| Posted April 14, 2005:
As this column is being written, crude oil prices end
the week at near record highs of $56.72 per barrel. While seasonal
issues like cold weather and the demand for heating oil have
some impact on the day-to-day pricing of the market, the long
term price pressure is driven by more fundamental forces. The
first force is the growth in the demand for oil by the world's
two most populous countries, India and China. The second is
the wellhead production capacity of the world's crude oil suppliers.
While OPEC recently agreed to increase the production quotas
of its member states by a half a million barrels a day, market
analysts are concerned that this increase may not be large
enough to meet the worldwide growth in demand. Much of this
increase, however, may come in the form of heavy sour crude
which is in less demand than low-sulfur light sweet crude.
That would leave refiners competing for limited quantities
of the more desirable oil, keeping the pressure on prices.
If Rodrigo Rato (the Managing Director of the International
Monetary Fund) is correct farmers may have to contend with
higher energy costs for the coming crop year. In a recent
statement, Rato said, "The world will have to adjust
to high oil prices for at least the next two years due to
a combination of strong demand and supply constraints."
Reading about the potential for high energy prices this coming
growing season got us to thinking about the potential impact
these prices may have on farmers and the farm economy. Given
the structure of crop markets, there is little chance that
crop farmers will be able to pass on the increased costs on
to the purchasers of their products. Barring an adverse-weather
or disease driven price spike, higher energy costs most certainly
will result in lower margins and lower profitability for crop
farmers who are dependent on diesel fuel and energy related
fertilizer supplies.
To cope with increased energy costs, farmers will be looking
for ways to reduce field passes. Increased fertilizer and
chemical costs may induce some to increase their dependence
on precision agriculture so that the chemicals are concentrated
on the areas of the field with the highest yield potential.
If Asian Soybean Rust proves to be a problem this year, farmers
will have to wrestle with the cost of each fungicide application
versus the potential loss if they don't spray.
Higher energy costs will increase the transportation costs,
not only for the commodities they sell, but also for the products
that they purchase: farm chemicals, seed, fertilizer, and
even the parts they need to repair their equipment. It would
not be surprising to see the basis for commodities increase
as local elevators factor in the increased transportation
costs to get the grains and seeds to the terminals. If this
year sees a wet fall, producers will have to balance out the
costs of drying fuel with the losses that could be encountered
leaving the crop in the field days or weeks longer in an attempt
to bring the moisture level down before harvesting it.
Higher fuel prices may give corn and soybean farmers a reprieve
in one area, the importing of those commodities into the Port
of Wilmington. Higher priced fuel will increase the cost of
shipping these commodities from South American ports, giving
growers closest to Wilmington a potential advantage. The scale
of the advantage will, in part, depend on the differential
impact of energy costs on various transportation modes.
It is possible that the higher energy costs could tilt the
playing field on horticulture and floriculture crops like
green peppers and roses. The increased cost of air-freighting
these commodities thousands of miles may be greater than the
increased costs of shipping these products within the US by
ground. Locally produced horticultural products likely will
be less affected by fuel prices than products that are shipped
in from Central and South America.
It seems almost certain that higher energy prices will put
significant pressure on crop farmers in the short-term. In
the coming weeks we will be looking at various scenarios for
the medium- to long-term. Increased energy costs have the
potential to make the 2007 farm policy debates an even higher
stakes game than it already is.
Daryll E. Ray holds the Blasingame Chair of Excellence
in Agricultural Policy, Institute of Agriculture, University
of Tennessee, and is the Director of UT's Agricultural Policy
Analysis Center (APAC). (865) 974-7407; Fax: (865) 974-7298;
dray@utk.edu; http://www.agpolicy.org.
Daryll Ray's column is written with the research and assistance
of Harwood D. Schaffer, Research Associate with APAC.
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