The Impact of Higher Diesel Fuel Prices on Cost of Field Operations

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1 The Impact of Higher Diesel Fuel Prices on Cost of Field Operations By Craig L. Dobbins Increases in energy prices have a direct impact on the cost of performing field operations. While no one knows what will happen in the future, the tight supply and demand for fuels indicates that we are likely to see continued high diesel fuel prices and wide price fluctuations. Fuel prices are a relatively small component of the cost of a field operation. Estimating the impact of the increased diesel price on the total cost of field operations requires an estimate of fuel usage and several other assumptions or estimates, described below. Estimating Per Acre Fuel Usage Tractor or engine size and equipment size are two important factors in determining fuel use and thus the cost per acre for field operations. The gallons of fuel used per hour can be estimated by multiplying the PTO horsepower of the tractor by If the PTO horsepower is not known, it can be estimated by multiplying engine horsepower by Fuel requirements per acre can then be determined by dividing the fuel required per hour by the number of acres covered by the operation in an hour. The area covered will be influenced by the implement size, field size, and field shape. As equipment size increases a larger tractor will be needed and more fuel will be used per hour. However, because of the larger implement, more acres can be covered each hour. The per acre fuel requirement for selected field operations is listed in the Diesel Fuel Usage column of Table 1. Estimating Per Acre Fuel Usage Diesel usage in gallon per hour = PTO horsepower * Diesel usage gallon per acre = gallon per hour acres covered per hour Fuel comprises a larger proportion of equipment expense for harvesting equipment compared to planting, spraying, and most tillage operations. ( courtesy Farmphoto.com) What Percent of is Fuel & Lubricant? To assess the impact that rising fuel cost has on the total cost of field operations, it is important to establish the proportion of the total cost represented by fuel. One method of estimating the total cost for a field operation is make assumptions about the purchase cost of machinery, its useful life, acres covered, etc. and make the necessary calculations. An alternative approach is to use the average custom rate to represent the total cost of field operations. This is the approach used in this paper. The 2004 average custom rate is used as an estimate of the per acre total cost and is reported in Table 1. The cost of providing custom services includes the labor cost for the operator; operating costs fuel, lubrication, and repairs for power units and implements; and overhead costs depreciation, interest on the investment in machinery, property taxes, insurance, and housing. To estimate the fuel cost in each custom rate, the fuel usage is multiplied by the fuel price. It is commonly assumed that lubrication costs are 15% of the fuel cost. Adding these two items provides a total per acre fuel and lubrication cost. The diesel fuel price of $1.10 per gallon was used for Combining the diesel fuel used per acre, the 2004 price of diesel fuel, and an additional 15% for lubrication cost results in the fuel and lubricant costs reported in Table 1. The fuel and lubricant cost is then divided by the total cost (the average custom rate) to obtain the percentage of the total represented by fuel and lubricant costs. As an example, the fuel cost of chisel plowing is estimated to account for only 6.5% of the total cost. The costs associated with operator labor, repairs, and owning the equipment account for 93.5% of the total. Top Farmer Crop Workshop Newsletter, June

2 Table 1. diesel fuel usage and fuel and lubricant cost as percentage of total cost for selected field operations. Diesel Fuel Usage (gal/acre) Average 2004 Custom Rate Fuel & Lube Cost with Diesel Price $1.10/gal Fuel & Lube of Total Cost Land Preparation Shredding corn stalks 0.74 $7.08 $ % Moldboard plowing 1.29 $13.03 $ % Chisel plowing 0.60 $11.78 $ % Disking 0.49 $8.38 $ % Field cultivating 0.32 $8.33 $ % Cultivating corn or soybeans 0.44 $6.98 $ % Application of Fertilizer and Chemicals: Excluding Materials Applying anhydrous ammonia pre-plant or side dress 0.63 $7.45 $ % Herbicide & Insecticide Spraying Tractor mounted or pulled 0.10 $4.81 $ % Highboy 0.11 $5.44 $ % Planting: Excluding Cost of Seed and Fertilizer Type of Planting Conventional till Corn, 30-inch rows 0.34 $12.56 $ % Soybeans, 15-inch rows 0.34 $13.02 $ % Soybeans, 30-inch rows 0.34 $11.85 $ % Soybeans, Drilled 0.61 $13.23 $ % Small Grains, Drilled 0.61 $12.41 $ % No-Till Corn, 30-inch rows a 0.53 $14.02 $ % Soybeans, 15-inch rows 0.53 $14.00 $ % Soybeans, 30-inch rows 0.53 $13.25 $ % Soybeans, Drilled 0.81 $13.45 $ % Small Grains, Drilled 0.81 $13.10 $ % Soybean and Small Grain Harvesting Operation Combine soybeans 2.02 $21.76 $ % Combine small grains 2.02 $21.25 $ % Corn Harvesting Combine, Yield at 135 bu 1.93 $22.29 $ % Combine, Yield at 165 bu per acre b 2.40 $22.92 $ % Hay and Straw Harvesting Operation Mowing with conditioning 0.40 $11.12 $ % Raking 0.50 $5.17 $ % Tedding 0.50 $4.71 $ % (gal./bale) ($/bale) ($/bale) ($/bale) Small lb. bale 0.01 $0.50 $ % Large over 1,000 lb bale 0.66 $8.69 $ % Baling Round Bales with Twine or Wire 1,000 lb. bale 0.39 $8.63 $ % a Used the Minnesota estimate for Min-til planter. b Fuel use was increased to reflect the greater volume of material being handled during harvest. c To estimate fuel usage per bale it was assumed that hay would be harvested four times each year with a total yield of four ton. Bale weight is 50 pounds, 1,500 pounds, and 1,000 pounds for small square, large square, and large round bales, respectively. Top Farmer Crop Workshop Newsletter, June

3 For many tillage and planting operations, fuel and lubricant costs account for 3% to 8% of the total estimated cost. Two notable exceptions to this range are moldboard plowing and anhydrous application - both with larger percentages. Fuel and lubricant cost estimates for harvesting operations range from about 11.0% to 13.5% of the total cost. These estimates Estimating Per Acre Fuel & Lubricant Cost Diesel fuel cost per acre = diesel usage gallon per acre * diesel price per gal. Fuel & Lube cost per acre = Diesel fuel cost per acre * 1.15 indicate that fuel and lubricant costs are a small part of tillage and planting operation costs. This means that the big increase in fuel prices will have a much smaller impact on the total cost. They also indicate that harvesting operations are more sensitive to fuel prices than tillage and planting operations. Adjusting Costs for Higher Fuel Prices To illustrate how rising fuel prices influence the cost of field operations, the data in Table 1 were used to calculate the cost of the field operations under different fuel prices. To arrive at these estimates, the fuel and lubricant cost with diesel fuel at $1.10 per gallon was subtracted from the average custom rate. The remaining costs represent the per acre amount of all costs except fuel and lubricant labor, repairs, and overhead costs. Fuel and lubricant costs were then calculated at the increased diesel fuel price and added to these other costs to give a new total cost estimate. The diesel fuel prices used were $2.00, $2.50, $3.00 and $3.50 per gallon. The additional 15% was included for the lubricant costs. The new estimated total cost and the percentage change is presented in Table 2. While fuel prices may have increased by 250% or more, the percentage change in the total per acre cost of a field operation is much less. This is because the fuel cost associated with a field operation is small relative to labor, repairs, and overhead costs. The increase in per acre cost caused by higher diesel fuel prices will be the greatest for those operations in which fuel represents a higher proportion of the total costs. For example, increasing fuel prices from $1.10 to $2.00 per gallon increases the cost of moldboard plowing by 10.7% but spraying by only 2.0%. The adjustments described here are comparable to the fuel surcharges that have found their way into the prices that many businesses now use. One way to estimate the fuel surcharge is to multiply the gallons of fuel used per acre by the increase in the price of diesel fuel. The custom rate with a fuel surcharge would be the rate before the increase in price plus the fuel surcharge. As an example, consider the diesel price increase from $1.10 to $2.00 per gallon and chisel plowing. This is an increase of $0.90 per gallon in the price of diesel fuel. Multiplying this price increase by the estimated fuel use of 0.6 gallons provides an estimated cost increase of $0.54. Adding this to the original custom rate of $11.78 provides an adjusted rate of $12.32 per acre. If lubrication costs are to be included in the surcharge, multiply the increase in fuel price by 1.15 before multiplying by the fuel usage. Again using the chisel plowing example, the added cost would be $0.62 ($0.90 price increase * 1.15 * 0.60 gal). Adding this to the original value provides an adjusted value of $ These adjustments reflect the cost increase associated with a higher fuel price, but they do not reflect changes in the cost of labor or machinery. USDA s index of prices paid for farm machinery indicates that machinery prices have increased nearly 7% since The increase in the price of machinery increases the cost of machinery ownership and places additional upward pressure on custom rates. Conclusions The estimates here provide some guidance in determining how higher fuel prices influence the cost of field operations. They also provide some guidance for adjusting custom rates to reflect higher fuel prices. But, custom rates also need to account for higher machinery prices. Depending on the particular activity, the adjustments associated with these higher prices can vary widely. Custom rates can be influenced by the number of businesses providing such services, the field size and shape, the skill of the operator, and the timeliness of operation. In many cases custom work is done on only a few acres as a way to supplement income or as a way to assist a neighbor. In such situations, the operator may not feel compelled to recover all costs. Top Farmer Crop Workshop Newsletter, June

4 Table 2. Total estimated cost and percentage change for various diesel fuel prices for selected field operations. Average 2004 Custom Rate Diesel Price - $2.00/gal. Diesel Price - $2.50/gal. Diesel Price - $3.00/gal. Diesel Price - $3.50/gal. Land Preparation Shredding corn stalks $7.08 $ % $ % $ % $ % Moldboard plowing $13.03 $ % $ % $ % $ % Chisel plowing $11.78 $ % $ % $ % $ % Disking $8.38 $ % $ % $ % $ % Field cultivating $8.33 $ % $ % $ % $ % Cultivating corn or soybeans $6.98 $ % $ % $ % $ % Application of Fertilizer and Chemicals: Excluding Materials Applying anhydrous ammonia preplant or side dress $7.45 $ % $ % $ % $ % Herbicide & Insecticide Spraying Tractor mounted or pulled $4.81 $ % $ % $ % $ % Highboy $5.44 $ % $ % $ % $ % Planting: Excluding Cost of Seed and Fertilizer Type of Planting Conventional till Corn, 30-inch rows $12.56 $ % $ % $ % $ % Soybeans, 15-inch rows $13.02 $ % $ % $ % $ % Soybeans, 30-inch rows $11.85 $ % $ % $ % $ % Soybeans, Drilled $13.23 $ % $ % $ % $ % Small Grains, Drilled $12.41 $ % $ % $ % $ % No-Till Corn, 30-inch rows $14.02 $ % $ % $ % $ % Soybeans, 15-inch rows $14.00 $ % $ % $ % $ % Soybeans, 30-inch rows $13.25 $ % $ % $ % $ % Soybeans, Drilled $13.45 $ % $ % $ % $ % Small Grains, Drilled $13.10 $ % $ % $ % $ % Soybean and Small Grain Harvesting Operation Combine soybeans $21.76 $ % $ % $ % $ % Combine small grains $21.25 $ % $ % $ % $ % Corn Harvesting Combine, Yield at 135 bu $22.29 $ % $ % $ % $ % Combine, Yield at 165 bu per acre $22.92 $ % $ % $ % $ % Hay and Straw Harvesting Operation Mowing with conditioning $11.12 $ % $ % $ % $ % Raking $5.17 $ % $ % $ % $ % Tedding $4.71 $ % $ % $ % $ % Baling Rectangular Bales with Twine or Wire ($/bale) ($/bale) ($/bale) ($/bale) ($/bale) ($/bale) ($/bale) ($/bale) ($/bale) Small lb. bale $0.50 $ % $ % $ % $ % Large over 1,000 lb bale $8.69 $ % $ % $ % $ % Baling Round Bales with Twine or Wire 1,000 lb. bale $8.63 $ % $ % $ % $ % Top Farmer Crop Workshop Newsletter, June

5 For More Information The estimated per acre cost of various types of machinery operations can be found in William Lazarus and Roger Selly, Farm Machinery Economic Cost Estimates for Late 2005, University of Minnesota Extension Service, August 26, 2005: A machinery cost calculator will help people develop their own cost estimates based on their own fuel, labor, and machinery prices. A calculator from the Minnesota can be found at: The University of Illinois also provides a machinery cost calculator. This cost calculator is one of the FAST tools available on the FARMDOC web site. This calculator can be found at: It is the Machinery Economics item. A survey of 2006 custom rates in Iowa is available at: The survey of 2004 custom rates in Indiana is available at: Alan Miller, Bruce Erickson, and Chris Hurt provided many helpful comments in the development of this paper. Top Farmer Crop Workshop Newsletter, June