Falling fuel prices a mixed blessing for farmers

WASHINGTON – Iowa farmers filling up their tractors and combines are benefiting from the plunge in fuel prices, like millions of other energy-hungry Americans.

But the recent decline in price is unlikely to yield big savings on farms, with cheaper energy costs being offset by a decline in how much farmers receive for corn used to produce ethanol, along with other high input costs. For Iowa, the country's largest producer of ethanol and corn, the effect on farmers could be especially pronounced.

"It's not an insignificant savings," David Miller, a corn and soybean producer and director of research at the Iowa Farm Bureau Federation, said of the drop in energy prices on the producer's bottom line.

"On the other hand, it is a two-edged sword because clearly in Iowa the dominant crop is corn. The question is, what is this doing to ethanol prices, and if it's dropping ethanol, is it pressuring the price of corn?"

Energy costs are among the largest input costs for farmers, generally trailing expenses such as rent for land and seed purchases. Growers — many of whom spend tens of thousands of dollars each year to buy diesel for their tractors, combines and other farm equipment — have seen prices for the fuel decline by about 20 percent, to less than $3 a gallon.

Justin Dammann, a southwest Iowa grower who farms 6,000 acres of corn and soybeans, estimated he spent about $320,000 to buy almost 100,000 gallons of diesel for his crop and livestock operations. Dammann, who typically locks in his fuel prices in December or January for the next crop, expects to see his energy expenses plummet as much as $60,000 for 2015.

"That's a significant reduction in my costs to do all aspects of the farm operation, whether it's truck the grain, plant the crops, till the soil," said Dammann, 35. "Diesel fuel is a big line-item in our budget every year."

In the Midwest, the average price for a gallon of gasoline has fallen 55 cents during the past year, to $2.59 a gallon, according to the Energy Department. At the same time, corn has plunged about 80 cents, to $3.85 a bushel — much of the drop because of a record U.S. crop and strong output around the world.

A decline in gasoline prices typically pulls down ethanol with it, putting further downward pressure on corn prices, farm economists said. Gasoline and ethanol are competing energy sources, so when gas prices fall, ethanol prices drop to remain competitive. That squeezes income at ethanol plants, reducing how much the facility pays for a bushel of corn.

Miller estimated his fuel cost to produce, harvest and transport his crop has fallen by $3 an acre to $14 per acre because of the drop in energy, but those savings could be quickly wiped out by a 2 cent-per-bushel decline in corn prices resulting from lower ethanol demand.

"Yeah, it feels good when I fill up the tank, but it is hitting me when I try to sell the corn," he said.

Even as energy prices have fallen, agricultural producers also have seen little relief from other areas. Land rents remain near an all-time high across much of Iowa and other parts of the Corn Belt. Fertilizer and seed prices also remain stubbornly high.

Chad Hart, an associate professor of economics at Iowa State University, warned that the benefits farmers experience from a decline in crude oil prices, currently around $60 a barrel, could diminish if prices fall further. The corresponding drop in corn prices that would occur, coupled with high input costs, would be too much to compensate for any help farmers would see from lower energy costs.

"The deeper it goes, the further my price erodes," Hart said. "As we go deeper, say we were able to see crude oil prices to the $40- to $50-a-barrel range, then I think the costs start to outweigh the benefits."