Expect agricultural prices to slump as oil slumps

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By Jacob Maslow

Tea Plantations India
Tea plantations. Munnar, Kerala, India

If there is any one sector that is highly dependent on gas and diesel, it is the agricultural sector. For the most part, this sector depends on fossil fuel to run its tractors and to power its processing equipment as well as post-harvest facilities and storage. Not surprisingly, a lot of agriculture sector players are happy that the price of oil is crashing. Unfortunately for them, this might translate to real pain in the already-beleaguered agriculture sector. How can that be? Well, with lower oil costs this might put upward pressure on productivity.

Higher fuel prices tend to depress not just agricultural profitability by increasing costs but also productivity. With lower oil prices, key agriculture sector players can produce more, keep processing equipment running longer without having to worry about higher fuel costs. This can translate to greater capacity utilization for producers. Unfortunately, greater capacity utilization can lead to greater supply which would then put a downward pressure on the prices of agricultural products.
Many analysts don’t see this applying across the board. However, the prices of oil and diesel do tend to put more money on the table in the short term. Low oil prices can increase the profits of cattle ranchers and can help mitigate some of the pain of depressed grain prices for grain farmers. Grain farmers are susceptible to price slumps right after bumper harvests. However, if productivity increases enough, the pain might continue so stay tuned for the long term benefits of depressed oil prices on the agriculture sector.
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