KANSAS CITY, Missouri/WINNIPEG, Manitoba | Fri Feb 25, 2011 10:45am EST
KANSAS CITY, Missouri/WINNIPEG, Manitoba (Reuters) - Not too long ago, a surge in oil prices such as this week's would have caused a groan of misery from the U.S. farm belt, forced to pay higher prices for tractor fuel and fertilizer. Today, farmers are far more likely to cheer.
The farm sector's response to a surge in fuel costs has inverted for two important reasons: the rise of biofuels now means more corn and soybeans are likely to be drawn into the fuel pool; and the disconnect between natural gas and crude prices means fertilizer costs are not being dragged higher.
While neither trend is new, it's been put in sharp relief this week as U.S. oil prices surged to $100 for the first time since 2008 amid Middle East unrest. U.S. crude futures rose toward $100 per barrel again on Friday before easing.
On balance, the surge is far more likely to lend support for a near-record corn sowing season than it is to crimp farm income through higher costs for crop chemicals and transportation charges, analysts say.
"All indications are that the only thing that will keep a farmer from planting this year is if he drops dead walking out the door ... and then somebody else will grab his tractor and plant for him," said Missouri corn farmer Richard Oswald.
"There is every incentive in the world to plant. High oil prices are just one more incentive."
In addition, the surge has come long after most farmers have tilled their fields and locked in fertilizer purchases, leaving them better prepared than in 2007-2008, according to National Corn Growers Association CEO Rick Tolman.
"When we saw this (run-up) a couple years ago, it really raised input prices and squeezed the margin," said Tolman.
This year, input costs may pinch, but they won't puncture the upbeat mood. Grain futures have fallen sharply this week as risk-averse speculators flee the market, but most remain within sight of their records struck in 2008.
Profits this year look to be strong. The U.S. Department of Agriculture has forecast farm income to be $94.7 billion in 2011, up 19.8 percent from the 2010 forecast and the second-highest inflation-adjusted value in the past 35 years.
LIMITED IMPACT
To be sure, higher oil prices raise transportation costs for farmers just like everyone else.
However, fuel to run farm machinery, trucks and other equipment accounts for only a tiny portion of overall inputs -- about 3 percent of the total cost of growing corn on an acre of land in central Illinois this year, said Gary Schnitkey, professor of farm management at University of Illinois.
That's more than offset by the bullish impact on grain prices.
"I think crude oil probably causes (crop) commodity prices to go up more than costs," Schnitkey said.
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