Statement of Harry S. Baumes

Senior Vice President, Industry & Agriculture, WEFA Inc.

BEFORE THE

U.S. SENATE COMMITTEE ON

AGRICULTURE, NUTRITION, AND FORESTRY

July 20, 2000

Mr. Chairman and Members of the Committee, good morning, and thank you for the opportunity to share my comments with you at this hearing on energy issues and US agriculture. My name is Harry S. Baumes. I am currently employed as the Senior Vice President for Industry and Agriculture at WEFA, Inc. I have served in this capacity since February 1999. Previously, from January 1996 to January 1999, I served as WEFA's Senior Vice President of Agricultural Services. Founded in 1963, WEFA, Inc., is a consulting company that provides economic data, software forecasts, analysis, and consulting to assist clients evaluating current and future economic environments, developing business and marketing plans, and participating in strategic planning. WEFA employs nearly 250 economists worldwide. WEFA's Agricultural Services division provides economic analyses on aspects of production and commercial agriculture, including fertilizers.

Prior to joining WEFA, I was with the U.S. Department of Agriculture from 1988 to 1996, in various leadership capacities. From July 1981 to January 1988, I was Senior Service Director, Agriculture Services, initially with Chase Econometrics, and then the WEFA Group. The WEFA Group purchased Chase Econometrics in 1987. WEFA, Inc., is the current company that resulted from the 1987 acquisition and merger. Prior to that time, from October 1979 to July 1981, I was a visiting assistant professor at Virginia Polytechnic Institute and State University, in the Department of Agricultural Economics.

My educational credentials include: a Ph.D. in Agricultural Economics from Purdue University (December, 1978); a Masters in Agricultural Economics from Purdue (August, 1976); and a BS in Statistics and Biometry from Cornell University (May, 1974). My graduate training emphasized supply, demand, and price analyses and quantitative methods.

In my comments at this hearing this morning I will focus on the following areas:

Direct usage of "energy inputs" in production agriculture,

Indirect usage of "energy" in production agriculture,

Short run implications of higher energy costs, and

Long run implications of higher energy costs on US agriculture.

Direct Usage of Energy Inputs in Production Agriculture

In the farm operation or production process, whether crops or animal production, farmers demand energy-based inputs. Different types of production activities require unique types and amounts of energy inputs.

Planting and harvesting activities typically require diesel fuel for tractors, combines, mowers, balers, and other equipment. This would include application of fertilizers and pesticides as well.

Electricity serves the farm sector well. Electricity is required to operate irrigation equipment. Dairy operations demand electricity to operate milking parlors, to keep milk cool, and to heat water for sanitation purposes. Electricity is needed to light homes, barns, and operate cooling systems for poultry. The farmer's living quarters needs to be "lighted," heated, and cooled, as well.

Natural gas, liquid propane, and electricity are used to power crop dryers.

In addition, gasoline, oils, and lubricants are necessary to the farm.

In the aggregate, farmers expended on direct energy expenses (fuels and oils, electricity) an average of $9 billion over the 1996-99 period, nearly 5.5% of cash expense and 5.0% of total production expenses. Estimates of energy expenditures and cash costs are expected to rise in 2000 after being fairly stable over the past three years. Direct energy costs are estimated to rise by $2.5 billion to $11.8 billion. Total cash expenses are also estimated to rise, but at a slower rate than direct energy cost. As a result, direct energy costs' share of cash costs is likely to increase to almost 7.0%. The types and amounts of energy needed by production activity vary considerably.

Exhibits I, II, and III present US crop production cost information as reported by USDA's Economic Research Service. As a reminder, the cost information is for production and does not reflect storage, marketing, or any transportation costs involved in the actual selling of the commodity. For corn, direct energy costs have ranged from $24 to $25 per acre, about 15% of cash expenses. Soybean production is not as energy intensive as corn. Direct energy expenses amounted to $6 to $10 per acre and only about 7.0% of cash expenses. In absolute terms, wheat producers expend about $10 per acre on direct energy, similar to soybeans, but the share of cash expenses is about 14%, which is closer to corn. Energy is a major expenditure for farmers, and clearly, any factor that raises the cost of direct energy expenses to the farmer reduces returns per acre.

Indirect Usage of Energy Inputs in Production Agriculture

Indirect energy use by production agriculture reflects the amount of energy consumed in the production of manufactured inputs required by farmers, primarily fertilizers and pesticides. Farmers use millions of pounds of pesticides and millions of tons of fertilizers. Fertilizer production, particularly nitrogen, is energy intensive. Anhydrous ammonia is both a fertilizer and feedstock for production of other nitrogen products.

Exhibit IV presents the cost of production for anhydrous ammonia for the 1996-99 calendar years. Every ton of ammonia produced in the US requires between 33 to 34 mmbtu of natural gas. For the past four years, natural gas prices have been stable. Energy costs in ammonia production accounted for about 75% of the total production costs.

Exhibit V presents energy costs, primarily electricity, share of total production expenses for phosphate materials. The production of fertilizer grade phosphate involves many steps. Energy costs in the production of triple superphosphate and diammonium phosphate account for 11% and 24% of total costs, respectively.

The recent rise in natural gas prices to more than $4.00/mmbtu has raised production costs to fertilizer producers and reduced margins. These cost increases have not been reflected in the prices farmers pay for nutrients. As a consequence, some nitrogen producers in the US have shut down facilities, either temporarily or permanently.

Energy-intensive fertilizer and crop chemicals cost account for about 43% of the total cash expenses for US corn production, 35% for wheat production, and 40% for soybeans. Direct energy costs account for another 10% to 15% of cash expenses for these crops. Energy is important to agriculture!

Short-Term Implications of Higher Energy Costs

In the short run, a farmer will have little to no opportunity to adjust to "shocks" or unexpected events. For example, once a farmer makes a decision to plant a specific crop, the farmer typically purchases or makes contractual obligations for the inputs required for production. Thus, the recent rise in diesel, gasoline, and natural gas prices has a direct effect on the farmers' bottom line. The farmer will not risk losing his crop if there is a pest infection or infestation--he or she will purchase the needed pesticide and treat the crop. Higher fuel prices will not prevent the farmer from harvesting the crop. This is illustrated in the costs of production information found in Exhibits I, II, and III.

Long-Term Implications of Higher Energy Costs

In the long run, more than one production cycle, farmers will respond to changes in input prices. In the absence of other changes, if the recent rise in energy costs is sustained, then farmers will adjust to less energy-intensive production activities and use less energy-intensive inputs in production. This has been demonstrated throughout history. The adoption of conservation tillage practices and the transition of gasoline to diesel engines.

Mr. Chairman, this concludes my comments this morning. I would be happy to answer any questions you and the Committee may have.