What Would Happen if: A Look at Changes in Nitrogen, Ethanol, Oil, & Cropland
Thursday, June 9th, 2011
You make plans, and then life happens. How often have you said to yourself, “I sure didn’t see that one coming.” And many times great thought is given to an initiative, but it backfires, only because of the “law of unintended consequences.” Trying to get a handle on the future is becoming more important, given the dynamics in today’s agriculture. Today, we will try to determine the impact of several significant dynamics that could occur.
Consider all of the fundamentals that are pushing and pulling on the market, along with monetary and fiscal policies of the US and its global partners. Blend with those the governmental policies on access to food, environmental protection, biofuel mandates, trade restrictions, and inflation. Those and others too numerous to mention are all plugged into a computer, programmed by the Food and Agricultural Policy Research Institute and the Center for Agriculture and Rural Development, both at Iowa State University. Their analysis was designed to examine several different policy changes and market shocks to determine their economic impact.
1) The first scenario raises the price of nitrogen in the United States by 10% over the baseline beginning in 2011 and extending to the final projection year of 2025.
The Iowa State economists say, “Because of the importance of fertilizer, a 10% increase in the price of nitrogen fertilizer translates into an increase in variable costs in the Corn Belt of the order of roughly 2% and 0.25% for corn and soybeans, respectively. As a result, corn and wheat prices increase while soybean prices decline.” This is due to corn and wheat requiring more nitrogen than soybeans, and production costs increase more as a result of the price increase. Because of increased production costs, there is a reduction in U.S. net exports of these commodities and higher prices. Consequently other global corn and wheat producer increase their production levels. Because of fewer acres there are lower fertilizer application rates, decreasing total fertilizer use in corn. The economists say, “Carbon savings from land reversion in the United States may not be significant because reverted cropland goes into idle cropland category.”
2) The second scenario reduces the cost of energy by fixing the crude oil price at $75/barrel from 2011 to 2025. This amounts to a 20% decline in the crude oil price on average relative to the baseline.
Additionally, the economists also reduce the price of natural gas by 10%, and revise crop production costs with the lower energy costs. They believe the lower price and its associated lower cost of production provide a supply boost, the rest of the world benefits from lower energy costs, and increases export competition. Lower energy prices cut livestock feed costs and so costs decline for all meat products, but they are lower for pork and poultry compared with beef, as beef production declines.
3) In the third scenario, the tax credit and duty scenario, the biofuel tax credit is reintroduced at $0.55/gallon for ethanol and at $1.00/gallon for biodiesel beginning in 2012 and continuing to 2025. The economists also restore the duty for imported ethanol of $0.54/gallon and the 2.5% ad valorem duty.
The increased trade protection for ethanol increases the corn demand and puts upward pressure on corn prices. The higher price entices more acres, drawing land away from competing crops such as beans and wheat and also increasing their price. The economists calculate, “This higher feedstock demand fuels a 4% increase in the world corn price.” The world responds to the higher crop prices with more acres and more intensive production. As a result, corn production increases in both in the United States and the rest of the world. In the US, soybean acres decline because of higher revenue for corn. With more corn consumed by ethanol, exports decline. That causes China to lower its net imports of corn from the US and Brazil, South Africa, and Argentina increasing their exports. The economists report that, “U.S. net exports of soybean meal increase as domestic demand from the livestock sector contracts more than the domestic meal supply. In the domestic biofuels sector, reintroducing the ethanol tax credit results in an increase in the blender demand for ethanol in excess of the RFS, as blender margins increase. As a result, the stronger blender ethanol demand exerts an upward pressure on the ethanol wholesale price. U.S. ethanol production, primarily that using corn, increases by 25%.”
4) Finally, a U.S. afforestation scenario is analyzed in which we use the crop area displacement from afforestation used in a report by the Environmental Protection Agency. This amounted to 50 million acres of cropland displaced from production in the United States by 2025.
The economists used EPA’s 2005 proposal designed to retain soil carbon by converting cropland to forests. The proposal initially projects the afforestation of roughly 100 million acres of land in the United States under the scenario of $30 per metric ton of carbon, and 50 million acres of displaced area from cropland.” However, resulting higher prices of crops cause some slippage, and only 40 million acres are actually switched from crops to forest. Looking at the geographic location, the economists 40% is in soybeans, 22% in corn, 13% in wheat, 12% in hay, 5% in rice, 3% in cotton, and 2% in sorghum.” As a result price of all of those commodities would increase, and then secondarily, there would be increased costs and prices for biofuels, livestock, and fertilizer. Initially there is a short supply situation, causing prices to increase by 10.5% for wheat and by 17% for corn, and with a short supply, the soybean price rises by 18.5%. Due to less cropland and higher prices for feed and bean meal there is a general short supply of meat, causing prices to rise for beef, pork, and poultry. And with less production, US exports decline and the rest of the world responds with more production and exportable supplies. The economists contend, “The afforestation scenario represents a major shift in U.S. agricultural production, and we see that the unintended consequence of this policy is an increase in carbon emissions from land-use change on a global scale.”