Fuel Price Impact

Agricultural production consumes large amounts of energy, either directly through combustion of fossil fuels, or indirectly through use of energy-intensive inputs, especially fertilizer. Over 2005- 08, expenses from direct energy use averaged about 6.7 percent of total production expenses in the U.S. farm sector, while fertilizer expenses represented another 6.6 percent. However, these sector averages mask much greater energy intensities for major field crops. Agricultural produc­tion is therefore sensitive to changes in energy prices, whether the changes are caused by world oil markets, policies to achieve environmental goals, or policies to enhance energy security.

To illustrate the flow of energy prices through the agricultural system from farm to retail, we construct three scenarios: a reference scenario of agricultural production from 2012 through 2018, and two alternative scenarios over the same time period with energy price increases expected to result from pricing greenhouse gas emissions. Price increases for different energy sources in the alternative scenarios are based on their carbon content. Results are compared to the reference scenario to estimate economic implications. Higher energy-related production costs would generally lower agricultural output, raise prices of agricultural products, and reduce farm income in the short run.

Two key economic models at USDA’s Economic Research Service (ERS)—the Food and Agricultural Policy Simulator (FAPSIM) and the Farm-Level Partial Budget Model—were used as the foundation of this analysis.

What Did the Study Find?

• Energy-related production expenses vary significantly for different crops. 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. With higher energy-related expenses (fuel up an average of 2.6 to 5.3 percent; fertilizer up 4 to 10 percent), total acreage for these eight crops would decline by an average of 0.2 percent (under the lower price change scenario) to 0.4 percent (higher price change sce­nario) over 2012-18. Planted area would decline for seven of the eight crops, the exception being soybeans.

• Although increased agricultural commodity prices affect consumer food prices, retail food prices are more af­fected by energy costs in food processing, distribution, and marketing than in agricultural commodity production. For the scenarios and time period focused on in this report, the Consumer Price Index (CPI) for food—including food at home and food away from home—would be 0.6 to 0.9 percent higher than without the simulated energy-related cost increases for electricity, diesel fuel, and natural gas.

• It does not appear that impacts through the agricultural sector of the higher energy prices scenarios studied in this report would have a substantial effect on farm county economies and populations. In general, farm counties tend to have relatively few people without high school degrees, very high proportions of adults employed, and low poverty rates compared with other non metro counties. Some farm-dependent counties in the Mississippi Portal region may be relatively more affected by energy-related farm income losses.

• A decrease in fossil fuel production under an emissions tax or a cap-and-trade program would reduce overall em­ployment in related energy extraction industries. Counties specializing in energy production are overwhelmingly rural. However, few non metro counties derive a substantial share of nonfarm employment from energy production, so overall rural impacts would be small, with the exception of some mining counties, principally located in eastern Kentucky and West Virginia.