farmgate: Climate Change: Profit Or Problem?
The popular agricultural press has taken the USDA to task over its position that the Climate Change legislation (HR 2454) will have little impact on agriculture. USDA’s analysis of the House-passed legislation, which is now in the US Senate for consideration, originated in the Office of the Chief Economist. The study says, “In summary, USDA’s analysis shows that the agricultural sector will have modest costs in the short-term and net benefits – perhaps significant net benefits – over the long-term.” But how did it come to that conclusion?
The USDA analysis is based on energy cost estimates of the Environmental Protection Agency, applied to agricultural supply, demand, prices, and net farm income over the near term (2012-2018), medium term (2027-2033) and long term 2042-2048.) USDA says its estimates are predicated on several assumptions:
• Farmers will receive payments for offsetting the carbon released into the atmosphere by industry.
• Some cropland and pasture will be planted to trees and that will reduce grain supplies causing higher values for grain. While that will help grain farmers, livestock producers will be hurt financially.
• There will be increased demand for biomass to produce renewable electricity, but that addition to farm income has not been calculated.
USDA acknowledges greater production costs because of higher energy costs, and says 50% of the cost of production of wheat and feed grains can be traced to energy costs. Over the past 4 crop years, 55% of corn production costs, 31% of soybean production costs, and 58% of wheat production costs are attributable to energy. USDA quotes EPA as expecting petroleum, electricity and natural gas costs will rise significantly above baseline levels, but while energy prices would be felt by producers, the cost of fertilizer would be unaffected until 2025. EPA has placed the fertilizer industry into a category that would be expected to experience high costs, but since foreign competitors would avoid those costs, they would not be charged against US fertilizer producers. However, that immunity would be phased out in 2025 and fertilizer costs would then catch up to where they would normally float.
The Chief USDA Economist also says a 2006 survey found more than a half million farmers took some action to reduce fuel or fertilizer expense, such as servicing engines, cutting back on trips across the field, or reducing fertilizer use, as well as negotiating price discounts. And USDA says efficiencies have increased in agriculture’s use of energy to the point that it is nearly half of what it was in the early 1950’s. Going forward, rice and sorghum producers are expected to see a more than $3 per acre increase in energy costs in the near term, while soybean producers will only see a $0.45 increase per acre. USDA says energy costs are forecast to be 6.4% more, pushing up total production costs only by 0.3% in the near term. That translates into a small decline in planted acreage, and a subsequent rise in market prices for grain commodities. Those include 0.1% for corn, and wheat, but no change for soybeans or livestock. Net farm income is expected to fade during the 2012-2018 period by $600 million per year. If the immunity were not given to fertilizer, net farm income would fall an estimated $1.3 billion per year.
In the longer term, over the next 40 years, USDA again used EPA-estimated energy costs, which would see higher costs for fertilizer because its immunity from higher natural gas costs would be phased out. Additionally, allowable emissions in the manufacture of fertilizer and chemicals would be reduced and that would have an increased cost for fertilizer. As a result, USDA says corn production costs would increase about 10%, but soybean production costs would go up less than 5%. With an estimated 22% rise in energy costs in the long term, higher commodity prices are not sufficient to offset the hike and farm income will decline over 7% from baseline levels. However, USDA says if farmers adopt production of biomass crops, annual net farm income would actually increase, but less than 3% by 2045.
The USDA analysis of the Climate Change legislation says farmers and ranchers would receive compensation for offsetting the release of carbon by others, not only through reduced tillage, but forest maintenance and conversion of pasture and some cropland to forest. Initially, USDA says those $2 billion in annual payments would rise to $28 billion per year, and in the long run, there would be more income than cost for agriculture resulting from the legislated climate change that will come in the form of higher taxes on fuel and energy.
Summary:
Climate Change legislation pending in Congress would place a tax on energy, and cause higher production costs for agriculture, not only from fuel, but also from higher costs from fertilizers. USDA believes the change will cause some farmers to reduce production to the point that higher commodity prices will result, as well as other farmers changing their production and cropping practices to earn money from industries that emit carbon beyond their limits.
Posted by Stu Ellis on July 28, 2009 12:54 AM to farmgate