Agriculture and energy pricing

Lucy Darragh and Anne Laurie

Agriculture is the fourth most energy-intensive industry in Australia, yet exclusive to environmental impact assessments, there has been minimal investigation into energy use, and even less on cost impacts related to projected energy price increases. New research currently underway at the Australian Farm Institute (AFI), funded by Energy Consumers Australia, is investigating the significance of different sources of energy as production inputs for 12 major farm commodity sectors and their constituent supply chains, and developing a database that will incorporate current and prospective energy cost changes to project the impact on the wider agricultural sector.

Energy costs as a proportion of production costs for irrigated agriculture have increased by as much as 100% over the period 2007–2012. Further increases in wholesale energy prices (coupled with the expectation that retail prices for diesel and unleaded petrol will rise in line with international crude oil prices in 2017–18) are likely to have flow-on effects that impact input costs, such as fertilisers. However, the lack of understanding on exactly how energy is used and how much it costs (and why) leaves little certainty as to where, and the extent to which, the increases will take effect across the supply chain. 

Agriculture is making the switch to a more digitally enabled industry, with a substantial uptake of revolutionary technologies. Energy costs are likely to become even more of an issue for producers in the near future – a good run of production years that are likely to level off, combined with efficiencies fast approaching their peaks, means a tightening of belts all round. Reliance on technology is growing substantially and the decision to adopt improvements or otherwise may, in some cases, boil down to the cost of energy (particularly electricity).

The potential for energy users in Australia to face significant increases in energy costs over the short to medium term therefore has important implications for the future competitiveness of Australian agriculture, and the sector needs to be well equipped to constructively engage in debates in relation to national energy policy to promote favourable outcomes for people and business across all ends of agriculture.

Initial investigation undertaken by the Institute has uncovered a major shortfall of research into the impacts of energy use and costs across all sectors of agriculture at many levels. Energy as an issue in itself has not been given the credit it deserves as a pressing agricultural policy issue. The bulk of agriculture research conducted has been in the form of life cycle assessment (LCA) in order to demonstrate the environmental performance of the industry. Other major research priorities for agriculture include supporting the uptake of energy efficiencies and the feasibility of renewable alternatives in response to the transition to a ‘clean energy’ economy.

The lack of very basic and fundamental energy use information has placed agriculture at a major disadvantage where discussions on the issue of energy are largely ill-informed and lack substance due to the absence of industry-specific evidence.

Early stage research has also revealed increases in production costs are likely due to combination of both fixed energy costs (network charges) and variable costs (usage charges). With network charges making up to 50% of the total energy bill and on the rise any efforts to improve energy efficiency and rein in use may not reduce the overall energy bill for producers and industry-related businesses. It is possible that energy efficiency gains may be negated by the growing increase in both network and usage costs. Therefore, research should give more consideration to aggregating energy use at a sector level and analysing the effects of increases in energy costs across all farm-related industries. The current research is providing the detailed evidence needed to support feasible policy changes.

Energy costs cannot be redistributed easily along supply chains, meaning that the management of energy at each stage of agricultural production and processing is important to ensure energy security, business viability and competitiveness. It is important for key industry groups and the wider community to become more engaged in understanding energy use, how energy prices are currently affecting agriculture and how agriculture will remain sustainable in the long run, given the likelihood of continued growth in energy prices.

Image:  Murray Goulburn