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High gas prices cut farmers’ bottom lines

By Brad Haire
University of Georgia

Fuel is an important part of farming, but it’s normally not considered a major cost to farmers. But, if the United States invades Iraq, that could change, says a University of Georgia agricultural economist.

Georgia farmers will soon be entering their fields to plant this season’s crops like peanuts, cotton, corn and tobacco. And they’ll be using a lot of fuel to keep their tractors and trucks and such on pace to get this crop in the ground and grown.

High price

Historically, war in the Middle East sends gas prices soaring in the United States and around the world.

It also seems that all fingers now point to a U.S.- led invasion of Iraq – closer to sooner than later. Troops are in place and ready to go. Some reports say it could happen in a matter of weeks or even days.

This situation has happened before. And when it did, fuel prices spiked, said Bill Givan, an Extension economist with the UGA College of Agricultural and Environmental Sciences.

During the initial phase of the 1991 Gulf War, crude oil jumped above $40 a barrel, he said. Crude oil is used to produce gasoline and other fuels.

Volatile

Key price indicators for crude oil are volatile right now. The Organization of the Petroleum Producing Countries (OPEC) crude oil prices have danced around $32 a barrel, higher than its target prices of $22-$28 per barrel, for several months.

West Texas Intermediate oil, U.S. crude oil, is around $36 a barrel, a level not seen since Oct. 1990, according to the Energy Department's Energy Information Administration. Oil prices are expected to go even higher this go around.

As of the second week in March, national unleaded gasoline prices averaged $1.686 a gallon. It now costs 54 cents per gallon more than this time last year to fill up on a tank of unleaded gas.

Diesel fuel prices are already at record highs. It costs about 58 cent per gallon more than this time last year to fill up on a tank of diesel, according to a recent survey of service stations by the Energy Information Administration.

The department predicts that U.S. fuel prices will soon reach an all-time high.

Razor's edge

“Normally, fuel costs are not a major input farmers have to face,” Givan said. But he added the margin of profit now sits on a razor’s edge for many farming operations. Any increase in any cost, like gasoline, would cut into an already small margin of profit.

The costs of some farm fertilizers and chemicals go up as crude oil prices increase, too, further cutting into profits.

According to a study by the American Farm Bureau Federation, farmers pay an extra $1 billion in manufactured inputs, such as fertilizer, electricity and pesticides, for every $3 increase in the prices of a barrel of crude oil.

But farmers, now, have had several years of depressed commodity prices and tough times. As a result, most farmers are running their businesses as efficiently as they can. If they’re not, Givan said, they’re probably not running at all.

Also, the 2002 farm bill, which was passed early last summer, will provide some relief for farmers, he said.

“This is a very generous farm bill,” he said. “Even if we have a depressed farm economy this bill will put money into the farm economy to pay bills.”

According to the energy department, Georgia and the Gulf Coast states have the cheapest gasoline, averaging $1.579 a gallon as of early March. The West Coast has the most expensive unleaded gasoline, averaging $1.932 a gallon as of the same time.

(Brad Haire is the former news editor with the University of Georgia College of Agricultural and Environmental Sciences.)

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