U.S. Agriculture After Hurricanes Katrina and Rita: Status and Issues
Released: 2005-10-05T00:00:00

Agricultural Marketing Infrastructure Issues

Overview and Current Status

Hurricane Katrina damaged much of the nation's grain marketing infrastructure located in theNew Orleans region including port facilities, river traffic infrastructure (buoys, moorings, channels,etc.), and grain elevators, as well as those barges and ships in the region at the time of landfall. Agricultural traffic on the Mississippi River came to a temporary standstill. The sharp decline inbarge availability shifted transport demand to rail and truck systems that were already operating nearcapacity, thus driving alternate transport prices higher and contributing to substantial congestionwithin the Mississippi River grain transportation system centered on the Mississippi River and itstributaries -- the Missouri, Illinois, Ohio, and Arkansas Rivers ( Figure 2 ). Grain elevators withinthe Mississippi River inland waterway system have reported disruptions in train service as rail carswere being diverted to handle grain previously destined for barges according to the Kansas Grain andFeed Association. (1) Farmers' transportation options also have been hurt by rising fuel prices which have sharplyincreased the cost of moving grain by truck. Economists are reporting the shortage of rail cars andstorage space could last into 2006. (2)

Figure 2. Most U.S. Inland Waterways are Centered on the MississippiRiver

In a competitive market, the price that producers receive for their agricultural commoditiesis derived from the price established in major markets such as Gulf port export terminals, less thetransportation and handling costs required to move grain from the farm to those markets. Whenmarketing costs rise -- as they have in the wake of Katrina -- farm-gate prices usually fall and alongwith them so do farm and rural incomes. This is exactly what has happened following Katrina'sdamage to the inland barge-based Mississippi River system. The news media reported sharp dropsin commodity prices in interior producing regions that depend on the Mississippi River as an outletfor their surplus production.

When weather services and news media forecast a second hurricane -- Rita -- approachingthe central Gulf coast, authorities shut down those transport services that were still operable or hadalready been restored. Fortunately, Hurricane Rita dissipated in intensity prior to landfall and dealtonly a glancing blow to most Gulf coast transport infrastructure. As a result, MississippiRiver-based agricultural transportation has again resumed its post-Katrina recovery; however, graintraffic flows are still well below last year's pace. Mississippi Gulf grain inspections during each ofthe first two weeks of September were 81% and 79% below levels of a year earlier. (3) Gulf vessel loading activitywas also significantly below levels of a year earlier.

Agricultural producers remain concerned about the rapid resumption of barge traffic on theMississippi in advance of the peak harvest-time period, about repair of the marketing infrastructure,and about rising energy prices in part related to hurricane damage. It is still unclear how much timewill be required before barge and ship traffic resumes its normal flow.

In mid-September, USDA announced that it was undertaking several activities to alleviatethe grain transport congestion. (See final section of this report, Government Response, for moredetails on USDA's response.)

Port of New Orleans

New Orleans is among the world's busiest ports. It is served by 6 major railroads, 50 oceancarriers, 16 barge lines, and over 75 motor carriers. (4) More than 6,000 ocean vessels annually move through NewOrleans on the Mississippi River. The port of New Orleans and its surrounding Gulf ports are theprimary outlet that links a vast barge-based inland waterway system to international markets ( Figure2 ).

Every year a substantial share of the U.S. corn, soybean, and wheat crops are trucked fromfarms in interior states to grain elevators located along the Mississippi River and its major tributaries,then loaded onto barges for the trip down river to a Gulf port facility where grain shipments areaggregated before being loaded onto ocean-going vessels for the trip to foreign markets. The Portof New Orleans reportedly handles 2 billion bushels of grain each year. (5) Corn, soybeans, wheat, andrice are the primary agricultural products exported via the Mississippi River. During the 2002-2004period, nearly 64% and 67% of U.S. corn and soybean exports (by value), respectively, passedthrough Louisiana ports on their way to foreign markets. In addition, about 23% of wheat and 41%of rice exports passed through the mouth of the Mississippi during that same period ( Table 1 ).

The Port of New Orleans provides a major destination for international containers, rubber,steel, plywood and coffee, and is an important link to the inward movement of fertilizers, fuel, andother vital farm inputs. The Port of New Orleans is the nation's top port for imported natural rubber. In addition, New Orleans is the nation's premier coffee-handling port, with 14 warehouses, more than5.5 million feet of storage space and six roasting facilities in a 20 mile radius. Two of the mostmodern bulk processing operations are located in New Orleans: Dupuy Storage and ForwardingCorp. (largest in the United States) and Silocaf of New Orleans, Inc. (the world's largest). (6)

Table 1. Exports of Major Agricultural Commodities, U.S. Totalversus District of New Orleans, Average for 2002-2004

na = not available.

Sources: U.S. Total from World Trade Atlas ; District of New Orleans data are from U.S. CensusBureau, Foreign Trade Division.

When Hurricane Katrina struck the Gulf Coast region, the storm brought a halt to the flowof agricultural trade entering and exiting the United States through the Mississippi River Systemcentered on New Orleans and surrounding Mississippi-River-based Gulf ports. Flooding and poweroutages stopped operations at most of the port facilities within the affected region. Concerns for theUnited States' ability to export its surplus agricultural production were immediate.

Figure 3. Status of Major Gulf Ports as of Sept. 6, 2005.

In addition to affecting Mississippi River traffic and operations at the Port of New Orleans,several other important central and eastern Gulf ports -- Gulfport, Biloxi, and Pascagoula,Mississippi; Mobile, Alabama; and Pensacola and Panama City Florida -- were completely orpartially shut down due to hurricane damage ( Figure 3 ). However, a significant share of shippingactivity was redistributed to alternate western Gulf ports to facilitate the resumption of trade andeconomic activity in the region. During the first week in September, most of the 86 ships that werereportedly queued at the Mississippi River's entrance just prior to Katrina's arrival were diverted toports in Texas and elsewhere to deliver their cargoes. (7)

Most export facilities did not sustain major structural damage; however, the bigger problemwas getting power restored, the channel cleared, and work crews back into the region. The principalconcerns regarding the Port of New Orleans were: first, how quickly could the channel be reopenedfor river traffic, and second, how quickly could port facilities for loading and unloading bulk grainresume operation? Within two weeks both the Mississippi River channel and the Port of NewOrleans were engaged in commercial shipping, albeit at substantially reduced levels relative to thepace of trade from a year earlier.

Timeline. Following is a brief timelinesurrounding major events at the Port of New Orleans.

August 29, 2005. Hurricane Katrina made landfallas a category 4 hurricane just east of New Orleans temporarily closing all transportation and shippingactivities between the Gulf of Mexico and the Mississippi River. An estimated 400 barges (out ofover 11,000 barges that ply the Mississippi River) were destroyed or damaged. Of the ten majorgrain elevators located within the New Orleans region, only one -- Myrtle Grove -- sustained anysubstantial damage.

August 31, 2005. The U.S. Coast Guard re-openedthe Mississippi River to tug and barge navigation. Ocean vessels were still barred pending CoastGuard investigation of the status of channel depths and navigation aids. The U.S. Coast Guardreported that about 70% of the navigation aids (such as buoys marking the river channel) along theMississippi River were damaged or missing. (8) The river channel itself had to be surveyed to guard againstpossible shoals or other obstructions that might have been left in the hurricane's wake. In the earlyperiod following the hurricane, the U.S. Coast Guard focused its full resources on search and rescueoperations in the areas affected by the hurricane.

September 4, 2005. The communications managerfor the Port of New Orleans announced that the Mississippi River was open in one direction to shipswith a draft of 35 feet during daylight hours. That same day, the Port President and CEO, GaryLaGrange announced that the Port of New Orleans' river front terminals had survived HurricaneKatrina in relatively good shape and, although slightly damaged, they would be workable onceelectrical power and manpower were available. (9) Although the channel was usable, most of the port facilities wereto be dedicated to military relief vessels through mid-September. Commercial vessels would not beallowed to return to the Port of New Orleans until electrical power and manpower werere-established. The U.S. Dept. of Transportation's Maritime Administration announced that it wasproviding several ships to the Port of New Orleans with the capacity to temporarily house 1,000people who will operate the port.

September 7, 2005. Secretary of Agriculture MikeJohanns reported that substantial existing infrastructure was available on the Mississippi River inthe New Orleans area for facilitating port activities. (10) In particular, he mentioned three floating rigs with a loadingcapability of 30,000 to 60,000 bushels per hour from river barges directly on to ocean-going vesselsor barges, and 10 export elevators with a storage capacity of 526 million bushels and a loadingcapability of 970,000 bushels per hour when fully operational ( Figure 4 and Table 2 ). SecretaryJohanns estimated that (as of September 7, 2005) the operational capacity of the 3 rigs and 10elevators was a combined 63% of normal and that slower barge movements and limited staffprevented full utilization of their loading capacity.

Gradually the U.S. Coast Guard began to shift its operational focus from search and rescueto the process of damage assessment and repair of the navigation infrastructure.

September 21, 2005. The U.S. Army Corps ofEngineers (USACE) reported in its weekly navigation update, that all of the ports listed as closedor opened with restrictions in Figure 3 were now fully open to daylight traffic with Gulf Port,Mobile, and Panama City open to 24-hour transit. (11)

September 22, 2005. Most major ports located alongthe Texas and Louisiana Gulf coast were temporarily closed in advance of Hurricane Rita.

September 24, 2005. Hurricane Rita makes landfallas a category 3 hurricane at the Texas-Louisiana border near the Sabine-Neches Waterway (PortArthur and Port of Beaumont) and Calcasieu Lock and River System connecting Lake Charles withthe Gulf of Mexico. Preliminary reports suggest that export grain elevators located along the TexasGulf coast sustained only minimal physical damage from Hurricane Rita. (12) Resumption of operationshinged on how quickly power was restored and personnel were allowed to return to the regionfollowing a mandatory evacuation.

September 27, 2005. Myrtle Grove grain elevator,the last of the 10 grain elevators in the New Orleans region, was fully restored for operations.

September 29, 3005. The USACE lifted all remainingrestrictions on the Lower Mississippi River through the Southwest Passage (the principal channelout of the Mississippi River system to the Gulf). The Southwest Passage was now open for both dayand nighttime traffic.

Figure 4. Mississippi River-Gulf Export Grain Elevators

Table 2. Mississippi River-Gulf Elevator Location, Storage andLoad Capacity

Source: USDA, Agricultural Marketing Service (AMS) materials provided in briefing to staff ofHouse Committee on Agriculture, September 22, 2005.

October 2, 2005. All major Texas Gulf ports wereopen to vessels with restricted depths of 40 to 45 feet at most harbor channels. (13) The Calcasieu River toLake Charles remained restricted to shallow draft tows and light tug traffic, but with 24-hourallowance. Deep draft vessels were restricted to 35 feet in daylight hours.

Barge-based Inland Waterway Transportation

Overview of Barge Transportation. Bargetransportation represents the lowest-cost transport mode for moving a high volume of bulkcommodities long distances ( Table 3 ). Because barge rates are generally significantly lower thaneither rail or truck, the Mississippi River navigation system provides considerable transportation costsavings to the regional and national economy. (14) Most economists and market analysts agree that inexpensivebarge transportation helps check rates charged by the rail and truck transportation industries. Inaddition, low internal transport costs relative to export competitors such as Argentina and Brazilhave helped U.S. products compete in international corn and soybean markets. (15)

Table 3. Barge Transport Moves Large Volumes Relative toTruck or Rail

Source: U.S. Tugboat & Towboat Industry.

a. Assumes a 9-foot channel as is maintained on the Upper Mississippi River by the U.S. ArmyCorps of Engineers. Barge capacity increases with channel depth.

b. Panamax vessels are restricted to 60,000 metric tons due to maximum draft requirements.

c. Bushels are corn-equivalent (1 metric ton = 39.3679 bushels).

A complex web of local supply and demand conditions determines how and when grainmoves through the U.S. grain-handling network comprised of on-farm storage, trucks, railroads,barges, and grain elevators (including county, sub-terminal, and export elevators). Price changes atany point along the chain can result in shifts to alternate transport modes or routes as grain marketerssearch for the lowest-cost method of moving grain between buyer and seller.

A hurricane such as Katrina or any similar weather or catastrophic event that dramaticallyslows or severely limits barge traffic will usually have the effect of raising barge freight rates as thedemand for barge services exceeds their supply. Higher barge freight rates for corn and soybeanswill in turn shift these commodities to alternate uses (feed, food, industrial, or storage), to alternatetransport modes (rail or truck), or to alternate trade routes (e.g., to the Atlantic via the St. LawrenceSeaway, or overland to Canada, Mexico, or alternate ports along the Gulf coast or as far away as thePacific Northwest). The degree of shifting depends, in part, on the perceived permanency of theprice change. Because truck and rail are significantly more costly than barge transport, shifting bulkcommodities to truck- or rail-based routes can substantially raise the cost of moving grain.

Hurricane Damage to Barge Transportation. When Hurricane Katrina struck the Gulf coast region, an estimated 400 barges (out of over 11,000barges that ply the Mississippi River) were destroyed or damaged, and a substantial number of bargesand vessels in the area surrounding New Orleans were displaced. Although this physical damagewas costly, it is not the major factor limiting the quick reprise of barge transportation.

The primary problem for barge-based agricultural transportation on the Mississippi Riversystem is the problem of restoring the entire transportation system encompassing trains, trucks,barges, ports, and ocean-going boats to a synchronized schedule of deliveries and arrivals. As ofSeptember 30, 2005, the entire transportation network remained somewhat out of sync. Waterwaysand rail lines are backed up and congested with barges and trains arriving to deliver their goods toboats that are berthed in port slots awaiting delivery for goods other than those being delivered.

In addition to an "out-of-sync" transportation network, approximately 140 barges containinghurricane-damaged corn (primarily water damage) were left in the New Orleans region. Thesebarges needed to be off-loaded and the barges moved back up-river to elevators eagerly awaitingbarge transport to ship their grain down river. However, because of the water damage, the corn wasno longer acceptable for contract delivery and could not be off-loaded at any of the export-servicinggrain elevators in the New Orleans vicinity. Because of the poor condition of their cargo, thesebarges must be towed to special locations (primarily back up river) for off-loading and removalbefore they can re-enter the normal barge traffic.

Commodity Prices

The immediate effect of the slowdown of barge traffic on the Mississippi River was areported sharp decline in grain elevator bid prices for corn and soybeans in interior grain markets. Many grain elevators serving barge traffic were already near their maximum storage capacity, andfelt compelled to reduce their bid prices to avoid buying grain that they could not store. The problemhas been made more acute by the approaching harvest when producers will likely need all of theiron-farm storage capacity to store their new crop harvests. As a result, many producers have beenlooking to sell the remaining supplies from last year's harvest to clear space.

It is expected that this situation will be remedied and elevator bids will strengthen whenbarge traffic returns to more normal levels. However, USDA officials have expressed concern thatthe price decline resulting from the temporary delay in the Mississippi barge-based export flow ofagricultural products could persist for at least three months and possibly into the spring dependingon several factors including how quickly barge traffic resumes; how early the winter freeze andshut-down of the upper Mississippi River occurs; and whether the low water levels of the Missouriand Upper Mississippi Rivers are replenished by rainfall.

Harvest-time Concerns. Harvest time generallysignals the busiest period of export movement for agricultural products for several reasons. First,supplies are generally most abundant at harvest time and can often exceed on-farm or local storagecapacity. As a result, both producers and marketers are eager to move surplus production throughthe marketing channels. Second, the more northerly inland waterways -- the Upper Mississippi Riverwaterway and the St. Lawrence Seaway -- shut down during the winter months due to freezingconditions. This limits export opportunities and increases the urgency for moving excess productioninto marketing channels ahead of the winter. Third, the arrival of surplus agricultural production intomarketing channels at harvest time tends to pressure commodity market prices to their season lowsand frequently offers the best purchasing opportunities for foreign buyers.

Table 4. Harvest Period for Major U.S.Crops

Source: Major World Crop Areas and Climatic Profiles , Agr Handbook No. 664, WorldAgricultural Outlook Board and Joint Agricultural Weather Facility, USDA, Sept. 1994.

USDA has initiated several activities designed to alleviate weak commodity prices by easingthe grain transport congestion that has raised transport costs and lowered farm prices. (See the finalsection of this report, Government Response, for details of USDA's activities.)

Farm Production Losses

From a national perspective, the region's agriculture is dominated by Louisiana's sugar canecrop which accounts for nearly one-third of the value of U.S. annual sugar cane production ( Table5 ). Poultry in Alabama and Mississippi, rice in Louisiana, and cotton in Mississippi also havenational significance. However, several crops play a much bigger role at the state level. Broilersand eggs accounted for over 62% of Alabama's agricultural output value in 2003, while broilersrepresented a 42% share of Mississippi's agricultural economy. Cotton's share of state agriculturaloutput value in 2003 was 15% in Mississippi, 12% in Louisiana, and 5% in Alabama.

Preliminary estimates by USDA economists are that Hurricane Katrina contributed to $882million in total crop, livestock, and aquaculture (16) losses in the Southeast. (17) (Estimates for HurricaneRita are not yet available, but are expected to be significantly less than for Katrina.) USDA reportsthat the greatest agricultural losses caused by Katrina, in terms of value of production, were toaquaculture ($151 million), sugarcane ($50 million), and cotton ($40 million). Other crops such assoybeans and rice were also prone to some wind damage. The $882 million loss estimate does notinclude Gulf state losses of timber (which USDA says could be in the billions of dollars dependingon its salvage value -- see the following section for more details), or losses of nursery andgreenhouse products and facilities in Florida, for which a Florida trade association projects $370million in structural damage and plant losses. (18) Also, the loss of electricity, the shortage of fuel, andinfrastructure damage temporarily interrupted the flow of poultry, milk and other agriculturalproducts to markets.

For some crops, particularly sugarcane, the extent of losses will not be known until harvest.Damage to the region's sugarcane crop initially appeared to be extensive because the high windsflattened the crop. Some analysts report that much of the crop that was downed by the storm wasnot destroyed and can still be harvested. USDA estimates that Louisiana's sugarcane production willbe 9% below pre-hurricane estimates, which translates into an estimated processed value loss of $50million. Katrina also caused two Louisiana sugar refineries to temporarily halt operations, whichexacerbated what was already a tight supply of sugar. In response, USDA increased available sugarsupplies by increasing the quantity of domestic sugar that may enter the market under the sugar pricesupport program. (19)

According to USDA, the largest cotton production areas (east and west of the storm track)were spared significant crop losses. Mississippi and Alabama, which account for 10% and 3% ofexpected U.S. cotton production, respectively, experienced some damage. Cotton production isestimated by USDA to be down 2.4% in Alabama and 4.3% in Mississippi following HurricaneKatrina. Total cotton losses in the Gulf region are expected to be about $40 million. Some of thedamage to the crop might be quality losses rather than production losses. Similarly, minor rice losseswere experienced, since the storm track was east of the major rice growing areas and most of theLouisiana rice acreage already had been harvested before Katrina struck.

The corn and soybean crops were also affected by the hurricane, but the region normally accounts for less than 3% of national production of these two crops. The most serious market effectsattributable to corn and soybeans are more transportation related (as discussed above). Accordingto USDA, estimated regional losses are $14 million for corn and $17 million for soybeans.

Industry analysts also report that the Gulf region's dairy industry experienced production andprocessing losses. USDA reports that 60,000 dairy cows were located in counties that experiencedhurricane-strength winds. Some of these cows were lost, but no estimates are available. The region'sdairy industry was hampered by the loss of production caused by power outages in milking facilities,and the inability to transport milk because of damaged roads and bridges, as well as the loss ofrefrigeration and metropolitan retail dairy markets. Alabama, Louisiana, and Mississippi combinedaccount for less than 1% of U.S. milk production; hence, market effects are expected to be limitedto the region.

USDA also reports losses to cattle operations and broiler production in the three-state region.The region accounts for about 4% of national beef production, so national market effects areexpected to be minimal. Poultry is a significant enterprise in the region: Alabama and Mississippirank third and fifth, respectively, among all states in broiler production. Most of the broiler losseswere concentrated in Mississippi where facilities were either damaged or without power for anextended period. According to USDA, an estimated 6 million chickens were killed and 2,400poultry barns were damaged in Mississippi alone, and another 200,000 chickens were lost inAlabama. The broiler losses are valued by USDA at approximately $15 million. Some analystsestimate that large area broiler losses could cause an increase in market broiler prices in the shortterm (1-2 months). However, increased production elsewhere would eventually fill the gap so thatmarket effects would be minimized by the end of the year. (20)

Table 5. Top 5 Agricultural Commodities: Alabama, Louisiana,and Mississippi, 2003

Source: U.S. Department of Agriculture's Economic Research Service.

Damage to Forestry and Wood Products. TheGulf Coast states are significantly forested and are major producers of lumber and plywood. Information on the effects of Hurricane Katrina on Gulf Coast forests is sketchy. The MississippiForestry Commission issued a news release estimating that 1.3 million acres of forest land in thestate had been damaged, with commercial timber valued at about $1.3 billion; urban tree damage inMississippi was estimated at $1.1 billion. (21) The USDA Forest Service estimated 19 billion board feet oftimber damaged on over 5 million acres in Mississippi, Alabama, and Louisiana. (22) In addition to the damagesto wildlife habitat and other environmental services from the loss of forest cover, the dead anddamaged trees can become hazardous fuels for wildfires as well as a haven for forest insects anddiseases.

Forestry assistance programs exist to help landowners, and can be used to help in therecovery of forest lands. One particular program, Emergency Reforestation Assistance, was enactedin the 1990 farm bill ( P.L. 101-624 ) to assist private landowners, primarily in South Carolina, withreforestation following Hurricane Hugo that hit in 1989. The program has not been funded sinceFY1993, following Hurricanes Andrew (FL and LA) and Iniki (HI). (23) Other forestry assistanceprograms are generally available to help landowners and states with forestry activities and forestprotection, such as reducing wildfire and insect threats from trees damaged by the hurricane.

The impact of the hurricanes on wood products is less certain. Damages to structures hasprompted an urgent demand for plywood, for temporary repairs; if plywood prices follow the patternthat ensued from Hurricane Andrew in 1993, prices might have peaked at about the time of the eventin anticipation of the damage, and will fall back to more normal levels within a few weeks. Longer-term impacts are less clear. Rebuilding will increase the demand for additional woodproducts, although demand depends greatly on interest rates. The dead and damaged trees mightprovide a significant boost to wood product supplies, as salvage and mill operations convert the treesto usable products. However, salvage operations are hampered by the increasingly fragmentedownership of forest land and by rising fuel costs, and some mills may have been damaged by thehurricane. The effect over the coming weeks and months is thus likely to be both greater woodproducts demand and greater wood products supply, and the net effect on wood product prices (afterthe current urgent demand for plywood has passed) is indeterminate.

Energy Costs and Agriculture

Following the damage inflicted by Hurricanes Katrina and Rita on the Gulf region's oil andnatural gas production, refining, and importing capability, energy prices -- gasoline, diesel fuel, andnatural gas -- rose sharply. (24) Considerable uncertainty surrounds the longevity of recentenergy price rises, and the implications for U.S. agriculture hinge on their permanency. Fuel priceshave been trending higher over each of the past three years, and farmers were already likely to seerecord high fuel costs before the post-Katrina runup in prices struck ( Figure 5 ). In the near-term,it is likely that such strong energy price rises will significantly increase energy's share of totalproduction expenses and could significantly alter the farm income outlook for affected farmhouseholds and rural economies.

Figure 5. Monthly Average U.S. Fuel Prices

Energy Prices Already Trending Higher, Jump After Katrina

The national average annual retail price for No. 2 diesel fuel has been rising steadily from$1.32 per gallon in 2002 to $1.51 per gallon in 2003, and $1.81 per gallon in 2004. In August 2005,it hit a then-record $2.50 per gallon. Gasoline prices followed a very similar pattern. In September2005, post-Katrina concerns have spiked both gasoline and diesel prices to record monthly averagelevels at $3.04 and $2.82 per gallon, respectively.

Natural gas prices also have experienced substantial demand-driven price rises over the past3Â½ years. After hovering just below $2.00 per 1,000 cubic feet (mcf) through most of the 1990s,natural gas (wholesale or wellhead) prices moved upwards to average $2.95 per mcf in 2002, thensurged to a $4.98 per mcf average in 2003. Wellhead prices continued rising in 2004, averaging$5.49 per mcf. Since April 2005, natural gas prices have been above $6.00. During the final weekof August (August 24-31), Henry Hub spot market prices (Henry Hub is a primary wholesale marketlocation for natural gas) sky rocketed in anticipation of Katrina's disruption to an average of $12.70per mcf. During September, after Katrina had moved through the Gulf Coast region and analysts hada chance to better assess the damage to production facilities, natural gas prices retreated to averagearound $11 per mcf.

Natural gas spot prices spiked again, jumping to over $14 per mcf in advance of the arrivalof Hurricane Rita. However, natural gas prices declined following Hurricane Rita's actual landfallas a weaker hurricane than expected, even while causing massive evacuations of rigs and platformsin the Gulf of Mexico and inflicting damage to both offshore and onshore energy-relatedinfrastructure. As of September 28, price quotes were still unavailable at the Henry Hub, which wasshut down owing to Hurricane Rita. (25) However, trading at other market locations in Louisiana saw anaverage decrease of $1.35 per MMBtu on the week (Wednesday-Wednesday, September 21-28). Theaverage price among Louisiana trading locations on September 28, 2005, was $13.45 per mcf.

Evaluating the potential effect of such volatile energy price movements on U.S. agriculturehinges greatly on their permanency. (26) The relative importance of energy costs as a share of totalagricultural production expenses varies greatly by both activity and region. Although there are manykinds of operations performed by the different farm types, nearly all mechanized field work, as wellas marketing and management activities involve machinery, trucks, and cars that are dependent onpetroleum fuels. Dryers and irrigation equipment are often more versatile in that they can bepowered by petroleum fuels, natural gas, or electricity, while electricity is the primary source ofpower for lighting, heating, and cooling in homes, barns, and other farm buildings. Some activitiessuch as dairy and poultry production, that require a constant supply of energy for refrigeration orcooling are particularly vulnerable to a cut-off of energy supply as evidenced by the damagesustained in the hurricane-affected region.

In the immediate term, higher diesel fuel and gasoline prices will raise the cost of harvestingand post-harvest treatment (e.g., drying, moving, and storing) of crops still in the field. For thosefarms that have been indirectly impacted by Katrina's damage to the region's marketinginfrastructure, higher fuel prices will make the overall cost of marketing products more expensive,while making rail and truck more costly options relative to barge transport. Such higher marketingcosts inevitably result in a widening farm-to-market basis and lower prices received at the farm gate. This, in turn, will alter the farm income outlook for affected farm households and rural economies.

In the longer term, sustained high energy prices through the winter could lead to significantregional shifts in agricultural activities as early as 2006. High natural gas prices are particularlytroublesome because of their relationship with nitrogenous fertilizer production. Natural gasaccounts for a substantial portion (75% to 90%) of nitrogen fertilizer production costs, either directlyas a feedstock or indirectly as a fuel to generate the electricity needed in production. Because U.S.fertilizer manufacturers are at a competitive disadvantage with foreign producers when U.S. naturalgas prices rise, the high prices of recent years have contributed to a substantial reduction in its U.S.nitrogen fertilizer production capacity -- over a 25% decline since 1999. In addition, higher naturalgas prices have contributed to significantly higher nitrogen fertilizer prices ( Figure 6 ).

Figure 6. Anhydrous Ammonia and Natural Gas Prices

The post-Katrina jump in U.S. natural gas prices casts a cloud of uncertainty over the futureof the U.S. nitrogen fertilizer industry as well as raising concerns about the potential supply and priceof nitrogen fertilizer for crops in 2006. Producers are undoubtedly eyeing fuel and fertilizer pricedevelopments and will consider shifting away from crops that rely heavily on fuel-dependent fieldwork or fertilizer applications and towards those crops and activities that are less energy dependent. Corn is perhaps the most vulnerable crop due to its high per-acre energy usage rates. (27)

In the longer term, a sustained rise in energy prices may have serious consequences onenergy-intensive industries like agriculture by reducing profitability and driving resources away fromthe sector.

Government Response

USDA Initiatives Targeting Export Traffic Congestion

During September 2005, USDA announced that it was initiating several activities to helpalleviate the grain transport congestion described below. On September 7, 2005, USDA announcedchanges to its Marketing Assistance Loan Program to help alleviate the urgency of marketing grainat distress-level prices. (28) USDA's Commodity Credit Corporation (CCC) is implementingchanges to allow producers to obtain loans for "on-farm" storage on grain stored on the ground inaddition to grain bins and other normally approved structures. This action was designed to alleviateshort-term logistical problems and support local cash prices above the distressed levels that haveresulted from the slowdown of barge traffic on the Mississippi River.

On September 20, 2005, Secretary of Agriculture, Mike Johanns, announced that USDA wastaking four additional steps to alleviate the grain transport congestion. (29) First, USDA, actingthrough the CCC, was providing temporary incentives to facilitate the immediate movement of 140barges of damaged corn (over 7 million bushels) from New Orleans to up-river locations foroff-loading. Once unloaded, the barges can return to duty moving new-crop commodities. Second,USDA was providing incentives for alternative grain storage. (30) Under this activity, theCCC would provide special, one-time assistance to operators to help with the costs associated withstoring corn and wheat in alternative storage facilities. Up to 50 million bushels of corn or wheatcould be eligible for this activity. Third, USDA was encouraging alternative shipping patternsthrough regions other than the central Gulf by providing for a transportation differential incentiveon the movement of up to 200,000 metric tons of corn, wheat or soybeans. Fourth, for thoseproducers with farm-stored commodities under loan to USDA whose loans mature at the end ofSeptember and October and who would otherwise forfeit those commodities to USDA, USDA wouldallow such producers to buy back the grain at the posted county price. Normally, these producerswould be required to move the forfeited grain to commercial warehouses. This offer is being madeon a state-by-state basis.

Current USDA Disaster Authorities and Programs

USDA has at its disposal three major ongoing programs designed to help crop producersrecover from the financial effects of any natural disaster:

federal crop insurance,

non-insured assistance program (NAP) payments, and

emergency disaster loans.

All three of these programs have permanent authorization and available funding. Forbackground information on these and other farm disaster programs, see CRS Report RS21212 , Agricultural Disaster Assistance , by [author name scrubbed].

For the 2005 crop year, Alabama, Mississippi, and Louisiana crop producers purchased justover $1 billion in crop insurance coverage, with nearly 70% of the value of coverage being forcotton, soybeans, and rice. According to preliminary reports from USDA, the three-state region hasrelatively high participation rates in the crop insurance program. However, much of that coverageis at the catastrophic level, which provides an indemnity payment only on losses in excess of 50%of normal production. For example, 90 to 95 percent of the cotton acreage in the three Gulf statesis enrolled in the federal crop insurance program. However, in Louisiana and Mississippi, just overone-half of that acreage is enrolled only at the catastrophic level. For those producers who growa crop that is not eligible for crop insurance coverage, USDA makes NAP payments available forcatastrophic losses, as long as the producer signed up for coverage and paid an administrative feein advance.

Agricultural producers in a county that has been declared a disaster area may be eligible forlow-interest emergency disaster (EM) loans available through USDA's Farm Service Agency. USDAcurrently has authority to provide just over $150 million in EM loans. An eligible producer must bea family-sized farmer who suffered a minimum crop loss of 30%, and is unable to qualify for a loanfrom a commercial lender. EM loan funds may be used to help eligible farmers, ranchers, andaquaculture producers recover from production losses (when the producer suffers a significant lossof an annual crop) or from physical losses (such as repairing or replacing damaged or destroyedstructures or equipment, or for the replanting of permanent crops such as orchards). A qualifiedapplicant can then borrow up to 100% of actual production or physical losses (not to exceed$500,000) at a below-market interest rate.

USDA announced on September 8, 2005, that $20 million in Emergency ConservationProgram funding will be given to Louisiana ($12.45 million), Mississippi ($7.1 million), Alabama($855,0000) and Tennessee ($25,000) to help these states clean up debris, and restore fences andconservation structures. Eligible participants can receive cost-share assistance of up to 75% of thecost to implement these practices.

Congressional Response

Since 1988, Congress frequently has supplemented the regularly funded disaster assistanceprograms with additional emergency aid. Funding for these programs generally are provided inemergency supplemental appropriations bills. Among these major ad-hoc farm disaster programsare (1) direct disaster payments, (2) livestock assistance, (3) tree assistance, and (4) emergencyconservation assistance. Most recently, the FY2005 Military Construction Appropriations Act ( P.L.108-324 ) contained supplemental funding to provide an estimated $3.5 billion in assistance for 2003and 2004 crop, livestock, and tree losses, primarily in response to ongoing drought in the West anda series of 2004 hurricanes that damaged or destroyed agricultural production in the Southeast. (Formore information on the ad-hoc agricultural assistance that was provided in response to the 2004hurricanes, see CRS Report RS21212 , Agricultural Disaster Assistance .)

Prior to Hurricanes Katrina and Rita, portions of the Midwest were experiencing significant2005 crop losses caused by a prolonged drought. The combination of the Midwest drought andlosses caused by the two hurricanes is expected to provide momentum for Congress to consideremergency crop and livestock assistance for 2005 production losses some time this year. Severalbills have been introduced in the 109th Congress that would provide supplemental agriculturalassistance, primarily in the form of crop disaster payments and livestock assistance. To date, theseinclude bills ( H.R. 3809 , H.R. 3754 / S. 1692 , H.R. 3702 , S. 1636 ) that would provide disaster assistance to all regionsof the country that meet certain loss requirements, using similar payment formulas as in past years. Other bills ( H.R. 3958 and S. 1766 ) have been introduced that includeagricultural assistance as a part of a much larger package of assistance for recovery and relief fromthe effects of Hurricane Katrina in Louisiana.

Congressional leadership has not yet determined the specifics of any agricultural disasterassistance package, or what legislative vehicle might be used to authorize this assistance. (31) The most likely vehiclefor agricultural assistance is in the context of a third supplemental appropriations bill for HurricaneKatrina recovery, which many expect will provide billions of dollars of assistance for rebuilding theinfrastructure of the affected region. Other possibilities include agricultural assistance being attachedto the pending FY2006 agriculture appropriations bill ( H.R. 2744 ) which is currentlyin conference committee, or the agriculture committees potentially could report emergencyagricultural legislation to the floor for consideration.