When Kidder County farmer Steve Koester looks out on his livestock and crops, he sees acres and acres of worry.

Koester, 41, said a drought has him concerned about his crops and about grazing lands for his cattle. And even if the drought lets up, Koester said he worries that this year's wildly fluctuating crop and cattle markets could move away from him so fast that he won't be able to recoup the record amounts he spent on fuel and fertilizer.

"It's unprecedented," said Koester, who's been farming for 20 years. "This is something the agriculture industry has never seen before."

On the opposite side of the Missouri River, Grant County farmer Chad Sketteberg is facing the same concerns.

He's kicking himself for not signing forward contracts to mitigate a sharp rise in his fuel and fertilizer costs. At the same time, Sketteberg, 39, is keeping one eye on the drought and another on the same wild swings in the wheat and cattle markets that also hold his financial fate.

"It's making all your decisions a big gamble," he said.

Across Western North Dakota, this triple whammy of high costs, commodity markets and a drought are turning 2008 into a balancing act.

On the one hand, the wildly fluctuating crop markets are still quite high by historical standards, and a new farm bill offers greater immediate protection if disaster strikes. On the other hand, fuel and fertilizer costs have risen even faster, and high crop prices of are little use to farmers who have their crops wiped out by a drought.

Already this year, Gov. John Hoeven declared an early stage agricultural emergency, opening up $1 million in state grants for farmers who need help buying equipment to get water to their livestock.

According to the U.S. drought monitor, a swath of North Dakota from the Canadian border to western Morton County is classified as in "extreme" drought - a condition that only exists in two other parts of the country. Except for the far southeastern corner, all of North Dakota is classified as at least "abnormally dry."

Byron Richard, president of the North Dakota Grain Growers Association, said he's seen many operations already affected by this year's drought.

If the drought persists, and results in federal disaster declarations, farmers should get payments quicker than those received from 2005 and 2006 disasters. That's because the new farm bill, which became law this month, includes permanent disaster aid.

Agriculture Commissioner Roger Johnson said that means the money is "on tap" and waiting for an emergency.

"As it turns out, that's likely the most important part of this farm bill for North Dakota farmers," he said.

But even with this and other price support protections afforded by the bill, farmers still face market risk. And naturally, the more the market moves, the more risk they face.

The markets are now moving faster than ever as farmers and grain buyers are joined by hedge funds and other speculators who have no interest in ever seeing a rail car of grain show up at their front door.

According to the Commodity Futures Trading Commission, which regulates these markets, monthly trading volume has increased 125 percent since 2005 for wheat, 85 percent for corn and 56 percent for soybeans.

Koester sold some of his crop via futures contracts last winter, but said the market's unpredictability makes it harder than ever before to wring this price risk out of his operation.

"There really isn't enough risk management in this environment," said Koester. "It's just like gambling."

Sketteberg said he would like to see regulators calm down the commodity markets by barring all the recent speculators who have nothing to do with the agriculture industry.

But while the final prices of crops fluctuate, there's been a steady uptrend in both fertilizer and fuel costs. According to the U.S. Department of Agriculture, farmers nationwide are paying 65 percent more for fertilizer, 43 percent more for fuel and 30 percent more for seeds than they did a year ago.

Dan Beyer, head of financial services for Farm Credit Services in Mandan, said farmers' higher costs have increased his agency's lending by 20 percent over 2007.

"They're not really planting more," he said. "It's entirely due to the higher costs."

The higher costs mean less margin for error come harvest time.

Richard, of the grain grower's association, estimates that area farmers will have to get at least $7 a bushel for their wheat to break even. Wheat closed the Friday trading day at $7.61 a bushel, but has come down from more than $12 in March.

Between working on his farm and running a custom harvesting business, Sketteberg sometimes pauses to wonder whether all these undercurrents will make this year more like last year or more like 2006. Last year, as crop prices raced up and inputs hadn't risen as much, he had his best year ever. But in 2006, he had his worst year ever when a drought destroyed his crop.

"If I can actually produce a crop, this could still be a good year for me. I'm not totally pessimistic," he said. "But, then again, if these wheat prices continue to drop, it could be really devastating to rural America."

(Reach reporter Jonathan Rivoli at 223-8482 or jonathan.rivoli@bismarcktribune.com.)