Fuel Prices and Cost of Production

Cornhusker Economics March 18, 20015Fuel Prices and Cost of Production

Last fall, when the 2015 Nebraska Crop Budgets were being developed, the cost of fuel for 2015 was estimated to be $3.25 per gallon. A farm supplier reported on March 10, 2015 that the price of fuel delivered to the farm is around $2.40. How much affect does that price change have on cost of production?

The 2015 Nebraska Crop Budgets were used to answer that question. The answer is, it depends on the crop and the production system.

The 2015 Nebraska Crop Budgets contain 69 different crop budgets including 14 corn budgets, 8 soybean budgets, and 7 wheat budgets. The reason for different budgets for the same crop is the different production systems. A crop may be produced using conventional tillage, no tillage, or another system such as ridge tillage. In addition, some crops are watered only by rainfall while others are irrigated. Irrigated crops may either use a pivot or gravity system for water distribution. Each system uses a different amount of fuel.

For example, non-irrigated corn produced in a no-till system uses only $8.49 worth of fuel at $3.25. The savings per acre when fuel prices fall to $2.40 per gallon is $2.22 per acre or 2 cents per bushel for the 115 bushels of corn produced. This compares to a $106.96 fuel bill for gravity irrigated corn grown using a ridge-till system. The savings when the price of fuel falls to $2.40 per gallon is $27.98 per acre which is 12 cents per bushel for the 225 bushels of corn produced.

As illustrated above, yield is important when looking at cost per bushel. While the gravity-irrigated, ridge-till system used the most fuel per acre, cost per bushel was higher for two other systems because they had similar per acre costs but the expected yields were lower. The conventional-till, pivot-irrigated system and the ridge-till gravity system using Bt, ECB, & RW seed showed the largest price decline per bushel ($0.13) from the lower fuel prices even though they had lower cost per acre changes because they used a lower yield.

Summing up these results, lowering fuel prices from $3.25 per gallon to $2.40 resulted in lower cost of production for corn averaging seven cents and ranging from two to 13 cents per bushel depending on the production system.
The changes in cost of production per bushel resulting from lowering fuel prices are more dramatic for soybeans than for corn because of lower soybean yields. The most fuel-intensive soybean budget ($75.64 per acre) was pivot-irrigated soybeans grown following corn using conventional tillage. Non-irrigated soybeans  grown  using a  no-till  system  was least  fuel intensive ($8.08 per acre). The savings per bushel of soybeans produced was 32 cents for the most fuel- intensive system compared to 5 cents for the least fuel intensive system when the price of fuel falls from $3.25 to $2.40 per gallon.

The cost saving for producing wheat is similar to soybeans when fuel prices decline. The most fuel intensive wheat budget was for wheat grown under a pivot following beans ($63.35 per acre) while the least intensive was non-irrigated, no-till wheat grown following corn ($7.87 per acre). The cost savings per bushel when fuel prices fell to $2.40 per gallon for these two systems were 18 cents and 5 cents respectively.

The tables below extract the cost changes in corn, soybean, and wheat budgets resulting from the change in fuel price. The 2015 Nebraska Crop Budgets are available online. Excel files may be downloaded and modified as needed to better reflect a specific operation.

Corn Budget Fuel Changes
Soybean Budget Fuel Changes
Wheat Budget Fuel Changes

Roger Wilson
Dept. of Agricultural Economics
University of Nebraska-Lincoln