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**INCREASING PRODUCTION COSTS**

***Background***

USDA forecasts that total farm production expenses rose to \$221 billion
in 2005, up 5 percent from 2004 and 12.6 percent from 2001. Higher costs
from purchased inputs such as fuel, fertilizers, and pesticides explain
much of the rise in total farm production expenses. The input prices
paid for fuel and fertilizer in 2005 spiked 61.5 percent and have
tripled in 3 years. These increases are particularly significant to
producers of program crops such as corn and wheat with relatively large
energy usages.

Prices paid and received by farmers have generally outpaced general
inflation measures in the U.S. economy since enactment of the 2002 farm
bill. Annual indexes compiled by the National Agricultural Statistics
Service (NASS) show that prices paid by farmers for all items rose 12.9
percent from 2002 to 2005. This was greater than the finished goods
producer price index (PPI), which rose 12.1 percent over the same
period.

The effect of price increases on profitability varies by enterprise.
Productivity increases for some commodities may offset rises in
production costs.

Prices Paid and Received by Farmers

  ------------------------ --------------- --------------- ---------------
  Index                    2002            2005            Index change

                           Index value                     Percent
                           (1990--92 =                     
                           100)                            

                                                           

  Prices paid by farmers                                   

  All farms1/              124             140             12.9

  Supplies /2              132             146             10.6

  Fertilizer /2            109             176             61.5

  Farm machinery /2        149             172             15.4

  Fuel /2                  128             256             200.0

  Crop farms /2            128             147             14.8

  Livestock farms /2       122             140             14.8

                                                           

  Prices received by                                       
  farmers                                                  

  All farms 1/             98              116             18.4

  Crop farms 2/            101             101             0.0

  Livestock farms 2/       95              121             27.4

                                                           
  ------------------------ --------------- --------------- ---------------

1/ Annual averages. 2/ 4^th^ quarter averages.

Source: USDA NASS

***General Opinions Expressed***

-   Many participants expressed concern over rising costs of fuel,
    fertilizer, and other energy-related inputs. They noted these cost
    increases were having a negative effect on farm profitability and on
    the competitiveness of U.S. producers in world markets.

-   Some offered suggestions on how higher energy and energy-related
    input costs could be minimized through various incentives or
    programs (typically through the tax code) to increase renewable or
    alternative energy sources, achieve greater energy efficiency in
    production systems, or bolster domestically produced input use.

-   Numerous participants expressed the concern that overall farm
    production costs were rising faster than the returns to farm
    production, making it difficult for existing farms to continue their
    operation.

-   Some participants suggested that farm program price support levels
    and benefits should be adjusted to reflect increasing production
    costs; others suggested that farm programs should be aimed at
    reducing or controlling the costs of production.

-   Some indicated that the cost of controlling invasive species was
    burdensome and that more assistance was needed to help mitigate
    these costs.

-   Others noted that growing regulatory costs were making U.S.
    producers less competitive and that relief from these burdens or
    monetary compensation was needed.

-   Higher input production costs, rising land and machinery costs, and
    greater regulatory costs were cited as deterring entry into farming.

-   Participants pointed out that farm programs, such as the CRP and
    direct commodity payments, increase production costs through higher
    land rental or purchase prices.

    ***Detailed Suggestions Expressed***

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-   The U.S. fertilizer industry, which supplied 85 percent of domestic
    needs through the 1990s, now relies on imports for 45 percent of its
    supplies. The Department of Energy needs to use authority granted to
    it in the recently enacted energy bill to develop rules that provide
    incentives for construction of natural gasification facilities.

-   Incentives need to be given to encourage companies to increase
    domestic production of fertilizer so that U.S. farmers are not
    forced to pay for the cost of shipping (from exporting countries).

-   Given high costs of fuel and fertilizer, profit margins could be
    increased by a push on bio-products, including biodiesel.

-   A fuel tax credit for commodity transportation to the market needs
    to be developed. The tax break on farm fuels should be extended to
    the trucks and vehicles used on the farm that go on our roadways.

-   Increase the ability of farmers to compete by reducing energy needs
    and costs through energy efficiency programs and renewable energy
    systems.

-   Look at ways to use solar energy to reduce costs for farmers.

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-   The new farm bill needs a component to alleviate the loss of
    profitability that is being caused by high fuel costs. The farm bill
    should provide a refund on a certain percentage of fuel cost or some
    type of a discount when fuel prices pass a certain level, which
    could be based on an inflation index based on global cost of
    petroleum and steel.

-   Provide a (tax) credit to farmers because of high chemical costs.

-   Crop prices should be increased as the price of oil increases.

-   The cost of nitrogen has doubled each year for the past 2 years and
    the price of corn is the same as it was during World War II.
    Subsidies need to take into consideration inflation of production
    costs and living expenses.

-   Establish milk prices such that they will cover the costs of
    production.

-   Create a sliding-scale tax schedule where small and rural farmers
    pay no tax on income up to a certain threshold, such as \$100,000.

-   To assure that farmers (and not landowners) receive the full benefit
    of commodity payments, direct payments should only be redeemable for
    agricultural inputs.

-   To be competitive, a committee should be in place to monitor our
    input costs versus those in other countries.

-   Establish price support levels that reflect the cost of production
    plus a fair profit to encourage farmers to stay in business.

-   Enacting effective payment limits on commodity programs would hinder
    the ability of larger farms to drive up land rental and sales values
    and would hence lower production costs for beginning farmers.

-   Increase the Federal share of the crop insurance premium to reduce
    costs.

-   In Alabama, farmers have a growing problem with non-native invasive
    plants. The cost of spraying to keep these plants under control is
    nearly prohibitive. More dollars are needed for cost-share programs
    for invasive plant eradication.

-   Provide subsidies to farmers who agree to cut back on fertilizer
    use. This will cut farmers' costs, improve water quality, and
    maintain farm income.

-   Farm policy should only include regulations that are science-based,
    affordable, effective, and applicable.

-   Review Government regulations and eliminate those that increase
    costs for farmers.

-   The United States should have a committee that continuously monitors
    our costs versus those of other countries. Then farmers should be
    compensated accordingly.