STATEMENT OF
ROGER K. CONWAY
DIRECTOR OFFICE OF ENERGY AND NEW USES
ECONOMIC RESEARCH SERVICE
U.S. DEPARTMENT OF AGRICULTURE

BEFORE THE

UNITED STATES SENATE
COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY

Mr. Chairman and Members of the Committee, I am pleased to appear before you today to discuss energy trends in agriculture. Agriculture both consumes and produces energy. Farmers need energy to use power equipment for field operations to plant, harvest, and transport. Energy is also a vital input to process and safely store our many food and fiber products. Of course, energy from the sun through photosynthesis is the process that creates our crops. On October 2 last year USDA testimony before this Committee outlined our biofuels and new uses programs so today, I would like to spend most of my testimony focusing on agriculture as a user of energy.

Agriculture as a Consumer of Energy

Various forms of energy are used to fuel farm machinery and vehicles, including liquid fuels, natural gas, and electricity. In addition to energy consumed directly on the farm, many farm inputs have an indirect energy component. By indirect, we mean that energy is required to produce most of the farm inputs purchased by operators, including commercial fertilizers, pesticides, machinery, and feed. Considering both direct and indirect energy, farm production utilizes approximately 2 percent of total energy consumed in the United States.

In 1995, U.S. farmers used approximately 1 percent of U.S. gasoline or 1.40 billion gallons and 12 percent of motor diesel fuel or 3.6 billion gallons. Onfarm operations use about .8 billion gallons of liquefied petroleum (LP) gas.

Gasoline is used primarily in farm trucks, older harvesting equipment, and small- and medium-sized tractors. It is the principal fuel used on small farms. Widespread adoption of diesel engines has resulted in gasoline use falling off by about 40 percent since the mid-1970's. Diesel fuel has become the major fuel used in powering most medium and large tractors and harvesters. The trend of favoring diesel fuel over gasoline is associated with the relative fuel efficiency and technological advances in diesel-powered equipment that have increased energy efficiency. However, diesel fuel consumption has not increased largely because many farmers have adopted reduced tillage practices, and newer and larger tractors are more efficient.

Liquid petroleum or LP gas is used primarily to dry crops, heat animal structures, and power irrigation pumps. LP gas consumption declined steadily throughout most of the 1980's but has remained relatively constant since 1989. Natural gas is used mostly for powering irrigation pumps and crop drying. The trend in natural gas consumption follows the same pattern as LP gas. Electricity is used primarily for powering motors, lighting and heating, and cooling livestock facilities. Electricity used in farm production has fluctuated up and down, showing no apparent trend since 1980.

Expenditures for most farm inputs have an energy component. Energy is used to manufacture and transport seeds, feed, agricultural fertilizers and chemicals, machinery, and repair parts. Chemicals and fertilizers are the most energy-intensive farm inputs and account for a large percent of total energy required in farm production. Fertilizer consumption grew throughout the 1960's and 1970's, peaking at 23.7 million nutrient tons in 1981. Recently, fertilizer use has remained relatively stable, ranging from 18.1 to 21.8 million tons during 1982-93. Fertilizer use declined from its peak level because of fewer planted acres and stable per acre rates of application. Farmers spent $10.0 billion on fertilizer in 1995 (Table 1).

Energy is the single most important input in pesticides production (includes herbicides, insecticides, and fungicides). Pesticides (mostly herbicides) used on crops increased rapidly between 1960 and 1980. Farmers increased their use of pesticides on corn and soybeans to a greater extent than other crops during that period. Since 1980, pesticide use has stabilized or declined. Farmers spent $7.7 billion on pesticides in 1995 (Table 1).

Farm energy expenditures are affected by production factors, such as acres planted, the degree of pest infestation and tillage practices. However, energy prices are probably the single most important determinant of energy fuel costs. Higher energy prices increased farm fuel expenditures during the energy crises of the 1970's but energy prices steadily declined during most of the 1980's. Since 1981, nominal fuel prices have shown a slight decline. Direct energy expenditures on farms for fuels and oils and electricity were $8.5 billion in 1995 (Table 1).

Direct energy costs represented about 4 percent of total farm production expenses in 1972. Increases in energy prices nearly doubled energy's share of expenses by 1981. However, in the past several years, lower energy prices have pushed the energy share of production expenses back down to about 5 percent for 1995. Indirect energy expenditures as reflected in fertilizer and pesticide expenditures during the same period accounted for 10 percent of total farm production expenditures.

Energy requirements vary by crop and region. Rice production has relatively high energy costs because it uses large amounts of fuel and chemicals. In addition, rice requires large amounts of energy for irrigation and drying (Table 2). Sorghum's relatively high energy cost comes from a combination of fuel, chemical, and high irrigation needs. Cotton ranks high because of its large chemical requirements, and energy for ginning. Field crops generally use more energy to produce than fruits, vegetables, and livestock operations.

Overall, energy efficiency in agriculture has increased because agricultural productivity has increased. The agricultural output per unit of energy input increased by about 90 percent from 1978-94 (see Figure 1). Productivity of other energy-related inputs has also increased. For example, nitrogen fertilizer applications for corn have been trending down, falling from 140 pounds per acre in 1985 to 123 pounds per acre in 1993.

Electric utility deregulation is likely to have implications for agricultural and rural America. The Department of Agriculture (USDA) has begun an interagency economic analysis to assess the likely outcome of deregulation on rural America.

As the debate on electric utility restructuring and deregulation develops, USDA believes there are two goals that should be part of the development of any restructuring of the marketplace: one, continuation of reliable, high-quality electric service at a reasonable cost to rural consumers; and two, protecting the integrity of the Government's loan portfolio.

To accomplish these goals, USDA believes that any restructuring of the electric utility industry should be guided by the principles of reliability, fairness and flexibility. The transition to a more competitive industry environment must maintain the reliability of the Nation's electric system. The electric infrastructure in rural America should not be put at risk by restructuring legislation. A more competitive electric sector with retail choice should be fair and equitable to all consumers, including rural citizens, to existing electric utilities, and to Federal taxpayers who support USDA's Rural Utility Service program. Finally, industry restructuring should be flexible and contain a thoughtful transition process that accommodates the diversity of the electric utility industry.

Energy is vital to maintaining the productive capacity of U.S. agriculture. Without energy farmers could not plant, cultivate, harvest, or transport their crops and livestock to market. So, the Department and other Agencies of the Federal Government monitor energy supplies and have developed contingency plans in the event energy supplies are disrupted. During Desert Shield and Desert Storm, USDA monitored the supply situation and coordinated emergency contingency plans across agencies and with the Department of Energy (DOE) and their State offices to prepare to act in the event of any energy shortfalls that might have occurred in the agricultural sector during the Middle East activities. During the Midwest flood of 1993, we performed a similar role.

Agriculture as a Producer of Energy

Farm products as a source of energy are promising because they have the potential to provide benefits in energy security and environmental quality while raising farm income. The energy security benefits arise from the replacement of imported oil from less than reliable sources by a domestically-produced renewable source of energy.

Agricultural sources of energy include well established products such as wood for fuel and ethanol from corn, and many others at earlier stages of development, for example, vegetable oils and animal fats as a substitute for diesel fuel, new cellulosic crops for ethanol and electric power, and methane as a byproduct of livestock production. Their environmental benefits have two elements, one relating to agricultural commodities as biorenewable resources and the other relating to ethanol as an automotive fuel and fuel additive and biodiesel.

Replacing fossil fuels as an energy source with energy derived from an agricultural crop can help reduce carbon dioxide in the atmosphere. Burning an agriculturally derived energy product releases into the atmosphere about the same amount of carbon, but growing the crop removes carbon from the atmosphere. The effect of a shift from a fossil fuel to an agricultural energy source is to reduce atmospheric CO2. Many unanswered questions remain about the relationship of CO2 concentration and warming of the climate, and about the consequences of such warming. Given the research to date, it would appear to lower greenhouse gas emissions. USDA and DOE are working together to provide an analysis of the effects of ethanol produced from corn on greenhouse gas emissions.

Agricultural fuels, particularly ethanol and ethyl tertiary butyl ether (ETBE) for automotive use and biodiesel for other equipment, also reduce emissions of other toxic pollutants, such as carbon monoxide, to the atmosphere than existing gasoline or diesel fuel. USDA, DOE, and the Environmental Protection Agency is collecting data on the health effects of both oxygenated and non-oxygenated fuels including ethanol. USDA is also working with DOE to provide a life-cycle assessment of biodiesel compared to petroleum-based diesel fuel.

Because of these agricultural, energy security, and environmental benefits, USDA has been a supporter of policies to foster and expand the use of biofuels and other agricultural energy sources. In our October 2, testimony last year we described the efforts of USDA's biofuel program to advance starch and cellulosic ethanol, biodiesel fuel from vegetable oil and animal fat, and biomass for electric power. In addition, USDA's work on new industrial uses of agricultural products is providing opportunities to reduce petrochemical uses. For example, most plastics are petroleum based. Development of starch-based polymers could provide a biorenewable alternative.

The biofuel of greatest economic importance at this time is ethanol, the production of which increased from less than 90 million gallons in 1980 to slightly more than 1.3 billion gallons in 1995. Record-high corn prices during 1996 dramatically reduced ethanol production to 990 million gallons. The financial squeeze ethanol producers experienced in 1996 has dissipated as corn prices have dropped and prices of gasoline and methyl tertiary butyl ether (MTBE) have increased. Blending margins for ethanol have greatly improved from last summer when the wholesale price of gasoline was almost $0.28 per gallon less than for ethanol (ethanol minus the $0.54 per gallon incentive). Ethanol prices are strongly influenced by gasoline prices, because a large portion of ethanol is blended into regular gasoline as an octane enhancer and fuel extender. In the spring of 1997, the price difference had narrowed to about $0.06 per gallon. Ethanol also has been competitive with MTBE in oxygenated-fuel mandated areas, since until recently, MTBE prices have been steadily increasing.

While ethanol production is increasing because of more favorable economics, it has not rebounded to the peak level of 1995 (Figure 2). It is now estimated that about 450 million bushels of corn will be used for ethanol production in the 1996-97 marketing year. In 1996/97 ethanol production is projected to be near 1.1 billion gallons, up about 100 million gallons from last year.

Ethanol producers are apparently still trying to regain the market share they lost in octane and oxygenated fuel markets when corn prices reached record levels during crop year 1995-96. After last year's production cutback, many petroleum firms elected to use MTBE rather than ethanol for the winter oxygenate season. Another reason for the slow rebound is that a robust export market for beverage alcohol has diverted production from fuel-grade alcohol. However, there is every reason to expect ethanol production will steadily expand if the tax credit is continued. By the year 2000, the Department projects 550 million bushels of corn will be used for ethanol production. The Clinton Administration is strongly committed to the continued growth and development of the U.S. ethanol industry. The Administration is pleased that both the House and Senate bills recognized the importance of the continued assurance of tax benefits for ethanol to encourage the use of alternative fuels. Earlier this year, the Administration proposed extension of the excise tax exemption for ethanol in our ISTEA reauthorization proposal. The Administration would support the Senate bill extending the incentives through 2007, but without phasing down the rate of benefits. The Administration also opposes the new score keeping language included in the House bill.

As we described in the October 2 testimony last year, the development and expansion of a renewable fuel industry can play a role in enhancing energy security, cleaning our environment, and promoting farm and rural economic growth. Economic factors will determine the possibilities for expansion. Petroleum and fossil fuel prices, feedstock costs, coproduct markets, energy and environmental policies, and advances in technology are all critical economic determinants of biofuel growth. USDA's research agenda will contribute to lowering the cost of producing biofuels and developing new nonfood uses for agricultural commodities.

That completes my testimony Mr. Chairman, and I will respond to any questions you or the other Members may have.