Where do you line up on the issue of climate change? Much of the answer may depend upon your involvement in agriculture, and many farmers seem to be skeptics who are concerned that legislation to reduce carbon use will result in higher costs for crop production. Joe Glauber agrees with you, and he carries some weight in Washington.

Glauber is the chief economist at the USDA, and testified Wednesday before a House subcommittee investigating the climate change issue and its economic impacts on farmers. He says the proposed legislation that establishes a cap and trade system for greenhouse gas emissions will have a broad impact that will be complex and slowly developing. Glauber’s remarks indicates USDA is still computing the financial impact to farmers. But he says the EPA estimates on farm costs will be small over the next twelve years when fertilizer will be eligible for significant rebates.

Agriculture’s consumption of energy comes in the form of direct consumption of gas and diesel fuel, which is 6.7 percent of production expense and indirect consumption, such as fertilizer expenses, which is another 6.5 percent of production expenses. Glauber believes energy costs as a percent of total production costs are highest for wheat and feed grains and have energy input shares of 55 percent  to 60 percent . Soybeans are among the least energy intensive crops at 30 percent of total production costs.

Glauber and the USDA economists began their calculations with statistics developed during the summer by the EPA and the Energy Information Agency. They used the economic model of the Food and Agriculture Policy Research Institute to analyze House Bill 2454, which is the climate change proposal for cap and trade. In the first six years of the legislation, most of the direct energy price increases would be felt immediately by agriculture, but with provisions in the legislation to delay any impact on fertilizer that would not be felt until 2025.

He says as carbon emissions become more restricted over time, the price impact will become larger. Based on 2005 costs, electricity prices would be 6 percent to11 percent higher in 2015 and 13 percent 20 percent higher in 2030. Natural gas would be 2percent to 7 percent higher in 2015 and 10 percent  to17 percent higher in 2030. And petroleum would be 3 percent to 7 percent higher in 2015 and 5 percent  to 14 percent higher by 2030.

Higher prices for energy related farm inputs that include fertilizer and fuel would raise the cost of production for all major crops, with the largest for corn. The rising production costs estimated by EPA would decrease major crop planting by 133,000 acres, most of that being a 63,000 acre reduction for wheat. Corn acreage would be down less than 0.1 percent because of the delayed impact of the cap and trade legislation on fertilizer. Glauber says the production cost estimates of the Energy Information Agency reduce planted acreage by 354,000 with wheat and corn declining the most in favor of more soybean acreage.

In the first six years of the legislation, the price impact on corn and soybeans would be negligible. However, the cost of production would range from $1 to $25 for corn, and 45 cents to $5.19 for an acre of soybeans. Net farm income declines 0.9 percent  to 2.1 percent during the first 6 years of the legislation, although higher cash prices offset higher production costs.

Fertilizer cost increases, related to the climate change legislation, are proposed to be offset in the first 12 years, and protected from higher natural gas prices. Glauber says the impact of the higher energy prices on fertilizer is not evenly distributed. While farms using fertilizer account for 49 percent of farms, those farms account for over 63 percent of the projected decrease in income because of the energy legislation.

The price and cost projection model used by USDA looked at a medium term impact in 2027 to 2033 and a long term assessment for 2042 to 2048. There were no changes made in production practices in calculating the impact on agriculture. In the long term corn production costs are expected to increase more than $25 per acre from 2005 levels, soybean production costs will rise $5.19 per acre compared to 2005 costs. Contributing to those higher costs are a 22 percent increase in fuel, oil, and electricity costs, and a 20 percent increase in fertilizer and lime expenses. Glauber says, “While total receipts increase marginally—due to higher crop and livestock prices—they only partly offset the increase in expenses. As a result, higher energy prices associated with H.R. 2454 would lower net farm income by as much as 7.2 percent from baseline levels in the long term scenario.”

The USDA Chief economist concludes his testimony to Congress by saying the cap and trade legislation will pay some farmers to offset carbon emissions from industry and will benefit farm income by adding almost $22 billion, which is a 12 percent increase. He says 78 percent of the increase is due to higher commodity prices, 30 percent of which would occur in the Cornbelt.

Summary:
Cap and Trade legislation, designed to reduce carbon emissions and allow farmers to financially benefit by retaining carbon in the soil, will have expenses for agriculture, as well as payments. USDA says higher costs for energy and eventually for fertilizer will increase crop production costs and reduce net farm income. Fertilizer costs are initially protected from rising, but in the long term, fertilizer costs will go up and corn production costs will rise $25 per acre because of higher fertilizer and fuel costs.

Source: Stu Ellis, University of Illinois