Input Price Indices

Figure 1 shows the prices received index for all farm products and the prices paid index for all farm inputs from 1970 to 2005. Prices received by farmers in the U.S. increased almost threefold, from an index value of 60 in 1970 to 164 in 2005 (the indexes have a common base year where 1977=100). The prices received index for dairy products was on par with the all products index, rising from a value of 59 in 1970 to 155 in 2005. Such increases in prices received seem to paint a good picture for U.S. agriculture; however, comparing the prices received index to the prices paid index tells a different story. The index of prices farmers paid for their inputs more than quadrupled, increasing from a value of 56 in 1970 to 260 in 2005. Prices received by farmers were higher than those paid by farmers from 1970 until 1980, after which prices paid surpassed prices received. Since 1980, prices paid and prices received indexes have continued to diverge at a steady rate. In order for farmers to continue to operate, cost saving technologies need to be adopted to improve productivity allowing farmer to produce more using fewer inputs.

Analyzing different farm input categories confirms the substantial general increases in input prices, and also sheds light on which farm input categories are responsible for the general rise in farm input prices. Consider the indexes of general farm business inputs required of most all farms, the prices paid for farm buildings, farm services, interest and taxes (Figure 2). These indexes represent changes in the prices farmers paid for the farm business in general and for the annual services provided by farm buildings. The price indexes for these related inputs all rose by similar amounts, with the exception of interest rates during the early 1980s. For example, prices paid for buildings and farm services increased from a value of about around 50 in 1970 to around 200 in 2005. Increases for building materials, farm services and interest were all between 320 and 350 percent between 1970 and 2005. Taxes increased by 200 percent during the same period. This category of inputs increased less than the general prices paid index.

 

Crop production inputs include seeds, fertilizers and agricultural chemicals. Prices paid for agricultural chemicals increased by 178 percent since 1970 (Figure 3) and during the past 10 years, agricultural chemical prices have increased by just five percent. These small price changes relative to other production inputs explain, in part, substitutions of chemicals for farm labor and machinery inputs. During the same period, seed prices increased by 520 percent and fertilizer prices increased by 368 percent. However, price increases represent technical changes embedded in these inputs. Genetic improvements in seeds help to push crop yeilds and higher quality seeds cost more. During the past decade, seeds and fertilizers have grown by 53 and 36 percent, respectively. These increases are greater than those of general farm buildings and services (Figure 2).

 

Price changes for animal production inputs are represented by feed, and livestock and poultry prices paid indexes (Figure 4). Livestock and poultry prices paid increased at a slightly higher rate than the general prices paid index, rising from around 75 in 1970 to nearly 300 in 2005 (an increase of 278 percent). The feed index saw a much lower increase from around 50 in 1970 to less than 150 in 2005, an increase of 167 percent. Of course, these are national price indexes. Regional differences in prices paid for feed depend also on transportation costs. In the past decade, while U.S. feed prices increased at just 14 percent, prices paid for livestock and poultry rose by just over 70 percent.

 

Most all farms use a substantial amount of machinery on the farm, and this category of inputs saw both rapid price increases (fuels and machinery prices) and some modest increases (autos and trucks, and farm supplies and repairs). As we might all expect, the input category that saw the greatest rise in prices paid, and is responsible for a good part of the rise in the prices paid index for all inputs, is fuels (Figure 5). Fuel prices paid by farmers rose by nearly 850 percent between 1970 and 2005. During the past decade, fuel prices increased by 153 percent, and in the last three years, by about 100 percent. Farm machinery and equipment prices also increased at a rate greater than other inputs, by 630 percent since 1970 and 44 percent in the last 10 years. The prices paid index for autos and trucks, and farm supplies and repairs climbed from about 50 to around 250, staying closer to the all input average.

The prices paid index for farm wage rates (see Figure 6) also rose faster than the general prices paid index for all farm inputs. The index of U.S. farm wage rates rose from a value of 57 in 1970 to 321 in 2005, an increase of 440 percent. In the past decade, U.S. farm wages have increased by about 45 percent on average.

While changes in the quantities of inputs used play an important role in determining the impacts of price changes on profitability, the trends in farm input prices illustrate the need for farmers to continue to seek new technologies that save relatively expensive inputs, or indeed, all inputs. Continual adjustments in input mix and adoption of technologies are crucial to keeping farms profitable.

Source: Figures were constructed using data from the National Agricultural Statistics Service.