1. Cost of Production Where Are We At And Where Are We Going By Duane Griffith Montana State University Extension April 2008

2. As We Discuss Cost Related Issues, Keep Volatility in Mind

3. Types of Costs Operating Costs (Variable Costs) Seed, Fertilizer, Chemicals, Crop Insurance Fuel, Oil, Repairs Vary with the level of production Usually on a per acre basis but can be lumpy Ownership Costs (Fixed Costs) Taxes, Interest (Opportunity Costs), Insurance, and Depreciation

4. Feeling the Pressure Production response to high prices = Downward pressure on prices Prices will remain relatively high Increased acreage planted = Upward pressure on production inputs Fuel, Chemicals, Fertilizers, Insurance etc. Upward pressure on land rents

5. Energy and Fuel Where is it headed

6. World Energy-Figure8

7. Energy Use by Fuel Type

10. Short Term Projections- DOE-Energy Information Agency Price Summary Year 2006 2007 2008 2009 WTI Crude a ($/barrel)66.0272.32100.6192.5 Gasoline b ($/gal) 2.582.813.363.24 Diesel c ($/gal)2.72.883.623.39 Heating Oil d ($/gal)2.482.723.463.3 Natural Gas d ($/mcf)13.751313.8314.15 a West Texas Intermediate. b Average regular pump price. c On-highway retail. d Residential average.

11. Diesel & Gas Price Projections Weighted Avg. All Grades

12. Chemicals Many chemicals are petroleum based Expect prices in the long run to rise

13. Fertilizer

15. Prices Expected to Decrease

17. Summary for Costs Some costs may ease in short run Long term picture is upward pressure on production inputs Move more towards the “Cost – Price Squeeze” we are familiar with in the long run

18. Managing Costs of Production Energy Use Input Use Crop Mix Tillage Systems

19. http://www.montana.edu/extensionecon/software/CropMixTillageSysEnergyPrice.swf

21. Current Cost of Production Estimates http://www.montana.edu/extensionecon/cropdownloads.html