USDA Releases Preliminary Analysis of Effects of "Cap-and-Trade" on U.S. Agriculture

Higher Energy Prices = Higher Production Costs

USDA's analysis focuses on the impact of higher energy costs on producers of major crops in the United States. In June, EPA released its estimates of likely energy prices. USDA uses these price assumptions to assess the impacts on crop production costs. Compared with a pre-cap-and-trade baseline, EPA expects electricity prices to show the biggest increase (on a percentage bases), followed by prices for natural gas and petroleum. USDA utilized the Food and Agricultural Policy Simulator (FAPSIM) to model the effects.

The USDA report makes a special point of mentioning the effects of provisions in HR 2454 that provide emission allowances to "energy-intensive, trade exposed entities" (EITE) through 2024. The fertilizer industry is likely to qualify as an EITE, so USDA assumes that fertilizer prices will be mostly unaffected by the rise in energy prices through 2024. Beginning in 2025, though, fertilizer prices would rise rapidly to reflect the cost of buying emission allowances. Corn and wheat have the highest fertilizer costs (on a percentage basis) among the major crops, so producers of those crops derive the most benefit from the EITE exemption.

With the EITE provision mitigating the effects of the legislation on fertilizer (at least through 2024), higher fuel prices end up having the biggest impact on crop production costs in USDA's analysis. Therefore, crops for which fuel costs comprise a higher proportion of total costs, such as sorghum and rice, shows the biggest increase in production costs, at least in percentage terms.

In total, USDA estimates that production costs would increase by an average of $700 million (0.3%) per year from 2012 through 2018 due to HR 2454, compared with their February 2009 baseline forecast. USDA's baseline only goes through 2018, so they have no basis for comparison beyond that. USDA predicts that planted acreage would decline somewhat due to higher production costs, especially for crops that are more energy-intensive. The reduced production would lead to higher prices, so in USDA's analysis, the effect on total farm cash receipts ends up being a wash. USDA apparently did not do much modeling of the effects of higher crop prices on the livestock industry, perhaps because they assume that effect would be fairly small.

Many Unknowns Remain

The bottom line is that USDA's preliminary assessment is in fact VERY preliminary, and by its own admission leaves out many unknown factors. In the longer term, it could be omitting a good deal of potential revenue opportunities for farmers created by the legislation, especially for carbon sequestration due to growing crops. USDA mentions the potential to lose some crop- and pasture-land as carbon credits encourage the planting of forests. USDA's analysis also does not explicitly account for potential revenues from new cropping opportunities, such as growing biomass crops to be used for producing cellulose-based biofuels. On the livestock side, potential costs and benefits related to animal waste, especially methane from cattle, are omitted as well.

Another factor not mentioned in the analysis is the potential impact on food prices paid by consumers. Perhaps this is because USDA believes the impact on commodity prices will be relatively small. The fact that fuel and electricity prices will rise, though, means that the cost of food processing, transportation, and storage will increase.

The overall impact on land use from all this legislation also warrants a much closer look. It seems safe to assume that cap-and-trade legislation will create incentives for reforestation, in order to generate carbon emission offset via carbon sequestration in trees. The potential for additional acreage devoted to biomass crops, as well, leads to the big question of where will all this land come from? Perhaps most of the new forests and biomass crops will be grown on acreage that is currently unused, but a fairly rigorous analysis will need to be done at some point.

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