Costs of Crop Inputs Made From Energy

Fuel prices are high – very high. But does it really matter? The USDA estimates that in 2002 only 6% of the cost of growing corn and soybeans was direct energy expenditure. The price of such a small input shouldn’t make much difference. But it does!

First, the average price of gasoline in 2002 was about $1.80. It is now over $2.60, or 45% higher. Assuming that all other prices remained the same (which they haven’t), energy would now account for almost 10% of the cost of production. If the fuel to grow a bushel of corn was 15˘ in 2002, it has now risen to 20˘. Given a 150 bushel yield, farmers are probably spending an additional $7.50/acre in fuel costs.

But that doesn’t tell the whole story. Many of the other inputs associated with crop production are energy derived. Nitrogen fertilizer and agricultural chemicals are tied to energy prices because they are made from energy sources such as natural gas and crude oil. Inputs not derived from petroleum are affected by energy prices as the cost to manufacture and transport them increases. This is what economists call a "cost push" – when input costs rise, causing whatever is dependent on those inputs to rise in price. Thankfully, we will see that the cost push effect is weak, at least for ag chemicals.

Let’s look at fuel, fertilizer and chemicals separately because, though they are tied together, they do have the ability to move independently.

Fuel
The graphs below show the prices of gasoline over time. The graph on the left shows the wholesale and retail gasoline prices for the last 4 years and a 2 year forecast from the US Department of Energy. Retail prices have risen from a little over a dollar to just under 3 dollars in 4 years. For perspective though the right graph shows the retail gasoline prices (dotted line) over the last 85 years. The dark solid line shows what gasoline would have cost in the past in terms of today’s dollars. During the last 85 years gasoline has dropped a few cents per gallon. The important line is the light solid line that shows the trend of gasoline prices. The real price of gasoline is going down.

Fertilizer
Nitrogen fertilizer, specifically anhydrous ammonia, closely follows the price of natural gas. When natural gas rises or falls, nitrogen fertilizer prices do so rapidly. Unfortunately, the Department of Energy forecasts that for the next several years natural gas prices will do what they did this year – rise into the winter and fall in the summer to slightly lower levels than seen in the winter of 2005-2006. That means that fertilizer prices will likely be a little below what you had to pay this year but not much lower.

Agricultural Chemicals
Crop chemicals such as herbicides are also petroleum based products. That means that when the price of petroleum rises, the cost of manufacturing them rises as well. The encouraging part of chemical prices though, is petroleum costs as a percent of retail chemical market price is rather low. In other words, a large increase in petroleum prices will result in an increased cost of production to chemical companies but not necessarily a higher price to farmers. This is because prices are determined by supply and demand. Without a significant shift in either supply or demand, ag chemical prices will not change much. The graph below shows that as fuel prices have varied over time, ag chemical prices have remained very constant. In other words, fuel prices have little effect on chemical prices even though chemicals are made from petroleum. Expect chemical prices to go up with inflation rather than with fuel prices.