In a report out this week from the USDA Economic Research Service, the agency says the sharply lower costs of oil and natural gas are lowering crop production costs, but only by a small margin.
Oil and natural gas – which are used not only to power irrigation equipment, tractors and other farm implements, as well as in the production of farm inputs – have seen a sharp decline since mid-2014. At the same time, agriculture is a producer of energy feedstocks itself, ultimately recycled in the form of biodiesel and ethanol, which may also influence prices and crop production.
In the report, "Effects of Recent Energy Price Reductions on U.S. Agriculture," ERS researchers explain these situations and the unique position of agriculture in the world of energy.
The analysis suggests that overall, lower energy prices will have a "small effect" on ag in 2015 and 2016 for two reasons:
1. Prices for energy-related inputs don't fall as much as energy itself. In 2016, ag chemicals and pesticides are likely to fall more – by about 13% -- when compared to 2015, because of lags in movements between energy prices and these inputs.
The report also notes that even though there's a 43% decline in crude oil prices, fuel prices in the ag sector may fall by only 20%. This is partly because oil prices are only one input in fuel production.
2. Energy-related costs are only a portion of crop production expenses. Energy-related inputs represent 45%-70% of operating expenses for crops, with rice, oats, wheat and barley on the higher end and cotton and soybeans on the lower end of the energy cost spectrum, leaving another 55% to 30% for other expenses.
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Despite these two reasons for energy prices' small effect on ag, farmers have incentives to adjust planted acreage to take advantage of lower energy prices. But the changes aren't expected to be large. ERS says variation in net returns for farmers often lead to acreage changes that are "relatively small."
Lower energy prices, the report said, also will affect the biofuels market by reducing ethanol production costs and increasing gas consumption, which includes ethanol blends.
The report notes, however, that as the price of gasoline decreases relative to ethanol, refiners become reluctant to blend more ethanol with gasoline because of ethanol's increased relative cost.
Continued reading: Farm Futures Weekly Energy Review
Read the full report, Effects of Recent Energy Price Reductions on U.S. Agriculture, on the ERS website.