By Charlyn Fargo
Oh, those falling gas prices. Don’t we all love them? We do when we’re paying at the pump, but some economists say they may not be so good for agriculture long-term.
Low oil prices might sound like good news for farmers, but surprisingly low oil prices often mean low commodity prices – and lately we’ve seen that. Those dropping agriculture commodity prices are partly due to lack of funding for agriculture imports from oil-producing countries which have less money to spend on imports. For farmers, that scenario may impact any cost-saving benefits from lower fuel prices.
Since 2014, oil prices collapsed 70 percent as barrels of oil dropped to $20, then climbed recently to $30 a barrel. That corresponds with the Energy Information Administration forecasting that fuel prices nationwide this year will average $2.03 per gallon for regular gas (down 40 cents from last year) and $2.29 for diesel (down 42 cents from 2015).
Historically, economists say there is a correlation between oil and agriculture commodity prices — the two have risen and fallen in tandem based on a multitude of factors, including energy consumption in farming and the use of feedstocks for biofuels. While gas and diesel prices are lower, the average producer faces greater challenges in higher interest rates and lower prices for corn and soybeans. Prices might not drop in the same steep proportions as oil; however, fuel costs in reality represent a low component of the production costs for a large proportion of agriculture produce.
“You’ve got to watch oil,” said David Kohl, Ag economist with Virginia Tech, who spoke recently at the Illinois Soybean Summit in Effingham, Ill.. “Every recession since the 1970s, oil is a leading indicator. It’s a disruptor of economic cycles and human behavior.”
Earlier, Kohl predicted a 50 percent chance the U.S. will slide into another recession.
So far, reduced profits and losses for oil producers resulted in 130,000 layoffs. And commodity prices have dropped below the cost of production.
Ethanol production has also taken a hit. Margins for many producers of corn-based ethanol are tight.
“We’ve got the great oil war,” Kohl said, adding that OPEC is trying to put alternate sources out of business.
Oil production in the U.S. could drop from 9.4 million barrels last year to a predicted 8.7 million barrels this year, according to the Energy Information Administration. The Administration also estimates U.S. oil prices will average $38 per barrel this year and increase to $47 per barrel in 2017.
The bottom line is low oil prices may be something worth watching if you’re a farmer.