Oil Prices Likely to Continue to Hurt Farming

May 25, 2000

A new report from USDA says if oil prices average around $25 per barrel for the next five years, grain and oilseed producers will feel a greater pinch in the pocketbook next year as available inventories of manufactured inputs dwindle. A resulting decline in net income from crops will persist longer than it will for the livestock sector.

"The rise in oil prices is (forecast) to cause limited and transitory increases in inflation and small and short-term reductions in economic growth," the Economic Research Service report said. "The agricultural sector, however, would be more significantly affected, because sizeable adjustments to sustained higher energy prices would affect food processing and marketing as well as farm production."

Oil prices sustained at $25 a barrel would have both direct and indirect effects on agriculture over several years. The more energy-intensive livestock product processing enterprises, for example, would make early adjustments to higher production and processing costs. In contrast, part of the impact on grain and oilseed producers would be delayed until 2001 because available inventories of manufactured inputs mean adjustments in prices of fertilizer, pesticides and other oil-based inputs lag gains in energy prices, the report said.

Some use of forward pricing also would postpone some of the impact on crops until after 2000. The decline in net income from crops also would persist longer than for the livestock sector Farmers would try to adjust their longer-term production in response to lower prices received by reducing herd size and feed use and limiting replacement of breeding animals.

The increased slaughter would depress livestock prices further. In the near term, the impact of lower prices on cash receipts would be offset partially by increased sales, reduced purchases of breeding stock and lower feed costs. Reduced feed demand in turn would depress grain and oilseed prices. The direct cost of higher fuel prices further would reduce farm income from crops in 2000 and 2001. Government payments would continue to offset partially lower cash receipts for major crops.

To read the entire report, access the Internet address http://www.ers.usda.gov/whatsnew/issues/oilprices/.