What Does Cheap Natural Gas do for California Berry Growers?

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So what does cheap natural gas do for California berry growers? Not a lot apparently, if one extrapolates from an excellent article written by Colin Carter and Kevin Novan and recently released by the Giannini Foundation of Agricultural Economics titled “Shale Gas Boom: Implications for California Agriculture.”

http://giannini.ucop.edu/media/are-update/files/articles/V16N3_1_1.pdf

As most Americans know by now, the ability to access through hydraulic fracturing (known in the common parlance as “fracking”) previously unavailable shale gas resources portends an big shift in the energy dynamics of the United States.

The enormous amounts of shale gas becoming available through fracking in the US has brought about a drop in the price of natural gas nationwide, but this has not been followed with a worldwide drop in natural gas prices. Natural gas, moved as a gas through pipelines domestically, can only be transported to overseas markets once it has been converted to liquefied natural gas (LNG) at facilities where the gas is turned into liquid form and then pumped into tankers for transit. The current lack of such facilities in the US and subsequent difficulty to get our natural gas to foreign markets has resulted in huge price discrepancies globally, with natural gas prices in the US at approximately $3.30 per thousand cubic feet, at the same time in Europe for example prices are $12 per thousand cubic feet.

This price discrepancy of course presents a real cost advantage for users of energy and natural gas in the US over their overseas competitors. How much of this price advantage accrues to California berry growers is a question worth examination.

According to the article cited above, only 0.8% of total natural gas consumption in the US occurs in the agricultural sector. A lot of farm equipment, from tractors to motorized implements to trucks, use gasoline or diesel rather than natural gas. Obviously, if a lot of this equipment were to be converted to use natural gas there would be some cost advantage, but this is very much a proposition for the long term.

On the other hand, natural gas is the main input in the production of ammonia, which is subsequently converted to the nitrogen fertilizers which are a mainstay of California berry growers, who use anywhere between 160 to 250 lbs of the stuff per acre. However, fertilizer costs in the berry industry, according the UCCE Cost and Return studies make up only 1% percent of the total cost of production, meaning that price changes in nitrogen fertilizer are not that meaningful in one direction or another to the total cost of running a berry operation. Furthermore, fertilizer prices are arbitraged internationally, meaning prices tend not to vary too much from country to country, so low fertilizer costs stemming from cheap natural gas feedstock in the USA don’t really translate to much of a cost advantage to local growers anyway.

The other possibility where cheap natural gas prices could confer an advantage to California berry growers would be a reduction in the price of electricity, more than half of which in California is generated from natural gas. The heavy reliance on irrigation and the use of electricity to get that water out of the ground in California agriculture and the berry business at least superficially points to some savings from reduced energy costs. However, digging into our latest Cost and Return studies, pumping irrigation water constitutes only about 1.5% percent of the total cost of production of berries. The gains from cheaper gas and subsequently cheaper electricity will be not that significant in other words.

In conclusion, the increasing amounts of shale gas becoming available through fracking in the US, while offering some possibility of advantage over the long haul in terms of energy inputs for traction and transport, does not appear to give a lot of advantage currently to California berry growers over their foreign competitors in terms of cost of production.

How much will cheap natural gas help California berry growers?