MOFB Cut to the Chase: Food for Thought: The Role of Oil Prices on Food, Fuel and Agricultural

American farmers are on the defensive. Despite the fact that two percent of our population produces the world’s safest and most abundant food supply, farmers now find themselves being lambasted for rising food and fuel prices.

It is somewhat ironic that not long ago U.S. farmers were admonished for producing too much and relying too heavily on new production technologies. Agriculture remains dependent on oil in many different ways. Gasoline and diesel fuel power our trucks, tractors, pumps and generators.

Petroleum-based products are used extensively in packaging and transporting agricultural products.

In recent days oil prices have topped $130 per barrel and the price of regular grade gasoline approached $4.00 per gallon in June. To put these prices in perspective, since 2001 oil prices have increased more than 400 percent and fuel prices have more than doubled. There is no simple explanation for the higher prices but experts attribute the increases to factors such as growing demand in the U.S. and nations such as China and India and geopolitical issues in other regions of the world.

According to the Energy Information Association, U.S. production of crude oil has dropped 31 percent from 7.36 million barrels per day in 1990 to 5.10 million barrels per day in 2007. Crude oil imports to the U.S. increased almost 70 percent from 5.89 million barrels per day in 1990 to 10.01 million barrels per day in 2007. All told, 66 percent of U.S. crude oil was imported last year.

U.S. consumers spend approximately $1.1 trillion per year for food and beverages. The annualized food price inflation rate was 5 percent in the first quarter of 2008. Using the $1.1 trillion food and beverage expenditures, this suggests annual growth in food outlays of $50 billion, double the historical average of $25-30 billion.

Now consider that for each dollar spent on food, 16 cents is attributed to energy and transportation. Yet, over the March 2007-March 2008 period, a whopping 44 percent of the food price increase is attributed to rising energy prices. This alone amounts to $22 billion in increased food costs.

At the farm level manufactured input expenses (fertilizer, pesticides, fuel and electricity) are forecast to exceed $45 billion in 2008. This represents more than a 70 percent increase in farmers’ expenses since 2000. Unlike many other industries, most farmers are not in a position to "pass along" their higher costs to consumers. They cannot impose a surcharge nor are they in a position to negotiate the prices paid for inputs such as fertilizer, fuel and natural gas. Also, it should be noted that not all of agriculture stands to benefit from high crop prices; many livestock

producers find themselves in a very tenuous financial position as record feed costs simply exacerbate the impact of rising oil prices.

Common sense actions such as conservation, utilizing domestic resources, encouraging the use of efficient transportation modes such as commercial navigation and continued movement toward renewable fuels will not solve the crisis but will provide Americans with much-needed relief from profit-driven, foreign oil cartels.