Monday, August 22, 2011

How Higher Energy Prices Will Affect U.S. Agricultural Production

KM: Note that this post is based upon the newly released USDA report, "Impacts of Higher Energy Prices on Agriculture and Rural Economies" by Ronald Sands and Paul Westcott. It focuses upon a subject which interests me greatly, that of how agriculture can adapt to higher energy prices (or less availability).

There is a great amount of give and take within the Ag/food system as we adjust and adapt to changing energy conditions of price and scarcity by changing what we plant and what we eat, driven by the consumer, Ag economics, markets, and farm policy.

The report studies the effects of higher fuel prices of up to 5.3% higher annually over the next seven years (using EIA figures). I did not include those studies in this post, so please go to the source to read more if you are interested. Not surprising, conclusions of this study include decreased production combined with less profitability in farming as well as adjustments in farming methods and crop choices.

Though part of this report deals with carbon mitigation energy expenses, for the purposes of this post I chose to use the report to focus upon "peak oil" issues in agricultural production. The report only discusses U.S. conditions, not global.


"Higher energy-related production costs would generally lower agricultural output, raise prices of agricultural products, and reduce farm income, regardless of the reason for the energy price increase."

Current stats and conditions:
  • Agriculture consumes significant amounts of energy: refined petroleum for farm machinery, electricity for irrigation and other equipment, natural gas indirectly through nitrogen fertilizer, and coal indirectly through electricity.
  • Direct and indirect energy related expenses represented an average of more than 13 percent of total farm production expenses in 2005-08. (Direct energy use averaged about 6.7 percent of total production expenses in the sector, while fertilizer expenses represented another 6.6 percent.)
  • Direct costs include gasoline, diesel, petroleum, natural gas, electricity, and energy use for operating irrigation equipment and indirect costs include fertilizer.
  • On a per-acre basis, corn and rice have the highest energy-related costs of the eight major crops (corn, sorghum, barley, oats, wheat, rice, upland cotton, and soybeans) examined in this report, while soybeans have the lowest.

This next graph shows the share of total operating costs for selected crops represented by the two largest energy-related input categories (fuel, lube, and electricity; and fertilizer) in 2007-08.

"Sorghum has the highest share of energy-related inputs while cotton has the lowest. For sorghum, oats, wheat, corn, and barley, energy-input categories are more than 50 percent of operating expenses."

Per-acre operating costs are important for determining producer net returns, which influence farmers’ cropping choices. Rice, corn, and cotton have the highest per-acre expenses for energy-related inputs (graph below). While rice and cotton have the highest per-acre costs for fuel, lube, and electricity, corn has the highest costs for fertilizer. Again, energy-related costs for soybean production are relatively low.

Direct energy costs account for smaller shares of operating costs for livestock operations, representing less than 5 percent of operating costs for hogs and cow-calf operations and about 10 percent for milk production in 2007-08. Livestock operations also see indirect effects of energy costs through higher feed costs. In 2007-08, feed costs accounted for about 11 percent of total operating costs for cow-calf operations, 58 percent for hog production, and 76 percent for milk production.

Fertilizer is an important component of production costs for crops, especially corn. Nitrogen fertilizer production is energy-intensive as natural gas makes up 70 to 80 percent of production costs. U.S. nitrogen fertilizer supplies, while historically domestic, have been increasingly imported over the past decade. Shares of U.S. nitrogen fertilizer are now nearly equal between domestic and foreign suppliers.

Regional variations in wheat and soybean energy costs are especially impacted by irrigation amounts:

"Irrigated farms accounted for nearly 40% of the total $297.2 billion of agricultural products sold for all farms in 2007."

Irrigation makes a significant contribution to U.S. agricultural production. For 2007, the market value of agricultural products sold for all farms was $297.2 billion, with irrigated farms (a farm irrigating any land) accounting for nearly 40 percent of this total. The average farm value of products sold for an irrigated farm ($393,700) was more than 4 times the average value for a non-irrigated farm ($93,900). Irrigation makes an obvious contribution to the value of crop products sold, but it also contributes to the farm value of livestock and poultry products via the use of irrigated crop production used as feed.

In 2008, energy costs for irrigation pumping for U.S. agriculture were over $2.6 billion and most of the costs associated with irrigation were that of energy.

Labor is the single largest variable cost for vegetable, melon, fruit, and tree nut farms. However, the second largest expense component is fertilizer and agricultural chemicals. Overall input prices for vegetables and melons jumped an estimated 19 percent in a single year (2008) due largely to rapidly rising fuel and fertilizer prices. Input prices were up 13 percent that year for specialized fruit and tree nut farms. Fruit and vegetable production in 2008 showed little effect from the sharply higher fuel and fertilizer prices.

These are ways in which Ag production would be expected to change:
  • Overall planted acreage would decline as higher energy costs lower producer net returns.
  • The mix of crops produced would adjust to relative changes in net returns.
  • Acreage planted to soybeans would rise since their production costs are less affected by higher energy costs than most other crops.
  • Prices for most crops would increase, the exceptions being prices for soybeans and soybean products.
  • Feed costs in the livestock sector would rise in addition to increases in energy-related production costs for livestock.
  • Livestock production would fall and prices would increase.
  • Pork and beef are affected somewhat more by higher energy costs than than poultry.
  • Increases in farm production expenses would increase, leading to overall reductions in net farm income.
  • The effects of higher energy costs would vary across sectors within agriculture and according to the region of the country.
  • Energy-related food processing, distribution, and marketing costs are higher throughout the food marketing chain and most of the retail food price increases would come from higher energy prices in the food marketing system rather than from agricultural commodity price impacts.

The USDA also concludes that:
  • The development and adoption of new technologies would facilitate changes in production practices and energy use in agriculture, potentially mitigating economic impacts of higher energy prices.
  • Agricultural production practices would be modified to improve energy-use efficiency.
  • Energy use per unit of output in the agricultural sector would be likely to continue its decades-long decline, also reducing energy price impacts.

source: usda

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