April 7, 2000

Although fuel costs are up at the pump now, farmers won’t feel the worst of it until 2001, if crude oil prices hold, according to an American Farm Bureau Federation economist.

Terry Francl, AFBF economic policy specialist, notes that fuel and oil costs account for only 30 percent of the typical farm’s energy bill, while the remaining 70 percent lies hidden in the prices of manufactured inputs, such as fertilizers and pesticides. (For example, on the fertilizer side, natural gas typically accounts for about 75 percent of the cash costs of manufacturing anhydrous ammonia, a basic feed stock for all nitrogen fertilizer products.) Energy accounts for half or more of the underlying cash production costs for nearly all of the other manufactured inputs.

"Fortunately, this year’s inventory, for all practical purposes, has already been produced. From a cost standpoint, inputs are relatively unaffected," said Francl, noting that relatively large supplies of fertilizer and other manufactured inputs also come into play. "If however, these crude oil prices should stay at this level through the remainder of 2000 and on into 2001, I would anticipate you would see those higher energy prices move through the other manufactured inputs—at all different levels. Anhydrous ammonia is the most intense. It’s only an educated guess, but by 2001, you could add another $2 to $4 billion to the cost of these manufactured inputs, in addition to what we’ve already seen on these fuels and oils this year.

"The other thing is that these are based on long-term contracts," he continued. "Just because crude oil goes up doesn’t mean it’s automatically factored in. However, nearly all these contracts have escalation clauses. Six or 12 months down the road, there are likely to be price adjustments. It will affect manufactured inputs at some stage."

An immediate impact, however, are the increased prices farmers are paying for diesel, gasoline, and oils.

"Last year the average annual price of West Texas intermediate crude oil was a little over $19 per barrel. At that level, farmers’ costs for petroleum fuels and oils was $6.4 billion," Francl noted. "For every three-dollar per barrel increase in the cost of crude oil, the cost for petroleum fuels and oils to farmers will increase approximately $1 billion. Therefore, if crude oil prices average $28 per barrel in 2000, it would increase the cost of petroleum fuels and oils farmers pay by approximately $3 billion, a 47 percent increase."

Competing energy product prices are also a factor.

"If crude oil prices continue near current levels, the prices of competing energy products will also begin to rise. As manufacturers and dealers begin replacing the inventories of fertilizers and pesticides utilized in spring, most of which are stored in warehouses or are in the process of being shipped, upward costs pressures will be exerted," said Francl. "This may add up to $500 million extra fertilizer costs in the latter half of the year and up to $300 million in higher pesticide costs."

While the cost of petroleum fuel and oils will remain essentially the same into next year, based on the current level of crude oil prices, Francl said fertilizers and pesticide costs will probably increase an additional $2 to $3 billion in the year 2001 as the cost of competing energy sources rise.

Looking at the impact on farmers in a little different perspective, Francl said fuel costs will probably increase $10-$15 per acre for crops like corn and cotton. Soybeans and wheat production costs will probably increase $5-$10 per acre.

"The final observation is that this is going to come right out of the bottom line. It will reduce net farm income, by whatever the amount of the increase turns out to be," Francl advised. "Of course, with crop prices at their current low levels, that certainly does not bode well for the agricultural industry. Net cash income to farmers, estimated by the USDA to be $59 billion in 1999, was projected to decline just under $50 billion in 2000. However, since energy prices spiraled upward, net cash farm income will slip even further, to about $47 billion this year unless Congress comes up with another supplemental disaster assistance program.