Risks and Rewards of Biofuels

USDA Energy in Agriculture Conference focuses on energy risk management strategies. Jerilyn Johnson

Published on: Jul 7, 2006

New strategies and risk management tools for production agriculture were explored at the Energy in Agriculture Conference June 27-28 in Kansas City.

The conference, hosted by USDA's Office of Energy Policy and New Uses, Risk Management Agency, and Farm Foundation, brought together ag economists, educators, lenders, government agency workers and agricultural producers.

When Secretary of Agriculture Mike Johanns unveiled his comprehensive energy strategy last December, he emphasized that producers have a place at the national energy table. One important component of his energy strategy called for the discussion and possible development of risk management tools to help producers manage the adverse impacts of high energy input costs.

The June conference took this charge and addressed several pressing questions for the ag industry, including:

  • What risk management strategies should producers use to maximize profits in a higher energy cost environment?
  • What strategies should farm cooperative ethanol and biodiesel plants use to protect against supply, production and price fluctuations?
  • Are new energy-related risk management tools needed?

"Energy is a crucial input into agricultural production – making up about 14% of the $229.2 billion in annual production costs, says Nick Piggott, North Carolina State University ag economist.

Piggott offered conference participants several solutions for farmers to manage energy price risk. One important one he'd like to see investigated and developed is a FCIC insurance product that provides a ceiling on the costs of energy.

"There's currently no insurance product in the Risk Management Agency portfolio that covers the cost of energy," Piggott says. "A product that establishes a price ceiling by paying an indemnity when prices reach some trigger level would offset the price-risk. The recent increased volatility in energy costs could be sufficient to make it worthwhile now to develop such a product."

Piggott adds, "one unappreciated aspect of renewable fuels is that further development of renewable energy technology, plus supplementing fossil fuels with ethanol and biodiesel blends, have the potential to reduce price volatility."

Keith Collins, USDA chief economist, and vice chair of the USDA Energy Council, also presented his analysis at the Energy in Agriculture Conference. He says that new risk management tools are worth exploring, but not to overlook the potential for further adaptation of existing tools to farm level uses.

 "Producers are already working hard to reduce energy use on the farm. Crop selection, cultural practices, precision agriculture practices, and filling farm tanks with biodiesel are good management strategies," Collins says. "Still, a 2004 ARMS survey shows that only 24% of producers lock in their fuel price before delivery, only 8% use fuel and fertilizer contracts, and only 20% buy fuel and fertilizer through cooperatives."

FYI: More information about USDA's energy strategy is available at www.usda.gov/energy, including a USDA Energy Fact Sheet, the Energy Calculator, and details of USDA's energy-related loan and grant programs.

Fuel up again in October

USDA is joining the U.S. Department of Energy to conduct a national renewable energy conference later this fall in St. Louis. The conference mission is to help create partnerships and strategies necessary to accelerate commercialization of renewable energy industries and distribution systems. The conference, Advancing Renewable Energy: An American Rural Renaissance, is scheduled for Oct. 10-12.

"Keeping America competitive calls upon us to work together to expand sustainable, market-driven, domestic energy sources," says Secretary of Agriculture Mike Johanns.

From Wall Street to Main Street, investors are seeking to understand potential markets. This conference will focus on elements of President Bush's Advanced Energy Initiative, specifically biomass, wind and solar research and commercialization.

The President's AEI requests $2.1 billion, a 22% budget increase at DOE. The AEI aims to reduce America's dependence on foreign oil and increase production of domestically grown fuel, which will in turn, promote U.S. job growth and increase energy security.

"The October conference will build upon the President's vision for overcoming our energy challenges and help create new wealth opportunities in rural communities."

"Never has reducing our dependence on foreign oil been such a pressing issue," says DOE Secretary Samuel Bodman. "We have the will and the means to replace significant quantities of foreign oil with homegrown fuel. We are hopeful this conference will identify major impediments and critical pathways to get more domestically grown, renewable energy sources out of the laboratory and into consumers' hands as soon as possible."

FYI: For more information on the October conference, visit the Web sites, www.usda.gov and www.energy.gov.