Farm Management Update

Quarterly Publication of Ohio State University Extension

Summer 2003

The Effect of the War in Iraq on Agriculture

Matt Roberts

Many farmers in Ohio hoped that 2003 would be a return to life as usual after the 2002 drought. While the war in Iraq may have ended the hopes of a 'normal' year, there is little reason to think that the war will have any major negative impact on U.S. agriculture this year. There are four main avenues through which the war might affect U.S. farmers: energy costs, exports, interest rates, and biofuels.

Fuel and fertilizer costs were the most apparent agricultural effects of the war. Fertilizer prices climbed dramatically through the winter, as did diesel costs. While prices of both commodities increased as war-related uncertainty grew, there were also fundamental supply shortages for both commodities that drove prices higher.

The exceptionally cold 2002-2003 winter drew natural gas stocks to their lowest levels in many years, and natural gas is the primary feedstock of nitrogen fertilizers. Simultaneously, U.S. oil inventories shrank in response to last fall's Venezuelan oil-workers' strike. These low-inventory conditions justified increases in prices. However, it was the fear of continued disruptions due to the war that drove prices to extreme levels. From November to February, May natural gas futures prices climbed 60%, from $4 to over $6.50/mmBtu. May crude oil futures climbed from $24 to over $36 per barrel. A measure of the 'war premium' in both commodities is their fall since early March. By early April, crude oil had fallen below $30 and natural gas had fallen below $5, both of which were still higher than in the last few years, but much lower than just prior to the outbreak of the Iraqi war.

The impact of the war on agricultural exports is less clear. The U.S. government has already announced that it will donate 30m bushels of wheat to Iraq, and another 10m or so to African nations. The crucial issue for the long-term impact of the food aid donations is the size of the import needs of Iraq over the next year or two, until domestic production resumes. Judging by history, over the coming year, we could see over 150m bushels of wheat going to Iraq, plus additional rice, and possibly cooking oil. Which nations supply these commodities has more to do with politics than economics. Over the next year, it is likely to be primarily the United States and Australia, who are both members of the "coalition of the willing" and are major agricultural exporters. How long this preferred status will be maintained is difficult to predict, as France, Canada, and the former Soviet Union are all also large wheat exporters. In any event, it is likely that a stable and prosperous Iraq will be an importer of U.S. agricultural products. On the negative side, it is worth considering whether there will be any negative impact on coalition members' exports to the Middle East. Given the widespread opposition, it is likely that there will be some reluctance to purchase U.S. commodities when alternatives are available from nations such as France or the FSU, though it is difficult to predict how large this impact might be. In the longer term, Middle Eastern nations will revert to choosing their food imports based on price and quality, not politics.

Biofuels are a potential beneficiary of the hostilities. Since the original Gulf War, the American public has become increasingly aware that our energy dependence requires us to take an active role in the Middle East. Biofuels, such as ethanol and soy-based diesel, are one way to reduce that dependency, and we have seen increased interest in biofuels on Capitol Hill in the last six months. While the current war may not have any direct effect on the U.S. policy toward renewable fuels, it does help to underscore their importance, and will likely play a role in the forthcoming debates of the Administration's energy policy in this area. In the long run, biofuels of some sort will play a larger role in America's energy policy. At the moment, though, most biofuels continue to be consumed due to governmental mandates, and so in the short run, continued expansion of biofuel consumption will only occur with legislative action.

One final possibility is that the war and the ensuing reconstruction will drive the growing U.S. budget deficits even higher, which may cause long-term interest rates to rise, and property values to fall. The fall in property values is worrisome on two fronts: real estate makes up a much larger proportion of the farming sector's asset base than in most other parts of the economy, and the only source of strength in the U.S. economy over the last two years has been consumer spending, much of it financed by lower interest and mortgage rates. If land values were to fall in response to higher interest rates, it is unlikely that the damage to the nation's farm economy would be major, but it would damage the balance sheets of many individual farms that have purchased property in the last few years. More seriously, if consumer spending were to be significantly reduced due to an increase in interest rates and a decrease in housing values, it could precipitate a much deeper recession than we have already seen.

In summary, any major impacts of the war in Iraq are likely to be long-term, and primarily due to the war's impacts on biofuel legislation and demand and interest rates. Exports, and therefore agricultural commodity prices, will not be harmed by the war, but it is unlikely that they will be significantly helped.