Hurricanes and Farming

Farm Business Management Update, October/November 2005

By Gordon Groover (xgrover@vt.edu), Extension Economist, Farm Management, Department of Agricultural & Applied Economics, Virginia Tech

I have received a number of calls from reporters asking about the impact of the hurricanes on already high energy costs farmers face. The obvious answer is that it is not good. Many of the inputs used in agriculture are derived from petroleum or natural gas produces in the Gulf, for example pesticides, nitrogen, and fuel for machinery and grain drying. One of the main inputs into manufacturing nitrogen is natural gas and the disruptions of the pipelines in the Gulf of Mexico have exacerbated the delivery of natural gas to manufacturing plants. Fall harvest season is a time when tractors, trucks, choppers, combines, and dryers consume a majority of the year's fuel on many farms.

Q: What do you get when you mix Katrina, Rita, diesel fuel, petrochemicals, and nitrogen together? A: Besides human suffering - higher production costs for all farmers. To help answer what's in store for farmers and to set the stage for a few alternatives to higher costs, I've included a section from the Agricultural Economic and Policy Perspectives a newsletter from the Ag Economics Department of Mississippi State and authored by Gregg Ibendahl about the impact of this summer's hurricanes on agriculture in the Mississippi http://www.agecon.msstate.edu/research/farmpolicy/newsletter/200509.pdf

ÉThe most obvious impact of the hurricanes is the dramatic increase in fuel prices. Fuel prices were already at record levels even before the hurricane came. The year plus run-up in fuel prices can be attributed to an increase in world demand from countries such as India and China. However, the hurricane added a temporary price spike of around $0.30 for diesel fuel. This hurricane increase is moderating but may still affect prices to a degree at least through the winter. Overall, diesel prices have increased by over a $1.00 a gallon since January 2004.

Compounding problems for farmers is the increase in natural gas prices. Because much of the U.S. natural gas comes directly from the gulf, the hurricane effects are even greater than on diesel or gasoline. Natural gas prices have increased around 60% since August. The natural gas hurricane price increase is also likely to persist longer than the hurricane diesel price increase. Unlike diesel fuel and gasoline, the greatest demand for natural gas is the winter months. Thus the hurricane effect on natural gas is magnified due to the greater disruption in supply and the normal seasonal increase in demand.

This increase in natural gas prices is important to farmers because natural gas is the key ingredient in nitrogen fertilizer. There is a 0.79 correlation between natural gas prices and the price of nitrogen. It is not unreasonable to expect a 50% increase in fertilizer prices for the coming year. Much of this increase can be attributed to the hurricane...

OK, now what? As you plan for the future, consider

1. Forage producers, expecting to see a 50% increase in nitrogen prices over historically high rates now, should prepare for overseeding with clovers in their pasture and hayfields this winter and abandon using nitrogen except on the most productive soils.
2. Substituting crops that require less nitrogen inputs - soybeans instead of corn grain or cotton.
3. Producing crops that require less machinery hours (use less total fuel per acre) and pesticide inputs like soybeans instead of cotton or peanuts.
4. Rethinking making hay and managing intensive grazing and stockpiling fescue to reduce the amount of hay harvested.
5. Rethinking your nitrogen fertilizer rates, currently your comfort zone for nitrogen rates are based on $0.25-$.30 per lb. If N prices double next year, then you'll need to use less, maybe a lot less. Consider this true story from a dairy producer in 1983 (I'm showing my age) responding to the requirements of the Omnibus Budget Reconciliation Act of 1982 to reduce milk production to be eligible for a $0.50 per cwt refund. The farmer began reducing feed to the milking herd and then reduced it a bit more, and more, and more before he saw any appreciable change the bulk tank. He finally had to dump some milk to meet the mandated reduction to receive the refund. The take away point is that many inputs make be used way beyond their point of economic benefit, or exceeding the point of diminishing marginal returns. Is nitrogen used beyond its point of economic benefit to your farm? At $0.50-$.60 per lb - yes.
6. Using split applications of nitrogen on non-irrigated crops based on crop conditions. This change requires a trade-off between fuel and nitrogen. If Greg Ibendahl is correct, then diesel fuel maybe less than N.
7. That poultry litter is a good substitute for all fertilizers, yet hauling a bulk product over long distances with high fuel costs can reduce the benefits. Push the pencil on N benefits vs. hauling costs. Make sure you get the details about the Virginia Poultry Litter Application Cost-Share Pilot program - For more information call Scott Ambler at (804) 786-2235.
8. Leaving grains in the field a little longer to reduce drying costs. The tradeoff is increased harvest loss and less grain to sell vs. the reduced energy costs.
9. Interested in the reasons behind the dramatic spikes in energy prices? Take a look at an article title The Energy Market Situation and Outlook, by Matthew C. Roberts, Ph.D., Agricultural, Environmental, and Development Economics, The Ohio State University. The article can be found on the October-2005, Ohio Ag Manager web site at http://ohioagmanager.osu.edu/news/index.php.
10. Finally, if you are interested in tracking fuel and gas prices to time your call to fill up the tanks a good source of data is the "Petroleum Navigator" supported by the Energy Information Administration (EIA) a statistical agency of the U.S. Department of Energy http://tonto.eia.doe.gov/dnav/pet/pet_sum_top.asp.

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