (in the south, such as Texas, Nebraska, and Iowa) have already purchased products first.

“I do know some co-ops are not allowing the pricing of spring fertilizer at any cost because they are not sure of how much product they will have. They may have to ration products,” he said.

Crop insurance

“When something like a global pandemic happens, it can illustrate how important crop insurance and government payments are to the ag economy. And in a year where we had a lot of prevent plant, those crop insurance payments help, as well,” he said.

In 2020, the amount of money borrowed and principle paid were about even.

“It was the first time, except for 2014-17, that the amount of money borrowed stayed the same or declined slightly,” Parman said.

Government payments

There were surveys taken on what farmers did with leftover CPAP and MFP payments, and the number one response was to “pay down debt.”

“Purchasing new farmland was low on the survey, but also higher on the list was replacing equipment because there was not enough cash flow (in other years) generated to replace depreciated equipment,” he said.

When trade disputes impacted farming, MFP programs became something farmers were entitled to.

“Ad hoc, disaster and trade assistance payments started overwhelming all the other farm payments,” Parman said.

In 2019, MFP 2 became “the largest farm program ever,” and in 2020, CFAP “swamped even that.”

Ad-hoc programs became the biggest farm program payments across the nation. Yet, they are basically “one-off” programs and no one is sure how much the payments will be.

Parman explained these ad-hoc programs payments aren’t known until after the fact, putting a wrench in farm business planning for both farmers and ag lenders.

With the regular Farm Bill programs, farmers can look to the future and there is an instruction set on when and how much these payments will be.

Land values and cash rents

Parman said land values and cash rents are another major part of farm wealth and the ag economy.

Cash rents for cropland and pastureland have stayed relatively flat across the region for the past six years, on average, although there are more fluctuations in pastureland.

Land values have also stayed flat.

“The moral of this story over the past six years is there just hasn’t been much movement in average land values,” he said.

Higher quality land tends to hold its value over time, and it is not as vulnerable to commodity price increases or decreases.

Regions that are able to take advantage of improved technologies, such as areas raising corn and soybeans, have seen higher land values.

USDA is predicting higher land values nationwide, less than 10 percent, because of higher commodity prices.

In summary, Parman does not see land values increasing by large amounts, and that is good news for producers.

“If farmland prices are not increasing, and there is a positive inflationary rate – then in real dollar terms, farmland prices are actually decreasing,” he concluded.

If there is an increase in land prices, the increase will probably not be a double-digit increase. It would essentially be an inflation correction.

The Prairie Star Weekly Update

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