How Will Higher Energy Costs Impact your Bottom Line?
Tuesday, August 23rd, 2011
How important is energy to your farming operation? How much of your expense budget is impacted by the cost of energy? How will changes in energy policy affect the way you farm? At a time when you are filling your diesel fuel tanks for the fall harvest and ordering your fall fertilizer, the cost of energy-related inputs may be at the top of your mind, if not, your checkbook.
Economists with USDA’s Economics Research Service (ERS) say recent costs for direct energy expenses consume about 6.7% of a farm operating budget and 6.6% of indirect costs, which can be related to fertilizer costs resulting from production of nitrogen from natural gas. Their analysis of energy costs in agriculture can become a major tool in understanding how energy policy can affect farm policy. They say, “However, results discussed here are not dependent on the emissions limitations resulting from cap-and trade—alternatively, an emissions tax could have been the underlying mechanism driving higher energy prices.”
Across the continent, agriculture is impacted in different ways by energy. The combination of fertilizer, electricity, and fuel make up 50%-60% of the operating expenses for corn, sorghum, wheat, oats, and barley. Beans and cotton require those for 30% of their budget. Direct energy costs are 5% or less for hogs and cow-calf operations, and 10% for dairy operations.
In a discussion of nitrogen fertilizer, it should be noted that natural gas makes up 70% -80% of its production costs and over the past decade, US production has declined from 14 million tons to 8 million, while imported nitrogen has climbed from 2 million tons to 8 million. Another often hidden issue related to energy consumption is the power required for irrigation operations, which total more than 56 million acres of cropland and pasture land. In 2008, energy costs were over $2.6 billion, including $671 million for water cost, $660 million for maintenance, and $870 for labor.
To estimate energy costs in future years, the ERS economists calculated the impact of policy proposals by the Environmental Protection Agency and the Energy Information Administration which projected a 5% and a 7.4% rate of cost increase, respectively. Using those forecasts of policy impacts, the economists were better able to project potential price increases paid by farmers due to energy over the next 7 years. They suggest that fuel prices will increase 2.6% to 5.3% annually, and a 4.1% to 10% increase in fertilizer prices.
Those increases in energy input prices have a significant impact on commodity production expenses. Production costs range from $7.37 per acre to $17.59 per acre for corn, and $1.57 to $3.65 per acre for soybeans. The economists say the higher production costs will reduce the net returns for producers, and will reduce total acreage by 450,000 acres per year due to the lower return scenario. That number is derived from a 265,000 acre reduction in wheat and a 200,000 acre reduction in corn planting, and because of cross-crop relationships, it includes a potential 93,000 reduction in soybean planting.
The higher energy prices and higher feed costs also lead to lower livestock production and higher livestock prices. That results from the lesser production of corn and moderately lower production of soybean meal, with livestock production declining slightly. Pork and beef are impacted more than poultry.
The higher energy costs are estimated at $1.73 billion to $3.91 billion for increased production expenses, resulting in lower net farm income. ERS estimates net farm income will drop $1.52 billion to $3.35 billion annually over the period from 2012 to 2018. Nationally, the greatest impact on agriculture is a 3% to 6% cut in net cash income for the Cornbelt and Great Plains for the lower priced energy cost scenario. For the higher priced scenario, the result is a loss of net cash income under 10% for the Cornbelt.
The impact of higher costs of energy will be felt across the Cornbelt, as well as the Great Plains due to lower returns for grain and livestock and reductions in net cash income for farmers. The cuts are in a range, depending on how energy policy impacts are calculated by the EPA and the Energy Information Administration. Higher crop production expenses lead to cuts in acreage and lower farm income, but also high production expenses for livestock producers.