With $3 gas and diesel prices, your pick up truck may even be parked alongside your planter and combine. Fortunately, July is not a high fuel use month and you are taking the opportunity to recover from spring field work while you are dreading the time you’ll soon be driving your combine up to the fuel pump. Fuel costs will be a major crop budget consideration for you next winter, but with the $3 national benchmark reached in fuel prices, let’s take a quick look at what USDA’s energy economists are thinking.

In his presentation at USDA’s Outlook Conference, macroeconomist Mathew Shane said USDA’s 10 year forecast for fuel prices exploded 30% upward between 2005 and 2006. In terms of real dollars, based on the value of the dollar in the year 2000, oil that peaked at $39 in 2004 and was expected to fall back about $10 and slowly increase through 2015, continued upward to peak at $51, fall back about $3, and slowly increase through 2016. (Keep in mind his statistics were calculated earlier this year.)

Shane reminds you the inflated petroleum prices are a function of:
• High GDP growth in China, India and other Asian newly industrialized economies competing with…..
• High GDP growth and energy demand in the United States
• Supply uncertainties from Iran and Iraq, Venezuela, and Nigeria
• Difficulties bringing new oil supplies online

But will petroleum prices stabilize? He says we will learn to be more conservation conscious, there will be technology improvement that will create efficiency of use, and there will be new source of petroleum coming on line, all of which will moderate the volatility. Currently, the US is using about 21 million barrels of petroleum per day with a moderate upward trend. China, however, is using 12 million barrels per day with a rate of increase about twice that of the US, and China has overtaken Japan as the number two consumer of petroleum. While China consumes three times the amount of energy than the US in term of dollar output, its efficiency gains are twice those of the US.

While it is no surprise to anyone in agriculture, our industry is very energy intensive. Shane says it has become that way because cheap energy sources created that environment. Consequently, agriculture will benefit greatly from efficiency gains and any change in practices in production that will reduce energy consumption. Using average production costs for 2000 to 2003, 27% of corn production, 14% of soybean production, and 21% of wheat production were attributed to energy, compared to 3% or less for hogs, cattle, and dairy production.

Shane says energy efficiencies have occurred in agriculture, and in the past 23 years there has been a 50% increase in output, per unit of energy. As your equipment has changed over time, your use of gasoline has changed to diesel. But while gasoline use in agriculture has declined by 75% in the past 35 years, diesel fuel use has gone up only 10%. Of the crop inputs originating from petroleum, both fertilizer and pesticide production and use have peaked and are declining. As a result, agriculture’s intensity of use of energy is declining faster than the US economy as a whole.

In your crop production budget, how much have energy prices climbed? U of IL ag economists analyzed several thousand farm records and say 44% of the $50 rise in per acre corn production costs from 2003 to 2005 can be attributed to "energy sensitive costs." Those include fertilizer ($16 increase)and fuel/oil ($6 increase). They add, "Since 1980, no other two-year period has had as large an increase in costs as between 2003 and 2005." Read their report.

Their statistics were taken from northern IL farms, however similarities exist with central IL farms, where 47% of the $42 per acre increase was attributed to energy, and in southern IL, where 34% of the $69 per acre increase was attributed to energy costs. Their belief is that there is a greater chance of a decline in energy prices, than in costs which are not energy sensitive, such as rent and seed.

USDA economist Mathew Shane says, “Energy will be a major share of farm costs, even as efficiency improves; high energy costs will be a drag on farm income, high energy prices will stimulate energy efficiency gains, and high energy costs will encourage production of lower energy crops.”

Summary:
Commodity prices may be easier to predict than the cost of fuel, but one thing is certain, energy prices are taking a larger share of crop budgets than either you or USDA thought would happen. It is not realistic to predict fuel prices, because supply is sluggish and competition to buy it is growing from China, particularly. Agriculture’s use of energy is becoming more efficient, but that must improve, along with energy conservation initiatives that farmers will take in their crop mix.