(Extract from the Paper) A report issued by Doane Advisory Services in May 2008 titled An Analysis of the Relationship between Energy Prices and Crop Production Costs has received recent attention as some interest groups have used it as evidence of how a U.S. federal cap-and-trade program - or any similar climate policy that creates a price on greenhouse gases (GHGs) - would negatively affect U.S. farmers. The study takes energy prices from EPA's economic analysis of the Lieberman-Warner America Climate Security Act (S. 2191) and combines this with USDA data on input costs from the eight largest crops (by value) in the United States to gauge how the higher energy costs expected under GHG controls translate into higher farm operating costs. Higher farm operating costs are the study's lone measure of farmer well-being, and the authors thereby imply that the economic harm to farmers equals their increased operating costs. The Doane report usefully addresses an important set of issues. Yet there are a number of reasons why the results provide a misleading view of the impact on farmers of a carbon price:
* Recent projections of cap-and-trade policy in EPA's analysis of the Waxman-Markey bill show smaller energy sector impacts than the estimates used in the Doane report
* The study uses a simple crop budget rather than a full structural economic model to capture the complex market linkages and substitution among inputs that determine net returns to agricultural producers
* The study ignores the following factors that raise the returns to farmers:
--higher prices received by farmers reflecting the input higher costs
--biofuels as an income source
--offsets from agriculture as an income source
* Other recent independent studies of carbon price impacts on agriculture capture many of the missing features identified above and tell a different story.
Each of these reasons is further expanded upon in this article.
