Project Summaries

07-145  Project Manager: J. M. Reeves

ENERGY, BIOFUELS, AND THE ECONOMICS OF COTTON

David Zilberman, University of California

This study analyzes the impact of the energy situation on the cotton economy through various mechanisms. First, energy is an input in cotton production, and changes in energy prices affect the cost of production of cotton. Also, energy affects the cost of operating machinery and transportation both on and off the farm. Last, energy costs are a major component on prices of agricultural chemicals, including pesticides or fertilizers, many of which are petroleum-based. Second, with the introduction of biofuel, production of energy crops has become a major part of U.S. agriculture, and biofuel production is indirectly competing with cotton production, especially in locations where cotton and corn are substitutes.

The increase in energy prices from 2005 onward has caused the cost of agricultural production and inputs to rise as well as increases in the cost of pumping water to crop location. Thus, this analysis suggests that for a while farmers were facing incentives to increase energy use efficiency as well as input use efficiency in farming and shipping activities. As a result, higher energy prices have provided additional incentives to adopt farm equipment with increasing input use efficiency. In the case of irrigation, adoption of more efficient irrigation technologies or more fuel-efficient pumps is desirable. Furthermore, higher energy costs have contributed to increased fertilizer costs and serve to reduce demand for fertilizer and other petroleum-based products. In addition to the increasing scarcity of fuel, consideration of climate change provides extra incentive for fuel conservation and increased fuel prices. Separation of the impact of climate change versus fuel scarcity is a subject of continuous research.

The increased availability of natural gas through fracking in recent years is likely to reverse some of the increases in fuel prices. In particular, the rising price of fertilizer may level off and the cost of energy for pumping may become less expensive. This may slow the process of technological change in the cotton sector and enhance the reliance on natural gas as a main source of energy when possible. However, while concern for climate change is likely to continue, because natural gas generates less greenhouse gas emissions than both gasoline and coal, transition to natural gas may reduce impacts of agriculture on climate change and further reduce the pressure to increase fossil fuel efficiency. One of the major challenges facing the industry is how best to take advantage of the availability of cheap natural gas. Furthermore, even with natural gas, it is important to contain greenhouse gas emissions, and thus the adoption of technologies like precision farming remain essential. The effect of changes in energy prices and natural gas availability on adoption of conservation technologies is a subject of future research.

The increased cost of energy on its own provided an incentive to reduce the supply of cotton. However, this analysis suggests that from 2000 up through the financial crisis, population and income growth in Asia increased global demand for agricultural commodities, including cotton. For some of the years during this period, increases in cotton prices overcame increases in energy prices, leading to increased intensification of cotton production. In other years when cotton prices stayed relatively constant, farmers had an incentive to reduce intensification of production. Furthermore, the introduction of biofuel associated with higher energy prices was a major contributor to price increases in corn and soybean, and reduced profitability of cotton compared to these crops. Thus, in some areas like California, the introduction of biofuel was a major contributor to increases in the price of corn relative to cotton and a reduction in the amount of land allocated to cotton. It is expected that there will be relatively less cotton production in countries where farmers are increasing biofuel production and increased production in countries not producing biofuel from corn. The introduction of biofuel and a rise in the demand for biofuel in the United States as well as an increase in the price of corn combined with the adoption of GM varieties led to some switching from cotton to corn and movement of cotton production to countries like India, who have adopted Bt cotton and not biofuel. In this coming year, better quantitative assessment of the various impacts of energy prices on cotton production, acreage of cotton, and its profitability will be evaluated.

 

Project Year: 2012
 

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