Rising energy costs hit farmers, ranchers hard

By Steve Miller, Journal staff | Tuesday, January 29, 2008

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When Travis Madsen fires up his Case tractor to plow his New Underwood farm ground, he burns 16 to 24 gallons of diesel fuel -each hour.

Last fall, he ran five tractors to plant his wheat crop. Each tractor burned about 25 gallons an hour.

Next summer, when he harvests that wheat, his four combines and his trucks together will burn 2,000  gallons of fuel - a day.

High energy costs hurt everyone. But the scale of pain is bigger on the farm or ranch.

In addition to higher operating costs, farm and ranch families face greater personal fuel costs just to get back and forth to town.

Most weekday mornings, Todd Trask watches his wife, Samra, and their 14-year-old son, Tyler, climb into one vehicle at their ranch north of Wasta and head for Wall 20 miles away. Later most mornings, daughters Jaymie and Torrie, who have different school and sports schedules, climb into another vehicle to drive to Wall.

The Trask family routinely puts 60,000 to 70,000 miles a year on their personal vehicles.

Like thousands of other ag families, the Trasks and the Madsens are tightening their belts, sending the effects of higher energy prices rippling through the rest of the West River economy.

Rising costs

The costs for fuel and other energy-related expenses are offsetting good grain and cattle prices for farmers and ranchers, particularly those who live long distances from nearby towns, according to Boyd Waara, vice president of First National Bank of Philip, and John Johnson, president of First Western Bank in Sturgis.

Waara said the high grain prices may be temporarily masking higher fuel costs. The full pain of the high fuel costs likely will be felt later when grain prices drop, he said.

"What we see on what's happened in the past year, a lot of people who normally would think they've come in with a pretty decent year have discovered they didn't have that good a year," he said.

Johnson has a similar take. "Right now, we're seeing all-time highs on grains, but the inputs to go into that production next year also will be at all-time highs," he said.

Madsen farms more than 10,000 acres, trying to take advantage of economies of scale.

That means his risk is big. Madsen spent $110,000 on fuel last year.

Madsen said the cost of fertilizer, also dependent upon petroleum, has doubled. Rents and taxes also continue to rise.

"Our net is not getting any better," Madsen said.

Average net farm income for South Dakota's 31,300 farmers in 2006 was $28,400, according to the National Agricultural Statistics Service, down from an average of $58,000 in 2005.

Drought kept crop yields down in 2006 and withered pastures, requiring ranchers to buy more hay.

Net incomes, of course, vary widely according to the size and the success of the farm or ranch.

Delivery bills

Besides higher costs for fuel to run their tractors, pickups and combines, farmers and ranchers are facing higher delivery charges on everything they buy, including fuel, livestock feed, fertilizer and equipment parts.

"It's just a cumulative effect," Waara said.

Trask, who ranches along the Cheyenne River just northeast of Wasta, recently got a $2,300 bill to have the diesel and gas tanks on his ranch filled. He has to get those tanks filled about every other month.

Despite the tax break for farm fuel, Trask paid $3.07 a gallon for diesel and $3.08 for gasoline this month. Part of the cost now is delivery. A couple years ago, he was paying less than $2 a gallon for diesel.

Madsen said he used to get chemicals delivered free. Now he pays a delivery fee.

Lester Pearson, manager of Dakota Mill in Philip, said truckers are tacking on fuel surcharges ranging between 15 percent and 30 percent. That cost gets passed along to the farmer and rancher.

Dakota Mill is now charging a $15 surcharge to deliver a truck load of feed, driving that cost up to $95 for a trip of up to 22 miles. Longer trips cost more.

Pearson said wheat prices have risen recently to record highs, running $9 to $10 per bushel on the futures market. "Five-dollar wheat would have been a good price 10 months ago," Pearson said.

"Now, $5 wheat would ruin some people."

Farmers have higher gross fuel costs than ranchers, but ranchers are affected, too.

In many of the past eight drought years, ranchers like Trask have not had a hay crop. So, to feed their cattle in the winter, they have had to buy hay from elsewhere, and the delivery costs have driven prices to nearly double the $40 to $50 a ton they paid in the past.

Trask said by shopping carefully, he has been able to buy hay for $85 a ton.

Like other businesses, farmers and ranchers have few options but to pay the cost of fuel to operate, although they are finding some ways to cut energy costs.

"Here, fuel is our lifeline," Trask said. "It's one of those things we have to have."

Because the costs of operating are rising as fast as the energy prices, farmers and ranchers are forced to borrow more money to operate. That means more interest to pay.

Country living cost

In addition to the costs of operating, ag people face huge costs for just living in the country, mainly the cost of fuel to drive to school in town for their kids.

And, if either the husband or wife works in town, the cost of commuting has gone up.

The Trasks usually have at least two vehicles driving the 20 miles to Wall each day. Samra teaches at the school. Tyler, Jaymie and Torrie are all involved in sports, so rather than come home after school and then drive back to Wall for a game or a late practice, they stay in town, hanging out at the Corner Pantry.

"A lot of days, we leave home at 7 and don't get home until 9," Samra Trask said.

Most farm and ranch folks aren't buying small cars for their kids to save on gas, Waara said.

"I think mainly, when you put your kids on the road and they're driving a lot of miles every day, you don't want them in the smallest car on the road, and you don't want them driving something that's not pretty sturdy," Waara said. "Those lighter cars don't hold up as well with the kind of miles they put on."

Madsen and his wife, Nena, have three kids. They drive Dalton, 7, to school in New Underwood, eight miles away, and Emma, 4, to pre-school in Rapid City.

David Hersrud of Hersrud's in Sturgis said he isn't seeing many ranch families buying small cars. "Washboard gravel roads are tough on smaller vehicles," he said.

"If you're going to be driving 80 to 100 miles into town, you're going to want something that has some degree of comfort," Hersrud said. "Transportation wise, rural folks are between a rock and a hard spot."

Energy outlook

High energy prices are here to stay, according to Marty Beutler, an economist with South Dakota State University's West River Ag Center in Rapid City.

He said demand is driven now by emerging economies in China, India and other countries. More energy is needed for increased manufacturing in those countries and to feed the wants of the growing middle classes there, he said.

"Traditionally, with a slowdown in the economy in the United States, that tends to drive energy prices down," Beutler said.

"But with these emerging economies, that won't be the case."

That conclusion matches projections by the U.S. Energy Information Administration, which foresee a spike in average oil prices this year at $87 a barrel and a slight drop next year to about $81 a barrel.

Petroleum and natural gas prices are expected to rise steadily through 2030, according to the government projections.

 

Tightening belts

That leaves farm and ranch families to do what they can to save energy, Beutler said.

"They tighten their belt, they do without, they economize, they double up where they can," Beutler said.

That belt tightening, in turn, is being felt by retail stores, restaurants and other businesses across South Dakota, according to Shawn Lyons, executive director of the South Dakota Retailers Association.

Lyons had no figures, but he said, "There's no question that higher fuel costs are having an  effect."

He said the impact is hurting retail businesses in small towns such as Philip and larger cities such as Rapid City.

It's difficult to draw conclusions from sales-tax figures in some cities that have major         effects from non-ag sectors of the economy.

Sturgis, for example, showed a 1.8 percent growth in taxable sales in 2007 over the previous year, according to state Revenue Department figures. Rapid City had a 4.5 percent growth.

And even some rural towns showed sales-tax growth. Bison was up 4.5 percent, Faith was up 1.7 percent, and McIntosh was up 9.6 percent.

Statewide, taxable sales were up 6 percent in 2007.

But taxable sales in Philip dropped 8 percent last year. White River had a 14 percent drop, Buffalo dropped 2.5 percent, and Timber Lake dropped 7.3 percent.

Higher energy costs are adding to the woes already facing rural folks and retail businesses because of drought, Lyons said.

"The lumber yard, the implement dealer, the restaurant in the small towns are just as impacted as the electronics store in Rapid City."

Johnson, of First Western Bank in Sturgis, said sales of large-ticket items such as vehicles, kitchen appliances and television sets all have been slow over the past five to six months.

"We have to assume that some of that is due to less spendable income caused by the price of oil."

Johnson said residents of rural towns, too, are seeing higher prices for groceries, clothing and other goods as well as for propane and electricity.

"I think everybody is affected by it," he said.

But for businesses like farms and ranches that depend upon fuel to operate, the size of the problem can seem daunting.

Even with some fuel-saving measures, the Trask family is spending $12,000 to $15,000 a year on fuel to operate their ranch.

"It sure put a pinch on us on the budget," Todd Trask said. "It's just kind of been a lesson in economics for us."

Contact Steve Miller at 394-8417 or steve.miller@rapidcityjournal.com