Energy Costs

Historically changes in cost of production have been due primarily to changes in the cost of land. More recently farmers have been especially hard hit by sharp increases in fuel prices because of their extensive use of oil and gas products in agricultural production.  Agriculture already has a low return on investment and equity when compared to many sectors of the American economy, so volatile swings in energy and other input costs can drastically alter farmers’ net revenue.  USDA’s projection for farmers’ expenditures for fuels and oils, electricity, fertilizer, and pesticides in 2001 is $30.0 billion, up $700 million from 2000.  That equals a decrease in net cash income of about 10 percent.

Increased energy prices, especially fuel prices, immediately impact farmers’ costs of production.  Even though farmers are more energy efficient than ever before, spikes in energy costs hit particularly hard their already tight profit margins.  But when considering the impact of higher energy prices on agriculture, it is also important to remember that the amount of energy used in agriculture is significant beyond the traditional gas and diesel for vehicle and machinery use.  They use heating oil, natural gas, propane, kerosene and/or electricity to heat or regulate temperature in their hog or chicken facilities and dry their crops.  Even pesticide costs are directly related to petroleum. As a general rule, it takes the equivalent of one gallon of diesel fuel to make one pound of active ingredient of pesticides. 

Farmers are limited in what they can do to mitigate the effects of higher energy prices.  When and where possible, producers are limited to employing different production strategies, such as reducing field operations by switching from conventional tillage practices to reduced till, adjusting fertilizer application rates, changing the timing of fertilizer applications and using animal manure and green fertilizer.  Unfortunately, however, for the foreseeable future the costs of energy will remain relatively high and it is in the nation’s best interest to deal with how to adjust to the increased prices.

NASDA recommends that government support for alternative fuel sources to fossil fuels continue, focusing on the use of ethanol, biodiesel and biomass production.  In the interim period, there should be a renewable fuels content standard in energy legislation, and preferential tax treatment for ethanol, such as in the small ethanol producer tax credit.  Congress should also provide funds to continue the USDA Commodity Credit Corporation Bioenergy Program.  Renewable fuels such as ethanol and biodiesel are the cornerstones in assisting American agriculture in terms of the use of its product and energy requirements.