Agriculture and Rural Communities Are Resilient
to High Energy Costs
Rising energy prices
may prompt farmers and rural residents to make tradeoffs
in their production practices and daily lives.
Robbin Shoemaker;
David McGranahan;
William
McBride
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Farm
energy expenditures continue to rise,
but at a slower rate. Fuel expenditures
are estimated to increase 12 percent
between 2005 and 2006, compared with
36 percent in 2004-05.
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Farmers
may be induced to adopt farming practices
that use less energy. And when farming
is only one source of household income,
additional household members may seek
off-farm employment. |
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Rising
energy costs affect rural household
transportation and heating costs. Transportation
costs are higher for rural residents;
urban and rural residents face roughly
the same heating costs. |
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This
article is drawn from . . . |
The
ERS Briefing Room on Farm Income
“Recreation
Counties Are the Fastest Growing Nonmetro
Counties,” by Calvin L. Beale, in
Amber Waves, Vol. 4, No. 1, USDA, Economic
Research Service, February 2006.
Recreation,
Tourism, and Rural Well-Being, by Richard
Reeder and Dennis Brown, ERR-7, USDA, Economic
Research Service, August 2005.
“Nonmetro
Recreation Counties: Their Identification
and Rapid Growth,” by Kenneth M.
Johnson and Calvin L. Beale, in Rural America,
Vol. 17, No. 4, USDA, Economic Research Service,
Winter 2002.
USDA
Agricultural Baseline Projections to 2015,
Paul Westcott, ERS Contact, OCE-2006-1, USDA,
Office of the Chief Economist, World Agricultural
Outlook Board, February 2006.
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To help farmers
begin to think about how reduced tillage can
save energy, USDA has developed an online
Energy
Estimator for Tillage |
Higher energy costs in the 1970s
prompted all sectors of the U.S. economy to increase
energy efficiency. Agricultural producers responded
by making tradeoffs—replacing more expensive
fuels with less expensive fuels, shifting to less
energy-intensive crops, and employing energy-conserving
production practices where possible. Energy intensity—defined
as energy consumed per unit of total output—has
steadily declined over time due to gains in energy
efficiency in the agricultural sector, and this
trend is likely to continue.
Nominal energy prices have been
steadily increasing, although inflation-adjusted
energy prices have remained largely unchanged until
recently. In the agricultural sector, energy expenditures
for gas, diesel, electricity, and other inputs have
increased over time and vary by major commodity
produced. However, the U.S. Department of Energy
expects the prices of crude oil and gas to decrease
in 2006-07 by roughly 5 and 3 percent, respectively,
but expects the price of natural gas to rise by
over 6 percent.
Rural communities face somewhat
different issues associated with increases in petroleum
and natural gas costs. As energy prices rise, so
do household costs for transportation and home heating.
Rising fuel costs also could discourage people from
vacationing in or moving to rural areas, particularly
remote areas far from major services and employment
centers. Because rural households tend to have higher
travel expenses—simply because they travel
longer distances—they are more likely to be
affected by increases in gas prices than urban households.
Farm Energy Costs Vary by Commodity
and Region
Direct energy consumption in the
agricultural sector includes use of gas, diesel,
liquid petroleum (LP), natural gas, and electricity.
Indirect energy use involves agricultural inputs,
such as nitrogen fertilizer, which have a significant
energy component associated with their production.
Since 1992, direct fuel and electricity expenses
for U.S. farms have averaged around 7 percent of
total operating costs. Diesel fuel and gasoline
are widely used for tillage, planting, transportation,
and harvesting. Electricity, LP, gas, and natural
gas are primarily used in drying; irrigation; operation
of livestock, poultry, and dairy facilities; and
onfarm processing and storage of perishable commodities.
Expenses from indirect energy use increase total
energy expenditures to 15 percent of operating costs.
Fertilizers embody the most energy among production
inputs because natural gas is the primary input
(70-90 percent of the cost of producing nitrogen
fertilizer).
The impact of energy cost changes
on producers depends on both overall energy expenditures
and, more importantly, energy’s share of production
costs. Even if farms spend a lot on energy, the
impact of cost changes on farm profits depends on
the extent to which energy is a significant share
of total costs.
The potential impacts on farm
profits from changes in energy prices are greatest
for feed grain and wheat producers. Beef cattle
operations consume large amounts of fuel nationally
but have small energy expenses per farm. Crops with
the highest energy input costs per acre generally
do not have the highest share of operating costs
from energy inputs. For example, the high energy
costs for rice producers accounted for 42 percent
of total operating costs. In contrast, energy input
costs for wheat production accounted for 52 percent
of total operating costs in 2004. Other commodities
with a high share (44 percent or more) of operating
costs from energy inputs are wheat, corn, grain
sorghum, and oats.
Rising energy prices make cotton
and soybeans more attractive alternatives to other
crops for which energy represents a higher share
of total operating costs. Per-acre energy input
costs are lowest for soybean production ($18), which
comprised 22 percent of total operating costs in
2004. Energy input costs for cotton, at $64 per
acre, were among the highest of major field crops
but made up just one-fifth of the total operating
costs of cotton production. In areas where feed
grain and wheat compete for acreage with soybeans,
higher energy prices may induce a switch to soybean
production.
Variation in the regional distribution
of energy input costs suggests that changes in energy
prices would most affect producers in regions where
irrigation is indispensable for crop production.
Corn, soybean, wheat, cotton, grain sorghum, and
peanut producers in the Prairie Gateway have a higher
share of total operating costs from direct energy
costs than do producers in other regions, partly
due to irrigation expenses. The higher energy input
costs in this region are mainly due to additional
fuel costs associated with irrigation. High energy
prices could reduce production of these crops in
the Prairie Gateway if less acreage is planted or
if reduced irrigation lowers yields.
Changes in energy prices may have
a greater effect on producers of major field crops
in the Southeast—the Southern Seaboard and
Eastern Uplands. Fertilizer costs as a share of
total operating costs were highest for corn and
cotton producers in these regions. Higher energy
prices could result in a reduction of these crops
in the Southeast if fewer acres are planted or if
reduced fertilizer use cuts yields.
Direct energy costs make up a small
share of total operating costs on livestock operations,
comprising 3-7 percent of the operating costs for
hogs, dairy, and cow-calf operations in 2004. However,
these operations can experience higher energy costs
indirectly through higher feed production costs.
Feed costs make up roughly 60 percent of total livestock
production costs, so livestock producers could expect
to see cost increases through either purchased feed
or feed produced onfarm.
Some Agricultural Production
Practices Save More Energy
Certain production practices provide
important means of energy conservation. For example,
conservation tillage provides key opportunities
for both direct and indirect energy conservation.
Reduced tillage involves less fuel consumption when
a tractor runs over the field fewer times and saves
indirectly by reducing fertilizer requirements.
Drip irrigation methods involve lower water-pumping
costs and can also use nutrients more effectively.
But, additional gains in agricultural energy efficiency
could still be captured, especially in the areas
of tillage, pest, nutrient, machine, irrigation,
and drying management for crops. ERS researchers
used the most recent (2001) production practice
survey for corn (one of the most widely planted
and input-intensive crops) to examine the extent
of adoption and use of selected energy-reducing
practices:
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Conservation tillage:
Acres devoted to conservation tillage could
increase. In 2001, 70 percent of corn acres
used some form of conservation tillage, while
26 percent still tilled conventionally, and
4 percent were moldboard plowed.
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Low-water-use irrigation:
More irrigated acres could use energy-reducing
low-pressure systems. Only about one-third of
irrigated corn acres use a low-pressure system.
Of the 14 percent of the acreage irrigated,
over two-thirds used a high-pressure system.
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Nitrogen management:
Commercial nitrogen use could be reduced through
soil testing and more efficient application
methods. While commercial nitrogen fertilizer
was applied to nearly all corn acreage, less
than 30 percent reported using a nitrogen soil
test. Over 20 percent of the acreage received
a fall nitrogen application; less than 10 percent
received a nitrogen inhibitor; and less than
30 percent received a split nitrogen application.
Manure was applied to less than 15 percent of
the acreage.
The above examples indicate areas
where energy use can be reduced. However, at the
time this information was gathered, the higher energy-using
practices may have been economically efficient.
The current increases in energy prices may result
in changes to such practices.
In Rural Economies, Rising Energy
Costs Have Direct Effects . . .
Increases in petroleum and natural
gas costs directly affect rural communities and
their residents through higher transportation and
home heating costs. A secondary effect of rising
fuel costs is to discourage people from vacationing
in or moving to rural areas, particularly remote
areas far from major services and employment centers,
thereby reducing revenues to businesses that provide
services to these people.
Rural Households.
Because of higher personal transportation
expenditures, rural households are more likely than
urban households to feel the pinch of increased
gas prices. Rural residents depend more on cars
and trucks than on public transit, driving 17 percent
more miles each year per household than urban residents
do. Less than 1 percent of nonmetropolitan (nonmetro)
residents use public transportation, compared with
6 percent of metro residents, according to the Census
Bureau. In addition, rural drivers are more likely
to use SUVs or trucks as personal transportation
than are metro residents, another factor raising
rural fuel costs.
Estimates based on recent surveys
of vehicle use and projected fuel prices suggest
that the average rural household with at least one
driver will spend about 30 percent more on fuel
in 2006 than in 2004, unless driving patterns change.
Because urban households drive less and are less
likely to drive small trucks, their fuel costs will
increase less—$680 compared with $850 for
nonmetro drivers.
Rural communities with persistent
poverty may be hit hardest by energy cost increases.
The poverty threshold for a family of four in 2004
was $19,157. Assuming that their driving level is
the rural average, their projected increase in household
fuel costs would represent over 4 percent of income.
While poor families may not drive as much as other
families, workers in persistent-poverty counties
tend to travel longer (25 minutes) to their jobs
than do workers in other rural counties (21 minutes).
Commuting time increased 24 percent between 1990
and 2000, a period of declining poverty in these
counties. Adjustments to rising fuel costs in poverty
counties are likely to be difficult because residents
are already more likely to carpool (17 percent)
than are workers in other nonmetro counties (13
percent), and public transport, as in other nonmetro
counties, is virtually nonexistent.
Heating costs will also be affected,
with variations by region, but rural and urban residents
will be affected about the same. Rural residents
use more LP than urban residents because of limited
access to natural gas. LP prices follow heating
oil prices and are expected to fall between 2006
and 2007. Both rural and urban residents rely on
electricity, which hasn’t seen the price increases
petroleum-based products have. And, urban residents
use 25 percent more natural gas than rural residents,
and the price of natural gas is expected to increase.
So on net, urban residents may face somewhat higher
heating costs than rural residents.
. . . and Indirect Effects
Rural communities increasingly
depend on tourism, second-home ownership, retiree
inmigration, and the ability of people to commute
long distances to work from rural places with desirable
attributes. Substantial rises in transportation
costs are likely to reduce these activities, particularly
in rural areas that are relatively remote from major
urban centers, and to slow rural growth, possibly
leading to job and population losses. Earnings from
recreation industries have grown considerably faster
than overall earnings in rural areas. Also, recreation
counties have generally gained population at a much
faster rate than have other types of rural counties.
The advantage is especially striking in counties
not adjacent to metro areas. In 2000-04, recreation
counties were the only type of county to gain population
in nonadjacent counties. With high rates of growth,
construction jobs are plentiful in these counties.
Moreover, these counties attract entrepreneurs and
retirees, whose incomes are generated by other types
of businesses or investments, as well as tourism.
While it is difficult to determine the impact rising
energy costs may have on these trends, significantly
increasing transportation costs may slow some of
these growth patterns.
Tradeoffs May Lie Ahead
Farm and rural households may need
to make certain tradeoffs to adjust to higher energy
prices. Farmers may need to grow commodities that
use less energy. High fuel costs may also induce
more farmers to adopt farming practices that use
less energy. And because farming is only one source
of household income, additional members of the farm
household may seek off-farm employment.
Because of higher transportation
expenses, rural communities may see changes in settlement
patterns, especially in more remote rural areas.
Commuting patterns may also change in terms of type
of vehicle used and distance people drive to work
(some could move closer to their employment, usually
near urban centers). With greater use of computers
and the Internet in rural areas, more rural workers
may seek jobs where they could work from home at
least part of the week.
In addition, rising energy prices
will likely increase the demand for bioenergy, from
which agriculture may benefit and play a key role.
However, data are not currently available to support
a comprehensive economic analysis of these effects.
Some insights are contained in the USDA Agricultural
Baseline Projections to 2015, which assumes
an increase in corn demand for bioenergy and incorporates
energy price forecasts from the Energy Information
Administration in production costs for all countries.
The USDA baseline embeds an assumption about future
corn use for ethanol: “Corn used to produce
ethanol in the United States more than doubles the
2004/05 level by 2015/16. This increase reflects
the Renewable Fuel Program of the Energy Policy
Act of 2005, large ongoing ethanol plant construction,
and economic incentives provided by continued high
oil prices.”
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