Contents

Approved by USDA’s 

World Agricultural 

Outlook Board

United States

Department

of Agriculture

www.ers.usda.gov

A Report from the Economic Research Service

Abstract

Over the last half of 2014, energy prices fell sharply, with crude oil prices down more 

than 40 percent and natural gas prices down more than 20 percent. Further, energy 

prices are expected to remain lower than previously projected through at least 2016. 

The agricultural sector will benefit from lower energy prices primarily because of 

reduced production and transportation costs. Additionally, biofuel markets are potentially affected by lower energy prices, but the effect on the demand for ethanol is 

expected to be modest. Effects on individual commodities, therefore, reflect the importance of energy in production costs and whether the commodity is used as a biofuel 

feedstock, an input in the production of biofuel. Overall effects on acreage and agricultural commodity prices are anticipated to be modest. Farm-sector production expenses 

are reduced by about $5 billion annually for 2015 and 2016.

Keywords: Energy prices, crude oil, natural gas, costs of production, acreage response, 

biofuels, ethanol

Acknowledgments

The authors thank Mark Jekanowski, Joseph Cooper, Gopinath Munisamy, and 

William McBride, USDA, Economic Research Service; James Duffield, USDA, Office 

of Energy Policy and New Uses; Walter Gardiner, Farm Credit Administration; and 

P. Lynn Kennedy, Louisiana State University, for comments and suggestions on this 

report. The report was cleared by David Stallings at the World Agricultural Outlook 

Board. The authors also thank Maria Williams for editorial assistance and Cynthia A. 

Ray for graphics and layout assistance.

BIO-04

June 2015

Kandice K. Marshall, Stephanie M. Riche, 

Ralph M. Seeley, and Paul C. Westcott

Effects of Recent Energy Price 

Reductions on U.S. Agriculture

Introduction . . . . . . . . . . . 1

Background . . . . . . . . . . . 3

Crop Sector Acreage and 

Price Adjustments . . . . . . 7

Impacts on Farm Income—

Lower Farm-Sector 

Production Costs . . . . . . 12

Lower Energy Prices and 

Biofuel Markets . . . . . . . 13

Summary and 

Conclusions . . . . . . . . . . 17

References . . . . . . . . . . . 18
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Energy Information on the Internet

U.S. Energy Information Administration, Short-Term Energy Outlook, 

http://www.eia.gov/forecasts/steo/

U.S. Energy Information Administration, Annual Energy Outlook, 

http://www.eia.gov/forecasts/aeo/

USDA, Economic Research Service, Bioenergy Topic Page,

http://www.ers.usda.gov/topics/farm-economy/bioenergy.aspx
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Introduction

Energy prices are down sharply since mid-2014, with crude oil leading the decline as it fell from 

over $100/barrel in June 2014 to an average of less than $50/barrel during the first 3 months of 

2015 (fig. 1). This reduction puts oil prices at levels not seen since late 2008 and early 2009 during 

the depths of the recession. At that time, crude oil prices had collapsed from more than $130/barrel 

in June 2008 to a low of just under $40/barrel in February 2009, but they recovered quickly as the 

economy regained strength, climbing above $80/barrel in early 2010 and above $100/barrel by 

March 2011 (EIA 2015). Although the recent oil price decline since mid-2014 is smaller than the 

2008-2009 decline, lower prices are expected to last longer.1 U.S. crude oil production has dramatically increased as a result of hydraulic fracturing and horizontal drilling (also known as “fracking”), 

and U.S. oil reserves have continued to rise, surpassing 36 billion barrels in 2013, for the first time 

since 1975 (EIA, 2014). 

Since October 2014, the U.S. Department of Energy’s Energy Information Administration (EIA) 

has lowered its price projections for crude oil and natural gas for 2015 and 2016 (table 1) in their 

1Additionally, the U.S. Energy Information Administration indicated in its April 2015 Short-Term Energy and Summer 

Fuels Outlook that crude oil prices could fall further: “On April 2, Iran and the five permanent members of the United Nations 

Security Council plus Germany (P5+1) reached a framework agreement that could result in the lifting of oil-related sanctions 

against Iran. Lifting sanctions could substantially change the STEO forecast for oil supply, demand, and prices by allowing 

a significantly increased volume of Iranian barrels to enter the market. If and when sanctions are lifted, the baseline forecast 

for world crude oil prices in 2016 could be reduced $5-$15/barrel (bbl) from the level presented in this STEO.” 

Note: Natural gas prices are Henry Hub spot prices, based on delivery at the Henry Hub natural gas distribution hub in 

Louisiana.

Source: Energy Information Administration, Short-Term Energy and Summer Fuels Outlook (STEO), April 2015.

Figure 1

Monthly oil and natural gas prices

Oil price, imported average ($/barrel) Natural gas price ($/million Btu)

0

1

2

3

4

5

6

7

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20

40

60

80

100

120

Oil

Natural gas
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monthly Short-Term Energy Outlook (STEO) report. February 2015 energy price projections for 

2015 are sharply lower than earlier projections, with crude oil prices down more than 40 percent and 

natural gas prices down more than 20 percent. If those projections are realized, the price of crude 

oil for 2015 would be the lowest since 2006, while the natural gas price would be the second lowest 

(to 2012’s price) since 2000. Although prices for both oil and natural gas are expected to increase in 

2016, they would remain much lower than projected a few months earlier.

The price of energy affects agriculture because of the sector’s roles as both a user and a producer of 

energy. Direct energy inputs such as fuel and oil account for a large share of agricultural production 

expenses. Energy prices—particularly, for natural gas—also strongly influence the cost of fertilizer, 

which is a major production expense for most crops. Additionally, energy prices influence costs of 

agricultural chemicals, such as herbicides and insecticides. Developments in the petroleum market 

affect the markets for biofuels such as ethanol and biodiesel, but the relationship is complex and 

depends on whether the biofuel competes as an energy source or complements the use of petroleumbased fuels. Changes in the demand for biofuels can, in turn, affect markets for agricultural products 

such as corn, soybean oil, and other biofuel feedstocks. This report examines how lower energy 

prices affect the agricultural sector by lowering production costs for major crops and influencing 

demand for biofuel feedstocks in the ethanol market.
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Background

Energy prices affect the production costs of agricultural commodities, as well as the demands for 

certain agricultural products, particularly biofuel feedstocks. Changes in the cost of production can 

directly affect the net returns (expected and realized) from producing different crops, and planting 

decisions at the farm level reflect producers’ expectations of those net returns. All else equal, when 

the cost of producing a commodity declines, the returns to producing that commodity increase, 

so lower production costs tend to encourage greater production. Since production costs vary by 

commodity, relative net returns also play a key role in determining acreage allocations among crops. 

Any changes in acreage allocations and production—based on expected net returns—have implications for the market price of each commodity, reflecting the new equilibrium between supply and 

demand. Hence, prices for agricultural commodities are tied, at least indirectly, to energy market 

developments through the link to production decisions.

Sands and Westcott (2011) used the Food and Agricultural Policy Simulator (FAPSIM) to analyze 

the impact of higher energy price scenarios on agricultural markets. They found that on a peracre basis, corn and rice have the highest energy-related costs among the eight major crops (corn, 

sorghum, barley, oats, wheat, rice, upland cotton, and soybeans). They found that higher energy 

prices and, therefore, higher costs of production would cause planted area to decline for seven of the 

eight crops. The exception was soybeans. Energy-related production costs are lower for soybeans 

than for most other crops, particularly corn, a crop soybeans compete with in farmers’ planting decisions. Energy-related expenses also affect livestock producers. Although livestock producers’ direct 

costs for ERS’s cost of production category “fuel, lubrication, and electricity” are relatively lower 

as a share of operating expenses than those of crop producers, a rise in energy prices would increase 

livestock producers’ feed costs, affecting production of beef and pork more than poultry, because of 

poultry’s lower feed intensity.

This report uses a methodology similar to that of Sands and Westcott (2011) to examine the opposite scenario—the effect of a prolonged period of lower than previously expected energy prices on 

agricultural markets.

Energy-Related Expenses Vary by Crop 

The effect of energy prices on the cost of producing particular crops depends on the level and 

share of production costs for direct energy inputs such as fuel and oil, as well as for indirect energy 

inputs such as energy-intensive nitrogen fertilizers and agricultural chemicals. Figure 2 shows 

energy-related production expenses per acre in 2014 for major field crops. Direct energy input 

expenses are shown for the ERS cost of production category “fuel, lubrication, and electricity,” 

while indirect energy-related inputs are shown for “fertilizer” and for “chemicals.” The three most 

energy-intensive crops are rice, cotton, and corn, with energy expenses almost $340 per acre for 

rice and exceeding $200 per acre for corn and cotton. Fertilizer costs account for the largest share 

of total energy-related expenses for major field crops, except for rice, which has extremely high 

direct energy costs mainly because of extensive irrigation requirements. Oats are the least energy 

intensive, with expenses for energy-related inputs under $75 per acre, while wheat, soybeans, and 

sorghum have energy related inputs less than $100 per acre. 
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Figure 3 shows energy-related production expenses as a share of each crop’s operating expenses. 

By this measure, sorghum, oats, and wheat have the highest share of costs related to energy inputs, 

partly because of their low overall operating expenses. Corn and rice remain highly energydependent in terms of share of operating expenses, with fertilizer, chemicals, fuel, lubrication, and 

electricity expenses accounting for about 60 percent of operating expenses. Soybeans remain one 

of the least energy-dependent crops, with less than half of operating expenses for soybeans tied to 

these energy-related inputs. However, cotton, a crop with high absolute energy-related expenses per 

acre, has a lower share of operating expenses related to energy inputs than other crops do, largely 

reflecting cotton’s high overall operating expenses.2

The Relationship Between Natural Gas and Fertilizer Prices 

Has Been Weak in Recent Years

As already noted, fertilizer is one of the largest cost components for most crops. Fertilizer production—particularly nitrogen—is extremely energy intensive, relying on natural gas as the source of 

hydrogen necessary to produce ammonia through the Haber-Bosch process. Natural gas typically 

accounts for the largest part of the cost of producing ammonia, the primary source of nitrogen for 

nitrogen fertilizer (Huang, 2007; Vroomen, 2010). Therefore, the price of natural gas has important 

implications for agriculture through its effect on fertilizer production costs and ultimately the price 

of fertilizer. 

2For livestock producers, energy costs are a smaller part of production costs than feed costs are, so lower energy prices 

will not greatly affect their costs and margins. 

Source: USDA, Economic Research Service, Cost of Production Database, November 2014.

Figure 2

Energy-related production expenses per acre for selected crops, 2014

$/acre

0

50

100

150

200

250

300

350

Chemicals

Fertilizer

Fuel, lubrication and

electricity
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While the largest declines in energy prices since mid-2014 have been in the markets for crude oil 

and its derivatives such as gasoline and diesel, natural gas prices have also declined significantly 

over this period, falling from an average of $4.59/million British thermal units (Btu) in June 2014 to 

$2.83/million Btu in March 2015, a decline of 38 percent (fig. 4). 

Lower natural gas prices result in lower fertilizer costs, but the impact is not immediate, and the 

magnitude of the price effect depends on underlying supply and demand factors. USDA data show 

that nitrogen prices paid by farmers declined about 13 percent between May 2014 and September 

2014, and remained relatively stable through January 2015, before falling further in February and 

March 2015 (see fig. 4). If natural gas prices remain low as indicated by EIA projections, markets 

are likely to adapt further, and fertilizer prices will continue to adjust in coming months.

Source: USDA, Economic Research Service, Cost of Production Database, November 2014.

Figure 3

Energy-related production expenses for selected crops 

relative to total operating expenses, 2014

Percent

0

10

20

30

40

50

60

70

Chemicals

Fertilizer

Fuel, lubrication

and electricity
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Notes: No fertilizer projections are available. Natural gas prices are Henry Hub spot prices, based on delivery at the Henry 

Hub natural gas distribution hub in Louisiana.

Source: Energy Information Administration, Short-Term Energy Outlook, February 2015 and USDA, National Agricultural 

Statistics Service, Quick Stats.

Figure 4

Monthly natural gas and nitrogen fertilizer prices

Natural gas price, $ per million Btu

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85

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120

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2.50

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5.00

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6.00

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7.00

Natural gas (EIA projections)

Nitrogen fertilizer

Natural gas (history)

Nitrogen fertilizer index, 2011=100
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Crop Sector Acreage and Price Adjustments

A U.S. agriculture model (henceforth referred to as “U.S. Model”) used in this study is based on 

prior versions of the FAPSIM model, which USDA developed in the early 1980s (Salathe et al., 

1982) and periodically re-specified and re-estimated to reflect structural and policy changes in the 

U.S. food and agricultural sector. Crops included in the U.S. model are corn, sorghum, barley, oats, 

wheat, rice, soybeans (including soybean meal and soybean oil), and upland cotton. Livestock sector 

commodities include hogs, cattle, dairy, broilers, non-broiler chickens, turkeys, and eggs. Each 

commodity model contains equations to estimate production, prices, and different demand components (including, for example, feed demand for corn and food demand for wheat). The commodity 

models are then linked through variables that are important to the different commodity prices, such 

as corn. The model solution computes the market prices that equilibrate supply and demand in all 

commodity markets simultaneously.

Key for this study are the behavioral relationships for acreage for different field crops. Economic 

theory for profit maximizing producer behavior indicates that production should be positively 

related to the price received for the commodity and negatively related to prices of inputs required 

in the production process. Producer net returns are used in acreage equations to capture these 

economic effects. Additionally, net returns for other crops that compete with each other for land use 

are included in the acreage equations. Through these relationships, energy-related input costs influence production in the model, and a new solution is computed across all commodity markets.

To assess the impacts on major field crops in 2015 and 2016, we developed two scenarios. The first 

scenario is based on higher energy prices that were assumed in fall 2014 and published in USDA

Agricultural Projections to 2024 (USDA, 2015)—this scenario becomes the reference case for the 

analysis. We then developed an alternative scenario for 2015 and 2016 using EIA’s February 2015 

STEO forecasts for energy prices (see table 1).3 Changes in agricultural production costs arising 

from the lower energy prices are used to implement the alternative scenario in the U.S. Model 

(table 2). The model calculates the impacts of changes in production costs on acreage allocations 

and production and the resulting adjustments in prices and use (quantities demanded) in major agricultural commodity markets. 

3Subsequent EIA STEO reports have projected lower energy prices than are used in this analysis.

Table 1

Recent energy price projections

Crude oil price

imported average

Natural gas

Henry Hub spot price

2014 2015 2016 2014 2015 2016

$/barrel $/mil Btu

October 2014 93.42 91.14 90.09 4.45 3.84 4.07

February 2015 89.39 51.57 67.53 4.39 3.05 3.47

Percent change -43.4 -25.0 -20.6 -14.7

Note: October 2014 numbers for 2016 are assumptions made in October 2014 from Table 1 of USDA’s Long-Term 

Agricultural Projections to 2024. Henry Hub spot prices are based on delivery at the Henry Hub natural gas distribution 

hub in Louisiana. 

Source: Energy Information Administration, October 2014 and February 2015 Short-Term Energy Outlook and USDA, 

Economic Research Service calculations. 
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Effects of Decreasing Energy Prices on Acreage and 

Production Are Small

Reduced costs of production enhance producer returns and can affect planting decisions in the 

aggregate, as well as cropping choices between competing crops. Overall, our estimates suggest that 

the impacts of lower energy prices on 2015 and 2016 planting decisions will be modest. 

Tables 2, 3, and 4 present alternative scenarios of costs of production, acreage allocations, and 

commodity prices, respectively, in response to lower forecast energy prices—namely, crude oil and 

natural gas prices shown in table 1. 

Lower oil and natural gas prices for 2015 and 2016 (see table 1) result in lower projected costs of 

production for each of the eight crops analyzed (see table 2). The magnitude of the cost reduction 

for each crop relates to the size of energy-related inputs in its production. In absolute terms, production costs are reduced the most for rice, cotton, and corn, reflecting their high energy-related production expenses. In percentage terms, all changes in production costs from the reference scenario 

are small relative to the sizes of the energy price reductions. For example, rice has the largest 

percentage reduction (6 percent) in its production costs among these crops in 2015, much smaller 

than the 43.4-percent reduction in crude oil prices and the 20.6-percent reduction in natural gas 

prices that year. The modest changes in production costs relative to changes in energy prices reflect 

the fact that energy-related input costs represent only a portion of overall operating expenses—as 

well as the fact that energy-related input prices are projected to decline much less than energy 

prices. (See box, “Why the Acreage Impacts Are Small.”) 

With lower energy costs, economic incentives encourage increases in planted acreage in 2015 and 

2016. Table 3 shows that, with the lower energy costs analyzed here, overall plantings to eight 

major field crops increase by about 1.1 million acres in both 2015 and 2016, relatively small gains 

of 0.4 and 0.5 percent, respectively. Within this aggregate acreage increase, changes in individual 

Table 2

Costs of production, operating costs, alternative energy price scenarios 

 Reference scenario

Lower energy 

price scenario Change in costs Change in costs

2015 2016 2015 2016 2015 2016 2015 2016

Dollars per planted acre Percent

Corn 350.31 350.04 337.02 337.58 -13.29 -12.46 -3.8 -3.6

Soybeans 181.08 182.21 174.86 174.75 -6.22 -7.46 -3.4 -4.1

Wheat 126.42 126.81 120.48 121.23 -5.94 -5.58 -4.7 -4.4

Cotton 497.27 500.92 479.72 481.17 -17.55 -19.75 -3.5 -3.9

Sorghum 142.00 142.45 134.87 135.03 -7.14 -7.43 -5.0 -5.2

Barley 188.77 189.47 179.05 180.84 -9.72 -8.63 -5.1 -4.6

Oats 111.41 111.45 104.86 106.98 -6.55 -4.47 -5.9 -4.0

Rice 558.43 561.02 524.86 530.43 -33.57 -30.58 -6.0 -5.5

Source: USDA Economic Research Service (ERS) Cost of Production Projections and ERS calculations.
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Why the Acreage Impacts Are Small

Despite the large reductions in energy prices, overall changes in acreage are fairly small. 

Several reasons underlie this result, as follows: 

• Even with large reductions in energy prices, price declines for energy-related inputs are 

considerably smaller. For example, with the 2015 reduction in crude oil prices analyzed 

here (over 43 percent), fuel prices in the agricultural sector are estimated to fall by only 

about 20 percent. This lower proportional price change stems from (1) the fact that oil 

prices are only one input to the production of fuels, and (2) the underlying properties 

(elasticities) of supply and demand functions in fuels markets. 

• Costs for energy-related inputs to agriculture production are only a portion of total input 

costs. As seen in figure 3, energy-related inputs represent 45-70 percent of operating 

expenses for crops. 

• Crop acreage supply response is inelastic to changes in producer net returns. In other 

words, changes in net returns lead to acreage changes that are relatively small. Although 

cross-commodity acreage effects may be more responsive, the aggregate acreage effect 

for major field crops is estimated to have a price (or price-equivalent) elasticity of less 

than 0.10. This means that a 10-percent price change for all crops would lead to less than 

a 1-percent change in total cropped acreage.1

1For more information regarding crop acreage supply response, see Lin et al. (2000). 

Table 3

Planted acreage, selected crops, alternative energy price scenarios

Reference scenario

Lower energy 

price scenario Change Change

2015 2016 2015 2016 2015 2016 2015 2016

Million acres Percent

Corn 88.000 90.000 88.522 90.090 0.522 0.090 0.6 0.1

Soybeans 84.000 79.000 83.890 79.277 -0.110 0.277 -0.1 0.4

Wheat 56.000 53.000 56.174 53.529 0.174 0.529 0.3 1.0

Cotton 10.000 10.000 10.173 10.138 0.173 0.138 1.7 1.4

Sorghum 7.500 7.500 7.606 7.509 0.106 0.009 1.4 0.1

Barley 3.500 3.300 3.572 3.340 0.072 0.040 2.0 1.2

Oats 3.000 2.800 3.136 2.838 0.136 0.038 4.5 1.4

Rice 2.935 2.850 2.972 2.875 0.037 0.025 1.3 0.9

Total 254.935 248.450 256.045 249.596 1.110 1.146 0.4 0.5

Source: USDA Agricultural Projections to 2024 and U.S. Model simulation results. The U.S. Model is based on prior versions of the FAPSIM 

model, which USDA developed in the early 1980s and periodically re-specified and re-estimated to reflect structural and policy changes in the 

U.S. food and agricultural sector.
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crop acreages reflect relative changes in producer returns and producer responses to the changes 

among competing crops (own- and cross-commodity return responses). 

The largest cross-commodity influences are between corn and soybeans. Corn has the largest 

increase in acreage in 2015, reflecting both its gains in expected net returns and those gains relative 

to increases in returns for soybeans. The 2015 corn acreage increase of more than 0.5 million acres 

partly reflects some acreage being shifted from soybeans—a primary competing crop with corn. 

For 2016, corn acreage gains are much less than in 2015, and soybean plantings show the second 

largest increase among the eight crops, rather than decline. These acreage changes reflect producer 

responses to (1) lower corn prices and higher soybean prices in 2015 and (2) smaller energy-related 

cost reductions for corn in 2016 than in 2015, combined with larger energy-related cost reductions 

for soybeans in 2016 than in 2015. 

Expected acreage increases for oats in 2015 are the highest percentage-wise because production cost 

reductions in the lower energy price scenario are the second largest for oats. Additionally, acreage 

adjustments for oats have one of the largest percentage responses to changes in its own returns, 

compared with the other crops, along with small percentage responses to changes in returns for 

competing crops, compared with the other crops. 

The effects of lower energy prices on wheat acreage are only marginal in 2015 because much of 

the wheat crop (typically 70-75 percent) is winter wheat, which, for 2015, was planted in fall 2014 

before the reduction in energy prices. However, because all wheat acreage decisions (including 

those for winter wheat) will respond to lower costs for 2016, wheat acreage adjustments are larger 

in 2016 (more than 0.5 million acres) than in 2015. Acreage changes for all other crops are generally small, with each of these crops showing an adjustment of less than 200,000 acres in 2015 and 

less than 150,000 acres in 2016.

Table 4

Prices, selected crops, alternative energy price scenarios

 Reference scenario

Lower energy 

price scenario Change Change

2015/16 2016/17 2015/16 2016/17 2015/16 2016/17 2015/16 2016/17

$ per unit Percent

Corn 3.40 3.50 3.371 3.469 -0.029 -0.031 -0.8 -0.9

Soybeans 8.50 8.55 8.508 8.530 0.008 -0.020 0.1 -0.2

Wheat 5.00 4.65 4.981 4.606 -0.019 -0.044 -0.4 -1.0

Cotton 0.595 0.605 0.588 0.596 -0.007 -0.009 -1.2 -1.5

Sorghum 3.30 3.40 3.254 3.356 -0.046 -0.044 -1.4 -1.3

Barley 4.80 4.50 4.773 4.475 -0.027 -0.025 -0.6 -0.6

Oats 2.70 2.40 2.674 2.379 -0.026 -0.021 -1.0 -0.9

Rice 14.80 14.70 14.709 14.598 -0.091 -0.102 -0.6 -0.7

Note: $ per unit = dollars per bushel except for rice (which is dollars per hundredweight) and cotton (which is dollars per pound).

Source: USDA Agricultural Projections to 2024 and U.S. Model simulation results. The U.S. Model is based on prior versions of the FAPSIM 

model, which USDA developed in the early 1980s and periodically re-specified and re-estimated to reflect structural and policy changes in the 

U.S. food and agricultural sector.
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Effects of Decreasing Energy Prices on Commodity Prices 

Are Also Small

With higher overall acreage and increased plantings for most crops, commodity prices are generally 

reduced for both years in the lower energy price scenario (see table 4). All price reductions for these 

crops are small, with none larger than 1.5 percent in 2015/16 and 2016/17. However, with soybean 

acreage reduced in 2015, soybean prices rise 0.1 percent in 2015/16 compared with the reference 

scenario price. 
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Impacts on Farm Income—Lower Farm-Sector Production 

Costs

Lower energy prices are expected to lead to lower total production expenses by the agricultural 

sector, largely reflecting the crop-specific reductions in costs of production. For the sector, fuel and 

oil expenses are reduced by 20.6 percent in 2015, and an additional 11.9 percent in 2016, from the 

reference scenario (table 5). Fertilizer and electricity expenses also are lower, but by smaller amounts, 

about 4.5 percent in 2015 and 2.5-3.4 percent in 2016. Because of lags between movements in energy 

prices and agricultural chemical prices, pesticide expenses fall more in 2016 (almost 13 percent) than 

in 2015 (slightly more than 1 percent). Overall, total energy-related production expenses in the lowerprice scenario are reduced by 7.8 percent ($5.1 billion) in 2015 and 7.7 percent ($4.9 billion) in 2016 

from the analogous numbers in the higher priced reference scenario. 

Table 5

Selected energy-related production expenses, alternative energy price scenarios

Reference scenario

Lower energy 

price scenario Change Change

2015 2016 2015 2016 2015 2016 2015 2016

$ billion Percent

Fertilizer 27.8 26.9 26.6 26.0 -1.2 -0.9 -4.4 -3.4

Fuel and oil 16.5 16.2 13.1 14.3 -3.4 -1.9 -20.6 -11.9

Electricity 5.6 5.7 5.4 5.5 -0.3 -0.1 -4.5 -2.6

Pesticides 14.9 14.9 14.8 13.0 -0.2 -1.9 -1.3 -12.9

Total 64.9 63.6 59.9 58.7 -5.1 -4.9 -7.8 -7.7

Source: USDA Agricultural Projections to 2024 and USDA, Economic Research Service calculations.
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Lower Energy Prices and Biofuel Markets

One of the largest developments in U.S. agricultural markets over the past decade has been 

a dramatic rise in ethanol production. U.S. ethanol production was about 3.4 billion gallons 

in 2004, rising to 14.3 billion in 2014. Corn accounts for almost all of the feedstock used to 

produce ethanol in the United States. Corn used for U.S. ethanol production has grown from 

about 11 percent of total U.S. corn use in 2003/04 to more than 38 percent of the 2013/14 crop. 

The surge in demand for corn by the ethanol industry has contributed to higher corn prices over 

the past decade.4 In turn, higher prices created an economic incentive for a sharp increase in 

acreage planted to corn, from about 81 million acres in 2004 to more than 97 million in 2012 and 

remaining above 90 million through 2014. 

While government policies played a role in facilitating the ethanol expansion, market forces also 

provided incentives to blend ethanol with gasoline to improve its performance and lower its cost. 

Importantly, the ethanol industry expanded rapidly at the same time energy prices were increasing 

sharply, with crude oil prices rising from under $40/barrel through most of 2004 to more than 

$100/barrel over much of the period since 2008, notwithstanding the temporary price collapse 

(second half of 2008) at the height of the recession and the recent price decline (second half of 

2014 and into 2015).

With energy prices now lower and expected to remain low, implications for biofuel markets are 

of particular interest. Lower fuel oil and natural gas prices have consequences for both supply and 

demand in the ethanol market. 

Effects of lower energy prices on biofuel markets reflect a complex role ethanol plays in the gasoline market. In some markets—particularly for high-ethanol blends such as E85 (85-percent ethanol 

blend)—ethanol and gasoline compete for use in automobiles based on price and energy content. In 

these markets, lower gasoline prices would be expected to erode the demand for ethanol, although 

overall effects would be minimal given the small size of the E85 market. But in markets for conventional gasoline (blends up to 10 percent, or E10), ethanol is a supplement to gasoline that provides 

important fuel characteristics, including energy content and octane enhancement.5 In these markets, 

lower gasoline prices—by leading to greater gasoline use—can raise the demand for ethanol because 

of the higher volumes of gasoline into which ethanol is blended. At the same time, feedstock prices, 

predominantly for corn, are key in determining the cost and profitability of producing ethanol. 

These multiple factors can affect both the supply and demand for ethanol. On the supply side of the 

ethanol market, lower input costs for natural gas and corn reduce ethanol production expenses and 

shift the supply curve to the right. 

On the demand side, major factors affecting the ethanol market can be summarized as follows:

• Lower gasoline prices lead to greater gasoline consumption, which expands the market for 

ethanol blends. The February EIA STEO forecast an increase in 2015 gasoline consumption due 

to lower prices (positive effect).

4Trostle (2008) and Trostle et al. (2011) discuss other factors that contributed to higher prices and price spikes for corn 

and other commodities. 

5Although the EPA approved a higher ethanol blend, E15, in 2012 for cars manufactured since 2001, infrastructure 

challenges and warranty issues have allowed E10 to remain the predominant blend sold in the United States.
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• Export demand for corn-based ethanol to date has continued to be strong (positive effect).

• As the price of gasoline decreases relative to ethanol (fig. 5), the use of ethanol as both an octane 

enhancer and an energy source becomes relatively more costly, so refiners become reluctant to blend 

more ethanol than needed to meet the anticipated Renewable Fuel Standard6 (RFS) (negative effect).

• Higher ethanol prices relative to gasoline prices reduce consumer demand (in the United States 

and abroad) for high-ethanol blends such as E85 (negative effect). 

These multiple forces shift both the supply and demand curves for ethanol. Lower production costs 

shift the ethanol supply curve to the right. A net increase in the demand for ethanol reflects greater 

gasoline consumption. Given the decline in ethanol prices from the fall of 2014 to early 2015 (see 

fig. 5), the shift in supply has been dominant over this period. This outcome is consistent with the 

continued pattern of high ethanol production (fig. 6) and positive returns over variable costs (fig. 7). 

As a result of these developments, the amount of corn used for ethanol production has continued 

to increase. USDA’s April 9, 2015 World Agricultural Supply and Demand Estimates (WASDE) 

report forecasts the amount of corn used in ethanol production will increase in 2014/15 a little over 

1 percent from that in 2013/14 to 5.2 billion bushels, due in part to projections by EIA of higher 

gasoline consumption.

6“The Renewable Fuel Standard (RFS) establishes minimum volumes of various types of renewable fuels that must 

be included in the U.S. supply of fuel for transportation. Those volumes—as defined by the Energy Independence and 

Security Act of 2007 (EISA)—are intended to grow each year through 2022. In recent years, the requirements of the 

RFS have been met largely by blending gasoline with ethanol made from cornstarch. In the future, EISA requires the 

use of increasingly large amounts of “advanced biofuels,” which include diesel made from biomass, ethanol made from 

sugarcane, and cellulosic biofuels.” (CBO, June 2014).

Note: Gasoline is conventional blendstock for oxygenate blending.

Source: Oil Price Information Service, Ethanol & Biodiesel Information Service.

Figure 5

Weekly wholesale Chicago spot prices for gasoline and ethanol 

$/gallon

1.00

1.50

2.00

2.50

3.00

3.50

4.00

Ethanol

Gasoline
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Source: U.S. Energy Information Administration Weekly Petroleum Status Report.

Figure 6

Weekly ethanol production

Million gallons

 220

 230

 240

 250

 260

 270

 280

 290

 300

Source: Iowa State Ethanol Profitability Model.

Figure 7

Ethanol plant returns over variable costs

$/gallon

-0.50

0

0.50

1.00

1.50

2.00

2.50
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Implications for RIN Markets

Changes in biofuel markets can affect the market for Renewable Identification Numbers (RINs). The Environmental 

Protection Agency (EPA) issues RINs to facilitate compliance with the Renewable Fuel Standard (RFS). Each 

RIN corresponds to a volume of ethanol (or other renewable fuel) that is produced in or imported into the United 

States. RINs stay with the ethanol through the distribution system, even as ownership changes. Once the ethanol 

is blended with gasoline, the RIN may be separated from the fuel and used to report RFS compliance to EPA if the 

blended fuel is used domestically.

To meet ethanol-related RFS mandates, obligated parties under the RFS must either blend ethanol with gasoline 

(retaining the RINs) or purchase RINs from other producers to meet their obligations. RINs may be used for 

compliance in the year they are generated or may be held for the following year’s compliance.1

Changes in gasoline prices, ethanol prices, and other factors that alter incentives for ethanol blending can affect 

the ability to meet the RFS and thus the value of the related RINs. The figure shows weekly RIN prices for ethanol. 

Through 2012, RIN prices were low because the RFS was not binding through this period and RIN supplies 

exceeded mandates. Over the past 2 years, however, RIN prices have been higher as the RIN supply and demand 

balance tightened, because of declining gasoline use and the effects of the E10 blend wall.

While ethanol prices have fallen since mid-2014 because of lower costs of natural gas and corn, gasoline prices 

have fallen more over this period as a result of the decline in crude oil prices. Thus, although ethanol prices are 

again lower than gasoline prices, ethanol prices in spring 2015 are higher relative to gasoline prices than they were 

in summer 2014. Such an occurrence reduces the incentive to blend ethanol, absent mandates. Changes in RIN 

prices reflect this change in relative prices, and thus RIN prices have risen recently, averaging about $0.70 per RIN 

thus far in 2015, up from about a $0.50 per RIN average for much of 2014.

1See McPhail, L., P. Westcott, and H. Lutman. 2011. The Renewable Identification Number System and U.S. Biofuel Mandates, 

BIO-03, USDA, Economic Research Service. 

Source: Oil Price Information Service, Ethanol & Biodiesel Information Service.

Current-year U.S. ethanol RIN prices

$/RIN

0.20

0.40

0.60

0.80

1.00

1.20

1.40

0.00
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Summary and Conclusions

The latter half of 2014 showed a sharp reduction in oil and natural gas prices, with expectations 

that energy prices would remain lower than previously projected, at least through 2016. Energy 

prices affect a number of markets, including agriculture and biofuels, which also interlink with 

one another. 

This report analyzes effects of lower energy prices in 2015 and 2016, focusing on crop-sector 

effects. Lower energy prices affect production expenses, which in turn affect total operating costs, 

acreage allocations, and commodity prices. Additionally, lower energy prices can affect biofuel 

markets, changing the demand for feedstocks, especially corn for ethanol.

Our analysis suggests that lower energy prices will have a small effect on agriculture in 2015 

and 2016. With lower prices of oil and natural gas, costs of production are lower than previously 

projected—however, this effect is minimal for two reasons. First, prices for energy-related inputs 

fall by less than the change in energy prices. Second, energy-related costs represent only a portion 

of total operating expenses. Nonetheless, with lower costs of production, farmers have incentives 

to adjust planted acreage in 2015 and 2016—a scenario with lower energy prices shows total 

acreage increases a small amount relative to a reference scenario (with higher energy prices) and 

the mix of crops planted changes slightly. In addition to the small changes in production costs, 

another factor causing the small acreage effects is that crop acreage supply response is inelastic to 

changes in producer net returns, meaning changes in producer net returns lead to relatively small 

acreage changes.

As a result of the acreage shifts in the lower energy cost scenario, commodity prices generally 

decrease. However, price effects in the alternative scenario are small compared with a reference 

scenario with higher energy prices. Overall farm production expenses in the sector are reduced.

Lower energy prices in 2015 and 2016 are also expected to have a variety of effects on the biofuels 

market. Primarily, lower natural gas prices reduce ethanol production costs, increasing ethanol 

availability. Furthermore, as lower gasoline prices (in response to lower oil prices) lead to higher 

gasoline consumption, the market for ethanol blends increases. However, as the price of gasoline 

decreases relative to ethanol, refiners become reluctant to blend more ethanol with gasoline (for 

energy and octane) because of ethanol’s increased relative cost. Overall, lower energy prices in 

2015 and 2016 will minimally increase the demand for ethanol, reflecting the increase in gasoline 

consumption. At the same time, lower corn prices are expected to combine with reduced natural gas 

prices to increase ethanol output. 
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