Iowa farmers concerned about increasing fuel prices

by Mike Duffy, extension economist, 515-294-6160, mduffy@iastate.edu

The recent fuel price increase has caused a lot of concern among farmers regarding its impact on corn and soybean production costs. It appears that fuel prices may go higher. These higher prices come following a period when energy prices had been falling.

There are many aspects of energy use in agriculture, but what we'll concentrate on here is a simple discussion of the more important considerations; and provide an estimate of the impact higher energy prices may have on farmers' production costs.

Short-term impact

Every year, lowa State University (ISU) Extension calculates estimates of the costs of crop production (File A1-20). We used \$.88 per gallon as the estimated cost of diesel fuel for the year 2000. Obviously, this was too low, but that is why we call it an estimate.

We have re-calculated the cost of crop production estimates using diesel fuel prices of \$1.00, \$1.20, and \$1.40 per gallon. We also increased the costs of gas and LP by the same percentages. The results of these estimates, along with the new fuel prices, are shown in Table 1.

A diesel fuel price of \$1.40 per gallon would represent a 59 percent increase over the original (Base) price estimate. With diesel fuel at \$1.40, the cost of producing a yield of 120 bushels of corn in a continuous corn rotation would increase by \$4.38 per acre as shown in Table 1. This represents a \$.04 per bushel or 1 percent increase in the cost of production. For corn in a corn/ soybean rotation, the cost would increase \$4.02 per acre.

 In the short run, increases in fuel prices will have a fairly modest effect on crop production costs. However, production costs can be expected to increase considerably if energy prices remain high.

For soybeans, the cost would increase \$3.14 per acre. Assuming a corn yield of 135 bushels and a soybean yield of 45 bushels per acre, this would represent a \$.03 and \$.07 per bushel increase for corn and soybeans, respectively. Again, this would be a 1 percent increase in the cost of production.

Table 1 shows that a 59 percent increase in the cost of diesel fuel would increase the cost of production by about 1 percent. If we don't include land costs, the increase would represent an increase of approximately 2 percent. These cost increases are fairly modest. However, they represent only the short run increases.

 Table 1. Impact of higher energy prices on crop production costs in lowa Base* Case 1 Case 2 Case Gas \$1.15 \$1.31 \$1.57 \$1.83 Diesel .88 1.00 1.20 1.40 LP gas .57 .65 .78 .91 Corn following corn (120 bushel yield) Machinery \$68.22 \$68.93 \$71.31 \$72.48 Seed, chemicals, etc. 137.05 137.08 137.13 137.18 Labor 22.09 22.09 22.09 22.09 Land 120.00 120.00 120.00 120.00 Total cost per acre \$347.36 \$348.10 \$350.53 \$351.74 Total cost per bushel \$2.89 \$2.90 \$2.92 \$2.93 Corn following soybeans (135 bushel yield) Machinery \$67.35 \$67.95 \$70.29 \$71.28 Seed, chemicals, etc. 120.85 120.87 120.91 120.94 Labor 20.15 20.15 20.15 20.15 Land 120.00 120.00 120.00 120.00 Total cost per acre \$328.34 \$328.97 \$331.34 \$332.37 Total cost per bushel \$2.43 \$2.44 \$2.45 \$2.46 Soybeans following corn (45 bushel yield) Machinery \$42.36 \$42.96 \$44.41 \$45.40 Seed, chemicals, etc. 89.44 89.46 89.50 89.54 Labor 18.99 18.99 18.99 18.99 Land 120.00 120.00 120.00 120.00 Total cost per acre \$270.79 \$271.41 \$272.90 \$273.93 Total cost per bushel \$6.02 \$6.03 \$6.06 \$6.09

* 2000 Iowa Crop Production Cost Budgets (File A1-20)

Long-term impact

Costs of production can be expected to increase considerably if energy prices remain high. With a permanent rise in energy prices, the cost of crop production will increase in two phases.

First, there will be a direct increase in the price of fertilizers and pesticides that are manufactured from fossil fuels. Seed costs would also increase quickly due to the increased cost of producing seed. There would be other cost increases reflecting higher transportation costs.

A second round of increases could be expected due to an increase in the cost of manufacturing capital and replacement items. Tires, parts, steel, and so forth would increase in cost over time if the higher energy prices remain in effect.

Impact of agriculture on total energy consumption

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

Importance of fuel costs in production agriculture

It is easy to see the importance of petroleum and fuel in production agriculture by comparing petroleum and fuel costs to total costs. The cost of petroleum and fuel as a percentage of total costs is shown in Figure 1. Notice that during the 1950s, fuel costs averaged about 6 percent of total costs. It dropped until the 1973 energy crisis, where it rose to almost 6 percent in 1981. Petroleum and fuel costs, as a percent of total costs, have declined almost continually since then.

Summary

An increase in energy price, especially fuel price, is very visible and immediately affects the cost of production. However, in agriculture, energy price increases do not represent a major, short-run increase in the costs of production. Our estimate is that non-land costs would increase by only about 1 or 2 percent. However, the intermediate and long-term cost increases could be considerably higher. At this time, it is too early to say how much long-term costs might increase.