Prices on the rise

How will higher energy costs impact farmers?

EDITOR'S NOTE: As energy costs rise nationwide, associate director and extension economist Mike Duffy looks at the impact of higher energy prices on farmers. For them, it's more complicated than paying the bills for heating oil and diesel fuel, or getting a guaranteed price for anhydrous ammonia

Looking at all farm expenses, those most directly associated with energy -- for fuel, fertilizers and pesticides -- added up to 16 percent of total farm expenditures in 1998. Duffy reports that energy costs are driving up the cost of production, possibly more than any other factor in the coming year.

When considering the impact of higher energy prices on farmers, it is important to remember that the amount of energy used in agriculture is small compared to overall energy consumed in the United States. The U.S. Department of Energy only considers four sectors in its energy statistics: transportation, industrial, residential and commercial purposes. Agriculture is not even considered a separate sector with respect to total U.S. energy use.

But energy is important to agriculture. It is easy to see how farm use of petroleum products has grown over the past 50 years by looking at the relative expenditures for major energy components in Iowa agriculture.  The graph on page four shows the percent of total farm expenditures in Iowa since 1949 for three primary energy components: fuel, fertilizer and pesticides.

Fuel includes both petroleum and oil used on the farm. It is what we think of most often when we think of energy use. In the 1950s, fuel averaged approximately 6 percent of a farmer's total expenditures. The cost of fuel dropped as a percentage until the 1973 energy crisis, then rose to almost 6 percent in 1981.  The percentage of farm expenditures associated with petroleum and fuel has declined almost continually since the 1980s to 2.6 percent in 1998.

Energy price increases, especially for fuel, are highly visible and immediately impact the costs of production. In agriculture, however, energy price increases do not represent a major, short-run increase in the costs of production. Iowa State University estimates that a 40 percent increase in diesel fuel would increase non-land costs from 1 to 2 percent.

Commercially produced fertilizer is another major energy component of Iowa agricultural production. About half of the nitrogen fertilizer used in Iowa is anhydrous ammonia, which is made from natural gas. Fertilizer costs also include lime, and estimates of the amount of energy needed to manufacture various types of fertilizer vary considerably. Reliable estimates from the Department of Energy show that 5 pounds of nitrogen has the energy equivalent of a gallon of diesel fuel. In other words, 100 pounds of nitrogen fertilizer would have the energy of 20 gallons of diesel fuel.

The graph below shows that expenditures on fertilizer, as a percent of total farm expenditures, have risen and fallen dramatically. Fertilizer expenditures peaked in 1975 at 10 percent of total farm expenditures.  Then they dropped, but have since risen to 7 percent in 1998.

The 2001 estimated costs of crop production from Iowa State University Extension show that fertilizer and lime costs will rise from the current 7 percent level to almost 14 percent of total costs in corn production, and 9 percent of total costs for soybeans. This estimate uses a price of $340 per ton for anhydrous ammonia, and assumes that half of the total nitrogen applied will be from anhydrous. If the price of anhydrous jumps to $420, total costs of production for corn after soybeans would increase by 1 percent and the non-land costs would increase by 2.3 percent.

Pesticides are made from petroleum.  The exact amount used depends on the product, the formulation and so forth.  A common measure used is that it takes the equivalent of a gallon of diesel fuel to make one pound of active ingredient of pesticides.  The graph below shows that pesticides, as a percent of total farm expenditures in Iowa, have risen from nearly zero in 1950 to a high of 6.9 percent in 1996.  In 1998 they represented 6.5 percent of total farm expenditures.

If we look at energy-related expenditures as a percent of the intermediate costs of production (for seed, chemicals and other values that vary from year to year), the percentages change but the general situation does not.  In 1998, fuel represented 4 percent of intermediate expenditures, fertilizers were 12 percent and pesticides were 10 percent.

The recent increases in the price for energy have resulted in higher costs of production for Iowa farmers.  The ISU estimated costs of crop production show that corn costs of production will rise by more than 5 percent from 2000 to 2001 as a result of higher petroleum costs. Soybean costs are not rising as much because nitrogen fertilizers are not used on this crop.

Cost of production estimates have varied considerably over time.  In the ISU series, the highest cost estimates were in the early 1980s. Land is the single biggest cost of production component. For soybeans, the cost of land averages more than 40 percent of total production costs. For corn, land costs on average make up 35 percent of the cost of production.

In the past, changes in the cost of production have been primarily due to changes in the cost of land. There have been shifts in the relative portion of other cost components as technology and farming practices change. Today's situation is different because increases in the cost of production are almost entirely the result of changes in the price of energy.

Farmers have many options and alternatives as they try to adjust to higher energy costs. But it's important to realize that increases in energy costs affect more than a farmer's fuel bill. It is equally important for us to realize that these increases will not likely go away. For the foreseeable future, the costs of energy will remain relatively high and it is in our best interest to start to deal with how to adjust to increased prices.

Want to make the best use of the nutrients you already have for crop production? Check out the NPKnowledge web site from ISU Extension.