For ag, North Korean conflict could outshine impact of Iraq war

www.agriculture.com By Ohio State University News Service

COLUMBUS, Ohio — Although America's minds are on Iraq and the potential impacts of war, the agriculture industry should be keeping a close eye on the developments with North Korea, says an Ohio State University agricultural economist.

Matt Roberts, with the Department of Agricultural, Environmental, and Development Economics, said a war with Iraq may cause little, if any, economic impacts, but a conflict with North Korea could cause a dramatic disruption in agricultural trade and market prices.

"A potential war with Iraq is simply creating short-term financial uncertainty, which may result in higher interest rates if tensions continue," said Roberts."Any long-term ramifications may result in the slow-down of imports and exports due to heightened security, and in what we call reputation effects — America’s standing in the international community when it comes time for other countries to make American purchases."

North Korean involvement could hamper ag trade

Such impacts would be minor and diminish as time moved on, but a war with North Korea could have a longer-lasting effect, said Roberts.

"South Korea is a very industrialized nation and is a close trading partner with the U.S. I think it's the fifth largest export market for our beef and pork," said Roberts. "Any attack would probably involve the near leveling of Seoul (the South Korean capital) from the north, so the economic disruptions would be immense. We would feel that in our agricultural community. The lesser demand for meat would reduce the demand for feed grains. In other words, a decrease in exports translates into a decrease in grain prices."

Although any conflict with Iraq or North Korea would produce some economic instability, the biggest impact a war would have on the U.S. agricultural community would be one of a social nature, said Roberts.

"The National Guard and (Army) Reserves draw heavily from rural areas: police forces, firefighters, farmers. If a war with Iraq is not a quic k and decisive one or if tensions continue to increase on the Korean peninsula, it's possible we'll start to see more people drawn out of our rural and farming communities," said Roberts. "Their absence would just compound the stresses that some of these families already face with drought and finances and a tough winter."

One impact Americans have felt with a looming war with Iraq has been an increase in gas prices, currently averaging $1.68 a gallon — a 54-cent increase from this time last year.

"Probably the biggest economic impact we would see with a war with Iraq would be sustained high gas prices," said Roberts.

With natural gas prices following suit, it could mean higher-priced fuel and fertilizers for farmers.

"We import more of our natural gas than we once did. It's the primary feedstock from which anhydrous is made, so that has some potential to impact farming profitability this year," said Roberts. "I don't think this is shaping up to be a year like 2001 where there was a gross anhydrous shortage, but those gas prices will stay higher. We may see a slight shift from corn planting to soybean planting because corn production requires higher input costs."

Venezuela also a piece of crude oil price puzzle

The other piece to the crude oil price puzzle is the political unrest in Venezuela that has substantially reduced the flow of petroleum products. Venezuela is the United States' third-largest oil exporter, behind Mexico and Saudi Arabia.

"Venezuela pretty much shot itself in the foot with this situation," said Roberts. "Venezuela has always been a reliable partner for us, until now. Many of our refineries were built to process Venezuelan oil, but they have had to alter their processes and it has made them less efficient."

Carl Zulauf, an Ohio State agricultural economist, said that another impact a war with Iraq could have would be a renewed emphasis on U.S. energy independence. This would result in the increased use of alternative fuel s like etha nol and biodiesel, crop byproducts.

"In the short run, this is probably good for U.S. agriculture, in particular corn producers because of increased demand for ethanol," said Zulauf. "In the long run, the impact could be more problematic if some other source of alternative fuel emerges that displaces the demand for ethanol."

Last year, the ethanol industry set an all-time production record and production in 2003 is likely to follow suit. According to data from the U.S. Energy Information Administration, American ethanol producers made 177,000 barrels of ethanol per day in January. Total production is projected to hit 2.5 billion gallons by the end of the year.

"In the past year, since harvest, ethanol has truly been a savior to the corn market. Our corn exports have been very weak. However, ethanol production has exploded over the last six months, to the point where ethanol is consuming around 8 percent of American corn production," said Roberts.

Biodiesel, another renewable fuel, is also making headlines in U.S. energy production. Last March, the Minnesota legislature passed a law mandating a 2 percent inclusion of biodiesel into the state’s petroleum diesel supply beginning in 2005. Minnesota is the first state to require the addition of biodiesel in commercial diesel supplies.

More recently, a bill was introduced to the U.S. Congress that would give biodiesel the same tax incentives that ethanol currently receives.

"Much of the tax incentive for ethanol is because it is exempt from the highway excise tax, but it has begun to impact the budget of the interstate highway system," said Roberts. "If biodiesel is exempt from those same taxes, concerns are being raised that as the production of alternative fuels increases, it will seriously impact that budget and the money is going to have to come from somewhere."

More emphasis on alternative fuels, however, would provide support for farm prices.

"Over the course of the year, my feeling is th at national p rices have been a dime higher because of increase in our ethanol production," said Roberts. 03/11/2003 12:22 p.m. CDT