Impacts of Energy Price and Ethanol Demand Shocks on U.S. Agriculture

Impacts of Energy Price and Ethanol Demand Shocks on U.S. Agriculture

Authors: Chenyang Hu, Darrell Bosch, and Wei Zhang

Pressure for reducing carbon emissions and increasing reliance on renewable fuels may give rise to higher and more variable energy prices in the future. Higher energy prices and potential higher demand for ethanol might have important implications for agriculture, an energy-intensive industry. Our study examines the possible implications for U.S. agriculture of increases in energy prices and demand for ethanol.

We find that higher energy prices lead to higher crop prices and lower crop output. Crop acres including corn decrease in most farm regions with the exception of Northern Plains. Livestock production tends to decline in response to higher energy costs. Total livestock value tends to increase reflecting that reduced output is more than offset by higher prices. The regional distribution of the value of livestock changes very little in response to energy price increases.

Higher ethanol demand for domestic use and for export leads to expansion of corn production but reduction of feed grain sorghum. Crop output increases the most in the Corn Belt which has the largest share of corn. Livestock production tends to increase in response to higher ethanol demand due to the increased availability of by-products used for animal feed. Total livestock value tends to decrease as price decreases offset the effects of increased output.

The vulnerability of agricultural enterprises to energy price increases varies by enterprise and region depending on their energy intensity and region where production occurs. Increases in demand for ethanol have important direct effects by expanding corn acreage, but also have indirect effects on the relative profitability and price of livestock enterprises through the availability and price of ethanol by-products. Farmers, farm advisors, lenders, input suppliers, and policymakers need to be aware of these effects and be well prepared to anticipate the effects of possible energy price increases and ethanol policy changes.