- Costs of crop production
- Fuel and fertilizer factors
- High prices stimulate acreage
They argue that “on the supply side, oil and oil-related costs constitute a substantial component of the production of most commodities, so rising oil prices provide
a strong explanation of commodity-price escalation across a wide range of food…commodities.” As every farmer knows, an increase in oil prices translates into higher fuel prices and has an immediate and direct effect on the cost of working each acre of land.
“And to rising fuel costs,” Headey and Fan write, “we also need to add the enormous surge in fertilizer prices, most of which are made from energy products, such as natural gas. Indeed, energy costs can constitute up to 90 percent of the costs of fertilizer production (for example, nitrogen fertilizers).”
In addition, they argue that “the bulky nature of grains means that agricultural prices are strongly influenced by transport costs.”
The first two, fuel and fertilizer, increase the cost of production while an increase in transportation costs decreases farm income and increases costs at the consumer level.
Though Headey and Fan tiptoe around the edge, they avoid directly asserting that higher oil-driven production costs—farm energy use and fertilizer—translate directly into higher commodity prices. They allow the reader to make that connection as they “attribute a large role to demand-side factors that would have interacted with supply-side factors affecting production costs.”