The rising cost of oil and fertilizer due to the U.S.-Israeli war on Iran is affecting farmers all over Oregon. On Monday, we spoke with local farmers and a nonprofit representing small and mid-sized farmers. They said gas prices are already starting to affect them, and although they have the fertilizer supplies they need for this year, they are very concerned about those prices rising the next time they buy.
Tim Delbridge is an assistant professor of economics at Oregon State University’s Extension Services. He says agricultural operations of all kinds and sizes have limited options for dealing with rising costs. Not every grower can just raise prices on consumers to compensate. Delbridge joins us to tell us more about how the rising price of energy and fertilizer are likely to affect Oregon’s agricultural economy in the near future — and how long farmers can continue to operate if prices don’t drop.
Note: The following transcript was transcribed digitally and validated for accuracy, readability and formatting by an OPB volunteer.
Dave Miller: From the Gert Boyle Studio at OPB, this is Think Out Loud. I’m Dave Miller. The rising costs of fuel and fertilizer because of the war on Iran are affecting farmers all over Oregon. Yesterday, we spoke about this with two farmers in the Willamette Valley, along with a statewide nonprofit that represents small and mid-sized farms.
We’re gonna get a broader look at this issue today. Tim Delbridge is an agricultural economist with Oregon State University Extension Service. He joins us now. It’s great to have you on the show.
Tim Delbridge: Yeah, thanks for having me on.
Miller: So let’s start with fuel prices. They affect just about everybody, every sector of the economy, and agriculture is absolutely on that list. Do you have a sense just for how big an effect an increase of, say, $1 or I’ve even seen $2 a gallon for diesel, how that would affect the economics of the average farm?
Delbridge: That’s a great question. I just pulled up, before I jumped on the call, the diesel prices and it’s showing a national average of $1.60 increase since February. So that’s about 30%. That’s a really substantial increase. The impact is, as any economist is going to tell you to answer any question, is it depends a little bit on the type of farm you’re talking about and the crops that they’re growing. Different crops are going to involve more machinery passes across the field, more energy needed, so they’re going to be affected a little bit more.
I did just pull up one of OSU’s Enterprise Budgets – these are documents that we put together to estimate the cost of production of different crops. And when compared against prices, we can kind of estimate net income from growing the crop. I pulled up a budget for green beans, which is a common crop here in the Willamette Valley. It looks like a 30% increase in diesel fuel would lead to about a 15% to 20% decrease in net income. And that’s going to be, again, different for different crops and different farm sizes and types.
Miller: But that’s a gigantic hit. Potentially 20% of income?
Delbridge: Yeah, it’s big. If diesel fuel stays high over the course of the year and we stack on top of that an increase in fertilizer costs … So far, fertilizer’s up maybe 10% but would get bigger if this goes on. And then shipping, as your guest mentioned yesterday, is a big issue for a lot of farms. So all in, this is a pretty big impact for farms.
Miller: How much can farmers pass their increased costs onto buyers?
Delbridge: That’s the question that we always get. For commodity producers, farmers don’t set the price. Farmers don’t choose how much to charge. They take what the market is offering. I will say that prices fluctuate for commodities and if production costs go up, to the point where the farms are going to choose not to produce the crop, well, markets adjust and prices will come up a little bit. But in the short term, really, the farms are bearing that increase in costs. So it’s only, I think, with the longer-term price increases that we’re going to see costs passed on in the form of higher prices to consumers.
Miller: Is it fair to say that all of the challenges we’re talking about here will hit smaller operations harder than larger ones?
Delbridge: I think that’s hard to say. There’s some nuance in farm size and what people are thinking of, when they say small versus large farms. I think yesterday, in the conversation, your guests talked about some farms that market directly to consumers. With those farms, people that are selling at farmers’ markets or they’re delivering their CSA boxes, or maybe they’re driving their product themselves in a box truck to their local distributor … Per unit of food, those operations tend to use more fuel and transportation and distribution of their products. So those very small farms are going to be more heavily impacted than larger farms with maybe more streamlined supply chains.
Miller: But is it also maybe the case that it would be a little bit easier for them to set higher prices to say, to their perhaps richer customers, “Hey, as you know, the cost of production is way higher, so [if] you want this nice CSA box of green beans and tomatoes, please pay us a little bit more,” as opposed to saying that to a commodity buyer where they’ll say, “Sorry, we locked in the price a year ago?”
Delbridge: I think that’s fair. Of course, every small farm is facing this question – as any small business is really – of, “If I increase my price, am I gonna scare them away?”
Miller: Yeah, “Will I lose my customers?”
Delbridge: Yeah.
Miller: So to go back to that earlier question about size, you don’t think that these shocks will necessarily or likely lead to even more consolidation in agriculture?
Delbridge: I would say that with energy, fuel in particular, there isn’t a huge and obvious efficiency of scale. I mean, in some crops, yes, you can get bigger equipment that you have to make fewer machinery passes to cover this same number of acres. And that maybe only makes sense on the largest farms, and there’s a little bit of savings there. But in terms of just fuel use, it’s not as big of an impact as some other areas where we see scale efficiencies.
Miller: What do the coming months look like according to the collective wisdom, as it were, of oil futures markets?
Delbridge: I pulled these up too, before the call. Now, the futures markets, which are essentially the idea of how much an asset will cost in the future, the market is determining a price for product delivered in the future…
Miller: But also, a very real bet, right? I could pay whatever the market says the price today is, for oil, six months from now. I can get that oil even if it goes way up or way down. I have to pay that price?
Delbridge: That’s right. So you can essentially lock in a price for physical product delivered in the future. And the futures markets for crude oil are showing a decrease in price over the next six months, right now. Now obviously, the situation in the Middle East is very volatile and we’re seeing pretty big swings each day. So there’s still a ton of uncertainty. But right now, the current price, or the price in May, is higher than the prices in July or the fall. So the futures market is expecting prices to fall a little bit before the end of the year.
Miller: Although, as I guess you heard as well in the conversation yesterday, we heard concerns that even if this current war ends sometime soon, the fertilizer prices could stay elevated for a while, if companies realize that they can get away with it. Do you think that those concerns are valid?
Delbridge: I think there’s certainly valid concerns. I wouldn’t want to speculate on how quickly prices will fall. And I, personally, haven’t done the research on how closely fertilizer prices match up with broader energy prices. Now, I would remind listeners that in 2022, when the war in Russia and Ukraine was getting started, fertilizer prices were very high – more than double what they are now. And those came down.
So it’s not a case where prices never fall. I know that that’s sometimes a thought, when we are seeing inflation at the retail level. But with products like fertilizer and fuel, prices do rise and fall. I would expect prices to come down. The question is how soon do they come down? And are the political and infrastructure issues in the Middle East resolved quickly enough for fuel and fertilizer prices to come down and kind of take the edge off the effect on farmers?
Miller: I want to turn to another theme that came up yesterday. In the past, you’ve studied the possibility of farms converting to organic methods during droughts. You’ve called it “turning crisis into opportunity.” Could the same thing happen now in terms of reliance on fossil fuels?
Delbridge: Yeah, you’ve done great research. I think looking for alternatives is certainly possible if fertilizer prices remain high, fuel prices remain high. Farmers don’t really have many options for reducing their risk of high-input prices. There’s crop insurance to manage risk associated with low commodity prices and low yields. But on the cost side, there’s really not many tools. So farmers have to adapt. Farmers have to figure out ways that they can modify their production systems, to either minimize machinery passes to save some fuel. Or, as one of your guests mentioned yesterday, maybe we plant more cover crops that are nitrogen fixing, so we don’t have to rely on chemical fertilizers.
I think certainly in times of high fertilizer prices, natural fertilization through livestock manure becomes more valuable. Farmers might look to what they can do there to offset their high fertilizer costs. I don’t know about organic specifically, but I think that substitutes or adjustments to the production system are a natural response to changes in input costs.
Miller: Tim, thanks very much.
Delbridge: Thank you.
Miller: Tim Delbridge is an agricultural economist with Oregon State University Extension Service.
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