AGRICULTURAL INDUSTRIES COPING WITH INCREASED COSTS By Scott Brown, PhD Today’s headlines are dominated by the increased costs facing all parts of the world economy. The sod industry is no exception, with significantly higher and sometimes record prices for many of the inputs used in the industry. In these times of skyrocketing input prices, it is imperative for all farmers to better know and manage their costs, and the sod production industry is no different. Although the last few years have been a period of growth, increased demand, and better returns for the industry, bottom lines have become increasingly squeezed in recent months. One well-documented, but rather un-widely publicized tool for tracking selling prices is the Producer Price Index (PPI) reported by the U.S. Bureau of Labor Statistics (https://www.bls.gov/ppi/). The Producer Price Index (PPI) is a family of indexes that measures the average change over time in selling prices received by domestic producers of goods and services. PPIs measure price change from the perspective of the seller. This contrasts with other measures, such as the Consumer Price Index (CPI), that measure price change from the purchaser's perspective.
Chart 1: Final Demand Producer Price Index
percent. Over the year, prices for final demand services increased 7.8 percent in February. Within the final demand services category, prices for final demand transportation and warehousing services increased 16.6 percent, while final demand trade services were up 14.4 precent. What’s the common trend? They’ve all gone up. Another benchmark is the U.S. Department of Agriculture’s National Agriculture Statistics Service (USDA-NASS). USDA-NASS conducts five surveys every year in midMarch to collect information from agribusinesses on the prices producers paid for recent sales of approximately 450 key agricultural inputs. The prices paid surveys collect information on agricultural chemicals (including fertilizer), farm machinery, feeds, fuels, and retail seed. USDA data shows the marked increase in costs facing agriculture in 2022 (Figure 1). The total fertilizer index is nearly 40 percent above a year ago, and components of the overall fertilizer index, like nitrogen, have more than doubled. Labor costs continue their upward march, with labor availability being an additional issue. Diesel fuel has increased from $3.15 per gallon in April 2021 to $5.20 per gallon in April 2022, with the war in Ukraine responsible for about $1.00 per gallon of the increase. Of course, most producers don’t have to look at a survey to know their costs have increased when they can just look at their bottom line. TPI has heard from members all over the world who have shared their experiences locally. One sod producer states “We have a lot of line items on our spreadsheet, but only six of them make up 90 percent of our expenses: Payroll, Fertilizer, Fuel, Chemicals, Rent, and Supplies (such as pallets and netting). Keep in mind that capitol items like depreciation, taxes, and some others are not in this variable list. The big changers for us are fertilizer up 96 percent, fuel up 78 percent, and pallets and netting up 60 percent. When I calculate the cost changes, (or the expected changes) and compare them with a three-year average of those same expenses I estimate an 18 percent increase in my expenses for 2022.”
As reported in Chart 1, producer prices for final demand increased 10.0 percent during the 12 months ending February 2022. Prices for final demand goods increased 14.4 percent over the year ending February 2022. Final demand energy prices increased 33.8 percent, while final demand food prices were up 13.7 percent. Final demand prices for goods less foods and energy increased 9.6 14
The uncertainty of when inputs will arrive and the extreme volatility in input prices have also made planning much more difficult. Supply bottlenecks that appeared with the Covid-19 outbreak have been persistent, with relief not expected soon for inputs shipped from overseas. Input cost and availability issues have provided multiple reasons to keep a sharp pencil at hand when examing your production costs. TPI Turf News May/June 2022
