L- I 293 l Ll! Will U! ll ll ”ll ll M l” l lllsllllll [ll "ll ll '— This is to certify that the thesis entitled . AN ECONOMIC ANALYSIS OF THE IMPACT OF RISING REAL ENERGY PRICES ON INTERREGIONAL COMPETITION IN FRESH POTATO AND APPLE PRODUCTION AND DISTRIBUTION presented by Jeffrey L. Jordan has been accepted towards fulfillment of the requirements for Master's(kgfiehLAgricuItural Economlcs aim ‘ I 1' a / Major professor Date AUQUSt 101 1979 0-7639 w LIBRARY Michigan State University OVERDUE FINES ARE 25¢ PER DAY PER ITEM Return to book drop to remove this checkout from your record. AN ECONOMIC ANALYSIS OF THE IMPACT OF RISING REAL ENERGY PRICES ON INTERREGIONAL COMPETITION IN FRESH POTATO AND APPLE PRODUCTION AND DISTRIBUTION BY Jeffrey L. Jordan A THESIS Submitted to Michigan State University in partial fulfillment of the requirements for the degree of MASTER OF SCIENCE Department of Agricultural Economics 1979 ABSTRACT AN ECONOMIC ANALYSIS OF THE IMPACT OF RISING REAL ENERGY PRICES ON INTERREGIONAL COMPETITION IN FRESH POTATO AND APPLE PRODUCTION AND DISTRIBUTION BY Jeffrey L. Jordan The objective of this thesis is to analyze the economic impact of rising real energy prices on the cost competitive- ness of producing and marketing Michigan's fresh apples and potatoes, as compared with Washington's. Most literature on the topic suggests that energy input costs represent a small portion of the cost of production, and thus will not in- crease agricultural prices significantly as compared to other input costs such as land and labor. Rather than con- centrating on energy as a percentage of costs alone, the emphasis here is on interregional competition. If inter- regional competition is altered due to energy input price increases, then it must be concluded that rising energy in- put prices do have a significant impact on agriculture. The conclusion reached is that it is in the increased cost of transportation, and not production costs, where total cost changes the competitive balance between the regions. This study concludes that the crucial factor in any regional change in competitive position due to energy input price Jeffrey L. Jordan increases fir; related to the distance from the production site to the market. Dedicated to Margery L. Jordan whose hard work and self-sacrifice over the past five years has taught me the meaning of responsibility ii ACKNOWLEDGMENTS While most leave to the end an acknowledgment of the author's spouse, I would like to begin with a word of thanks to Sherry A. Maddock. Rather than simply thanking her for support, more importantly, I would like to acknowledge both her emotional and intellectual force. I would particularly like to thank my thesis supervisor, J. Roy Black. Not only was his guidance invaluable, but I appreciate deeply his confidence in me; he took someone with little background or skill in this area and developed some of the sharp analytical abilities he possesses. Furthermore, his patience in the face of a drawn-out thesis writing pro- cess was extremely helpful. WOrking with Professor Black over the past few months has been the highlight of my M.S. program. A special word of thanks is also appropriate to Stephen Davies, my partner in this project. The help he gave me last summer was invaluable. The selflessness he exhibited will always be appreciated. I would also like to thank those peOple at Interna- tional Studies and Programs, Michigan State University, without whose support I would have never reached the thesis writing stage. Particular thanks go to Dean Ralph Smuckler, iii Assistant Dean Homer Higbee, Richard Niehoff, Charles F. Doane, and especially Assistant Dean Iwao Ishino whom it was my pleasure to work closely with for three years. I would like to acknowledge my major professor, Robert Stevens and my thesis committee, A. Allan Schmid and Bill Stout. The guidance of these people has been appreciated. A word of thanks also to Professors Myron Kelsey, Donald Ricks, and Thomas Pierson for their assistance with the gathering of cost data. My one regret is that my father is not here to share in this accomplishment. iv LIST OF LIST OF CHAPTER I. II. III. IV. VI. TABLE OF CONTENTS TABLES O O O O O O O O O O O I O O O O O O O FIGURES O O O O O O O O O O O O O O O O O O O INTRODUCT ION O O O O O O O O O O O O O C O 0 Procedure. . . . . . . . . . . . . . . . . Organization of Thesis . . . . . . . . . . REVIEW OF LITERATURE . . . . . . . . . . . . ECONOMIC FRAMEWORK . . . . . . . . . . . . . Assumptions of Static Economics. . Shift in Factor Prices . . . . . . Methodology. . . . . . . . . . . . Indirect Energy Costs in Mathinery Factors of Distance. . . . . . . . INDUSTRY AND MARKET DESCRIPTIONS . . . . . . Apple Industry in Michigan and Washington: Interregional Competition. . . . . . . . Potato Industry in Michigan and Washington: Interregional Competition. . 1976 COSTS OF PRODUCING APPLES AND POTATOES IN MICHIGAN AND WASHINGTON INCLUDING ENE RGY CO ST S C O C C O O C C O O O O O O 0 Potato Budgets . . . . . . . . . . . . . . Apple Budgets. . . . . . . . . . . . . . . THE IMPACT OF RISING ENERGY PRICES ON INTERREGIONAL COMPETITION. . . . . . . . . 1976 Energy Cost-Total Cost Ratios . . . . Energy Cost-Total Cost Ratio with In- creased Real Energy Input Prices . . . . Threshold Prices at Which Competitive Advantage Changes. . . . . . . . . . . . Page vii 15 16 17 23 27 29 35 35 39 43 43 57 70 71 78 84 CHAPTER Page VII. CONCLUSIONS AND IMPLICATIONS . . . . . . . . 108 Summary of Contributing Conclusions. . . . 109 Implications for Further Research. . . . . lll LISTOFREFERENCES................. 115 vi 10. 11. 12. l3. 14. LIST OF TABLES Indirect Energy in Farm Machinery . . . . Percentage of Market Accounted for by Washington and Michigan Apples in Ten Cities 0 O O I O O I O I C I O O O 0 Partial Estimated Cost of Production, $/acre: Potatoes. Including Only Costs to be Held Constant. Base Year 1976. . Estimated Cost of Production, $/acre: Potatoes. Including Energy Costs. Base Year, 1976 . . . . . . . . . . . . Energy Use in Potato Production: USDA 1974 Data Base. 0 O O O O O O O O O O O 1976 Energy Parameter Values. . . . . . . 1976 Cost of Energy Use in Potato PrOdUCtion. o I o o o o o o o o o o o 0 Energy Use in Potato Production: Fertilizer. . . . . . . . . . . . . . . Energy Use in Potato Production: PestiCide I O O O O O O O O O O O O O 0 Cost of Transportation Model. . . . . . . 1976 Transportation Rates by Truck to Chicago 0 O O O O I O O I O O O O O O 0 Partial Estimated Cost of Production, $/acre: Apples. Including Only Costs to be Held Constant. Base Year, 1976 . Estimated Cost of Production, $/acre: Apples. Including Energy Costs. Base Year, 1976 . . . . . . . . . . . . Energy Use in Apple Production: USDA 1974 Data Base. . . . . . . . . . . . . vii Page 28 39 44 50 51 52 52 S3 54 56 57 58 64 65 TABLE Page 15. 1976 Cost of Energy Use in Apple Production . . . . . . . . . . . . . . . . . 65 16. Energy Use in Apple Production: Fertilizer . . . . . . . . . . . . . . . . . 66 17. Energy Use in Apple Production: Pesticide. . . . . . . . . . . . . . . . . . 68 18. 1976 Total Cost-Variable Cost-Relative Cost and Yield Comparisons With and Without Transportation Costs to Chicago. . . 73 19. 1976 Energy Cost/Total Cost Comparisons With and Without Transportation Costs to Chicago 0 O O O O O O O O O O O O O O O O 7 5 20. Real Energy Input Prices: Tripled. Esti- mated Cost of Production, $/acre: Apples. Base Year, 1976. . . . . . . . . . . . . . . 79 21. Real Energy Input Prices: Tripled. Esti- mated Cost of Production, $/acre: Potatoes. Base Year, 1976 . . . . . . . . . 80 22. 1976 Total Cost-Variable Cost-Relative Cost Comparisons With and Without Transportation Costs to Chicago: Real Energy Prices Tripled. . . . . . . . . . . . 83 23. 1976 Energy Cost/Total Cost Comparisons: Real Energy Input Prices Tripled With and Without Transportation Costs to Chicago. . . . . . . . . . . . . . . . . . . 84 24. Estimated Cost of Production, $/acre: Potatoes: 30.6 Percent Increased Real Energy Prices . . . . . . . . . . . . . 87 25. Real Energy Input Prices: Tripled. Esti- mated Cost of Production, $/acre: Potatoes . . . . . . . . . . . . . . . . . . 88 26. Real Energy Input Prices: Quadrupled. Estimated Cost of Production, $/acre: Potatoes . . . . . . . . . . . . . . . . . . 89 27. Estimated Cost of Production, $/acre: Apples: 30.6 Percent Increased Real Energy Prices. . . . . . . . . . . . . . . . 90 viii TABLE Page 28. Real Energy Input Prices: Tripled. Esti- mated Cost of Production, $/acre: Apples . . . . . . . . . . . . . . . . . . . 91 29. Real Energy Input Prices: Quadrupled. Estimated Cost of Production, $/acre: Apples . . . . . . . . . . . . . . . . . . . 92 30. Total Farm Costs, per ton, Apples and Potatoes, Varying Real Energy Input Prices 0 O O O O O O O I O O O O O O O O O O 93 31. Transportation Costs to Varying Markets: Varied Real Energy Input Prices. . . . . . . 94 32. Total Costs of Delivery to Various Mar- kets at Varied Real Energy Input Prices. . . 95 33. Percent Real Energy Price Increase that Switches Origins of Potatos and Apples in Major Markets . . . . . . . . . . . . . . 105 34. Approximate Threshold Miles Given 300 Percent Real Energy Price Increase . . . . . 107 ix FIGURE 1. 12. l3. 14. 15. LIST OF FIGURES Changing Expansion Path, Marginal Cost and Output with an Increase in Energy Input Prices . Distance and Product Price. . . . . . . . . Effects of Transportation Costs Upon Land Rent. . . . Cost Curves and Transportation Costs. . . . Interregional Competition in Ten Major Demand Points: Apples . . . . . . . . . . Interregional Competition in Four Major Demand Regions: Potatoes. . . . . . . . . Threshold Threshold Threshold Threshold Threshold Market. Threshold Threshold Threshold Threshold Market. Price: Apples Price: Apples Price: Apples Price: Apples Price: Apples Price: Apples Price: Apples to Chicago Market . to Detroit Market . to St. Louis Market to Cleveland Market to Cincinnati to Buffalo Market . to Milwaukee Market Price: Potatoes to Chicago Market Price: Potatoes to Philadelphia Page 18 31 33 34 38 41 97 97 98 99 100 101 102 103 104 CHAPTER I INTRODUCTION The issue to be addressed is: "What increase in the price of fossil fuel inputs is required to affect the pro- duction flows in interregional competition?" The objective of this study is to analyze the economic impact of rising real "energy" prices on the cost competitiveness of Michi- gan's fresh apples and potatoes. The analysis will employ the following four steps; to: 1. construct comparative per unit cost of production and transportation budgets for Michigan and Wash- ington in apples and potatoes; 2. construct comparative per unit energy budgets for the same states and commodities; the per unit dol- lar amount, and type, of energy will be measured, examining both direct and indirect energy require- ments; 3. with the use of the above two budgets, the price of energy inputs will be increased to find the threshOld price that changes the competitive bal— ance between the two states and commodities; that is, can energy prices-~both direct and indirect-- affect the cost of production enough to shift the 1 costs in favor of the state that now produces and ships at greatest cost? 4. provide estimates of which market areas Michigan's commodities can be delivered to at lower cost: by varying the distance to market, the impact of rising energy prices on the viability of long- haul transportation can be tested. Concommitantly, the impact of transportation costs on interregional competition can also be examined. As will be noted in the next chapter, many analysts have been concerned primarily with the amounts of energy used in the production process. However, from the view- point of the producer, the issue to address is in terms of dollars of output relative to dollars of input, rather than energy output relative to energy input. In a value- oriented society,9 the producer makes decisions on the ba- sis of the value society places on his/her products; the cost of energy being only one of the costs of production. Thus the emphasis is on the price of energy rather than simply the amount employed in the production and transpor- tation stages. Procedure This is the first of a two-part study. The compara- tive statics approach employed here does not deal with the dynamics of the implied adjustment process. Part Two of the study will examine the adjustments and dynamics that will follow the conclusions here reached. Washington has been chosen in part because their fresh apple and potato industries compete successfully with Michi- gan's, even over great distances. Furthermore, regional variations in the energy consumed in agricultural produc- tion appear related primarily to irrigation and chemical use. Due to the amount of irrigation necessary in the Northwest, that area is sensitive to increased energy prices, particularly when compared to the rain fed areas around the Great Lakes. Dvoskin and Heady conclude that a tripling of energy prices will result in declining farm income in three regions: the South Central, Southwest, and Northwest. The South Atlantic and the North Central re- gions, including Michigan, increase farm income by 27 per- cent and 14 percent, respectively.16 For the commodities chosen, Washington transports much of its fresh produce to the Midwest. Washington's fresh produce is in direct competition with the Michigan apple and potato industries in both the Midwest and elsewhere. Therefore, not only will irrigation costs increase due to energy price increases, but the cost of transportation will also be affected. On the other hand, the use of energy- intensive chemicals in Michigan produces a situation which may adversely affect Michigan farmers when the price of energy inputs rise. Thus, given the energy price effects on irrigation, chemical use and transportation, plus the fact that Washington and Michigan compete in many of the same markets, a comparison between these two states should give a clear example as to whether interregional competition will change due to price increases in energy inputs. Three related reasons account for the choice of pota- toes and apples as the selected commodities. First, these commodities represent sizable industries in both states. Second, Michigan and Washington compete in these commodi- ties. Finally, both commodities require substantial fossil fuel inputs. Organization of Thesis The literature review of Chapter II will focus pri- marily on those sources, published since 1973, which deal generally with the "energy and agriculture" topic. While literature on the energy/agriculture topic has expanded rapidly over the past five years, the interest here is on a relatively few, basic resources from which most other materials appear to be derived. Chapter III will examine the appropriate economic theory. The appropriate economic theory will be that which explains the substitution and output effects of a change in input price, and the changes in patterns of production and interregional competition. The assumptions underlying the analysis will also be introduced in Chapter III; assumptions modifying the economic theory and those relevant to energy use will be considered. Chapter IV is a brief institutional description of both the fresh apple and potato industries and a description of each of the markets. Of interest will be the present regional supply distribution of Washington and Michigan products. In Chapter V the comparative cost of production and transportation and energy budgets will be estimated. Of special concern will be the estimation of the cost related to the variable energy inputs, both direct and indirect energy requirements. The primary analytical section ap- pears in Chapter VI, which will take place in three steps: 1. Examination of the budgets to analyze the propor- tion of total production costs accounted for by energy inputs, both with and without transporta- tion costs. 2. Establishment of various "threshold" energy prices at which regional competition shifts in favor of the state that had previously produced and shipped at the highest cost. 3. The above will be repeated in each of the markets in which Michigan and Washington compete. Thus, not only will a set of threshold prices be established, but also the "threshold distance" will be found at which transportation costs cause a shift in the cost of supplying a market region. Chapter VII will summarize the results, discuss the direction and strength of any changes, describe what rising energy prices will mean to Michigan producers, and suggest further points and issues to be taken up in subsequent studies. CHAPTER II REVIEW OF LITERATURE Energy from fossil fuels is used in agriculture because 9 it has been profitable to do so. If this were not the case, United States agriculture would not have evolved into the most energy-intensive system of farming in the world.40 There appears to be widespread agreement in the literature (for example, 9, 17, 25, 42) that despite the unquestioned importance of fossil fuels in the United States food system, they still contribute a relatively small share of total 16’17'42 did attempt to food cost.42 While some studies empirically test this conclusion, most investigators appear to take it for granted that even a doubling or tripling of fossil fuel input prices will change production costs only about 2 to 8 percent. The conclusion is that fossil fuel prices do not have a significant impact on agricultural production, particularly relative to land as a residual claimant, and labor costs. On the other hand, some studies (notably, 9, 36, 40) suggest that such increases in fossil fuel input prices will have a measurable and important ef- fect on food costs. In one (as noted in 36), Slesser ex- amining the case for England, suggests that a quadrupling of real energy prices in the next 40 years would bring about a six—fold increase in food prices. 6 What must be noted when comparing these opposite con- clusions is that the impact of rising fossil fuel prices differs among energy sources. The impact of natural gas or LP gas price increases are different than those of electri- city.8 Second, while fossil fuel costs do indeed consti- tute a small portion of the final costs of all food, more fossil fuels are used to produce and market some foods than 40 Furthermore, when examining the conclusion that others. the cost of production of food is only affected slightly by fossil fuel prices, one is confronted with two basic omis- sions. First, some studies, particularly Whittlesey and Lee42, examine only the disembodied, or direct energy re- quirements in agriculture. Energy embodied in the manu- facture and delivery of tractors, trucks, processing mach— inery, packaging materials, etc. was not measured or in- cluded. Recognizing this gap in data suggests that esti- mates of the significance of energy in agriculture remain tenuous. Here, an attempt will be made to include estimates of the indirect energy used in fertilizer and pesticides, as well as the embodied energy in truck transportation. The use of energy also differs between regions due to fertilizer application, irrigation requirements, and trans- portation costs. While the price of energy may only in- crease costs 2 to 8 percent generally, the regional differ- ences in irrigation as suggested by Dvoskin and Headyls, and transportation costs,can in fact affect the competition be- tween regions. Where two regions compete for the same market, an increase in the price of energy inputs can alter the existing competitive situations. As Carter and Youde point outs: The competitive position of a region or country in the production of a particular commodity may improve or deteriorate as a result of increased energy costs. Casavant and Whittlesey identify commodity and region- al characteristics that determine the impact of higher energy-related transportation costs on interregional and international competition. Commodity factors in- clude perishability, transportation mode adaptability, extent and location of processing, and elasticity of demand. Regional characteristics affecting competi- tive position include distance to (domestic or export) markets, available transport alternative, back haul possibilities, and seasonability of product movements. (p. 833) While "literature reviews" are often a listing and critique of relevant bibliographical material, this chapter will instead establish some of the assumptions that will apply to the analysis, by way of the existing literature. The first assumption culled from the literature is related to why the concern is with changes in the price of fossil fuel inputs, rather than supply restrictions or interrup- tions. Adjustments facing agricultural producers are likely 6,8,40 In to be price-related rather than supply-related. developing the Mandatory Petroleum Allocation Program, the Federal Energy Administration (now Department of Energy) granted top priority to agricultural production. That is, 100 percent of current needs in agricultural production and processing of perishable products has been guaranteed.4o In commenting on recent supply restrictions in California and throughout the country, both President Carter and then-Energy Secretary Schlesinger guaranteed agriculture would receive enough energy to meet current needs. While recent demands for increased amounts of diesel fuel by in— dependent truckers forced President Carter to rescind this allocation temporarily, he reaffirmed the priority of the agricultural system in the July 15 "energy speech". In addition, the literature suggests a concern with relatively large real price increases. While the exact level of price increases in the future is unpredictable, the model that will be developed will examine real energy price increases of up to 400 percent. If the current 15 percent per year real increase that existed between 1972 and 1976 (l976=100) continues, this assumption is not un- realistic, and the price in 1985 will be 300 percent higher 17 All of this of course is in addition to than in 1975. the recent price increases due to OPEC decisions which have raised imported crude oil almost 60 percent in six months, the crisis in Iran, and the new government's desire to sell their 3 to 6 million barrels a day production at a rate 30 percent higher than existing rates, and President Carter's "import quotas" set at 1977 levels. Each of these actions imply that the price of imported oil from the Mideast will continue to rise to unpredictable, and probably higher levels. Also, phased decontrol of domestic oil prices effective June 1, 1979 will have a significant, as yet undetermined, impact on energy prices, with or without a ”windfall profits tax". Although this study will not be 10 8,9,17 that concerned with supply problems, it has been noted supply reductions may in fact occur in agriculture's use of natural gas and LP gas. About 70 percent of the LP gas is processed from natural gas, and agricultural production uses about 20 percent of the LP gas in the United States.8 In fact, even diesel fuel seems to be in short supply in some parts of the country, delaying this year's planting. Yet, Carter and Youde have concluded that even if large energy price increases, relative to land and other inputs, did justify a "radical retooling" of the energy use in agri- 6 Therefore, culture, a long lead time would be required. at least in the very short-run, there exist few substi— tutes for the energy inputs in agriculture. It has also been observed that given the relatively small amount of energy use in the United States' food sys- tem (3 to 4 percent on farm) and the fact that capital equipment designed to operate on LP or natural gas is al- ready in place, the potential for conserving large amounts of energy in agriculture will be limited and will be as- 6,8,16,17 More impor_ sumed impossible in the short-run. tantly,fOr the present analysis it will be assumed that the capital equipment has already been paid for. Further- more, even if conservation were possible in the short-run, Dvoskin and Heady estimate that a 10 percent energy reduc- tion would have a severe impact on food costs (up 55 per- cent) and would do almost nothing toward reducing United States energy consumption. The 10 percent reduction in 11 energy use in agriculture would amount to only a 0.2 percent reduction in total United States energy consumption in 1972.16 With regard to sources of energy for agriculture, Connor8 points out that agriculture is basically a solar energy pro- cessing machine and that solar energy has seldom been in- cluded in energy accounting analysis. However, from an eco- nomic viewpoint, the amount of solar energy stored in food commodities is of little concern because this energy is 17 The concern then both free and has an unlimited supply. is with fossil fuel energy and its numerous and quite dif- ferent forms: natural gas, LP gas, electricity, etc. When solar energy is excluded, 99.89 percent of the energy in- puts in rice production in the United States, for example, are from fossil fuel.16 Carter and Youde6 contend that major long-term adjust- ment problems for agriculture will result from indirect ef- fects such as the impact of energy prices on general price levels and economic growth rates. Although this may be true, this study will be concerned with the direct effects of increases in energy prices. That is, the effect of real energy price increases in electricity, fuel, fertilizer, transportation, irrigation, etc. This is done for two reasons; first, as Connor8 notes, these indirect effects are difficult to assess since a general equilibrium model would be required (page 6). Second, it is believed that the indirect effects Carter and Youde discuss are far 12 enough into the long-term that they will not affect the per- ception by farmers of a change in competitive advantage re- lated to real energy input price increases.* Most of the literature that examines the role of energy 16’17'25’26’27’30’31 concentrates primarily use in agriculture on production. Yet while 24 percent of the energy inputs in agriculture are used in the production stage, 39 percent of the energy used is during the processing of agriculture pro- ducts.36 Since such a large amount of the energy in agri- culture is used during the processing stage, it is important that the impact of rising energy prices from the production stage through the processing stage be examined. Further- more, the analysis must be taken to the point of delivery to wholesalers or regional distribution centers. A second study will be particularly concerned with the energy costs incurred in the processing of apples and potatoes. Here, the cost of transportation from the farm to regional dis- tribution centers will be included. Finally, it is necessary to discuss energy accounting analysis. Connor's study8 is particularly useful in estab- lishing several deficiencies and strengths of major works that have utilized an energy accounting approach. Connor identifies four problems with the kind of energy accounting *This discussion of the indirect effects of energy price increases on the general economy is not to be confused with the previously mentioned indirect energy inputs into the agri- cultural system, such as nitrogen fertilizer, etc. 13 exhibited in major studies including Pimental's31 and Stein- hart and Steinhart's36. l. The utility or human value derived from energy with respect to time, form and place is ignored. The calories of energy embodied in LP gas do not have the same value as cal- ories of energy in labor. 2. The relationship between energy inputs in agricul- tural production receives only cursory attention. Energy embodied in agricultural inputs have complementary relation- ships for some production technology and substitute rela- tionships for other types of technology. 3. Solar energy has seldom been included in such analysis, although agriculture is basically a solar energy processing machine. 4. Differences in the supply-demand situation for each energy category need to be recognized. The supply and demand situation for natural gas is quite different from that for electricity. Hence, the net energy or the output-input ratio is not as important in appraising the energy efficiency of an agricultural production system, as the amounts of specific types of energy inputs and the amounts and types of energy produced. Of these four points, the concern with the complementary and substitutability of energy inputs will be discussed in Chapter III. The concern about the accounting for solar energy has already been discussed. It is because of the problems with energy accounting outlined in numbers one and 14 four above that enable the conclusion that the role of energy use in agriculture may be better handled from an economic analysis approach. CHAPTER III ECONOMIC FRAMEWORK Although only the static economics of changing the price of one variable input with all others held constant is being considered, it is recognized that the problem inVolves several analyses. Specifically, economic theory explains that over a period of time,factor substitution is possible, fixed assets become variable, restrictions in supply may occur, markets change, and demand for final products should also be considered. However, if the increase in energy in- put prices does not change the competitive balance between regions in the restrictive case of static economics, then it will probably not change when firms can employ dynamic adjustments. Thus, knowledge of the relationship between energy price increases and changes in comparative static advantage is needed. The following assumptions help to create a static sit- uation and clarify those areas that will not be covered until the dynamic analysis. While recognizing that some of these assumptions do not reflect conditions under which decision-making will occur, at least in the long-run, it is believed that they are sufficiently accurate in the short-run to allow for consistent analysis. Most of these assumptions will be relaxed in the second study. 15 16 Assumptions of Static Economics* The specification of the fixed variables and the elim- ination of random variables are the first steps in construc- ting a static theory of economics. The term static economic theory has a variety of meanings. Hence, when one tries to outline the assumptions underlying static economics, a rather specific definition is required. The theory usually considered when the word static is used is a theory of a given number of exact relationships among the same given number of economic variables. In a theory of exact static relationships, the magnitudes of certain variables can and are permitted to change as the theory is used to explain changes which occur when the value of one or of a set of variables is changed. Thus, the price of the energy var- iables will be permitted to change. The assumptions which secure static equilibrium theory in its usual form fall into three categories: 1) those which make the system static with respect to (a) production func- tions, (b) consumption functions, and (c) institutions: 2) those which eliminate random variables; and 3) those con- cerning motivations. As these are considered, more concern will be with the first of the categories than the others. In formulating the problem, the most important static assumption is that which fixes the production function, the *The following discussion on the assumptions of static economics is taken from Course Notes, Agricultural Economics 805, Production Economics, Glenn L. Johnson, Michigan State University, 1978. 17 state of the art is assumed constant. That is, the total production of any given set of production factors remains fixed. What is of interest here is not differences in pro- duction functions, but the impact of real energy price in- creases given the fixed production functions of the two re- gions. All other assumptions of static economics remain. However, assumptions that eliminate random elements, i.e., perfect knowledge and perfect foresight, are rather limit- ing when discussing decisions facing a farmer. Although these assumptions are necessary to make the system static, they will not be strictly enforced here. Whether the farmers in Michigan and washington have perfect knowledge and foresight will not change the problem under considera- tion. Shift in Factor Price When questions are asked about the effect of a change in the price of energy on agriculture, it is the basic eco- nomic theory of changes in factor price that is applicable. Referring to Figure 1.1, the firm faces a set of budget con- straints KL, K'L', K"L", which are tangent to isoquants I, II, III. The expansion path 0G represents the line of least cost combination, or points where the firm will produce A, B, C. When the input price of one factor increases, in this case real energy inputs, the budget lines shift as represented by the dashed lines in Figure 1.1. The new ex- pansion path OH illustrates the effect of an increase in 18 MC \ \ MCz \\ MCl U) h \ 45‘ K" \ \\ g \ P=MR T. \ \ I I .2 K' \ \ H I i 8 \ 5' G | 1 H I H y \. C | E I ‘c \ III : g \ II I ' \ \ . l \ I\\ \\ Q2 Q1 Q \ \ L \ L L L' L" E er n W l. 1 1-2 energy input prices. Figure l.--Changing Expansion Path, Marginal Cost and Output with an Increase in Energy Input Prices. When the price of a factor of produc- tion changes, this change will also affect the marginal cost of output and therefore the rate of output that the firm will choose to maximize profits. If the price of a factor increases, marginal cost will increase and output will be reduced, as Shown in Figure 1.2, Thus, any change in the budget constraint that results from a change in factor prices implies that a change in the rate of output will oc- cur . Depending on the demand for the product and the pro- duction function, the firm will produce at some level below 19 01' the exact level depending on the rise in marginal cost that occurs as the price of energy inputs increases. As applied to the specific interest in the competitive position of apples and potatoes between Michigan and Wash- ington, what this study will want to know is not the change in energy usage, but whether or not the change in input prices will cause output in either state or either commo- dity to fall drastically. This can be illustrated if ap- ples shipped to the Midwest from Washington and Michigan are considered as two different products. The question in general then becomes: Will the shift in factor prices (energy) be greater or lesser in either state because of irrigation, chemical use, and transportation requirements, causing output to fall, changing the competitive situation? To further understand this process, the demand for factors of production will be put in mathematical terms, employing the notation given by R. G. D. Allen.1 If a good X, produced under constant returns to scale, is sold in a competitive market at price p equal to the constant average cost, then pa/fa = pb/fb = w/x = p. So pa = pfa and pb = pfb. This is the law of "marginal pro- ductivity"; the price of a factor equals the marginal pro- duct of the factor valued at the selling price of the pro- duct. If the demand for X is x = ¢ (p) with elasticity n = -p/x dx/dp, the amounts (a and b) of the factors and selling price (p) in terms of given factor prices (pa and pb) is 20 determined by three conditions: 1. f(a,b) = ¢ (P) 2. pa = pfa 3. pb = pfb The output x = f(a,b) = ¢ (p) and total cost I = px = apa + bpb are also determined. Full competitive equilibrium, with constant returns to scale, is thus determined. When one of the factor prices (pa) changes while the other (pb) remains constant, new demands can be detenmined for each of the factors of production. For the linear homo- geneous function x = f(a,b), we have f = -b/a fa aa and f = -a/b fa b bb b The elasticity of substitution between the factors is o = fafb/xfab. Therefore: 4. faa = -b/a fafb/xo fbb = -a/b fafb/xo fab = fafb/xo The equations(l), (2) and (3) hold for any values of pa and pb and can be differentiated partially with respect to pa: fa aa/apa + fb ab/apa = ¢%p) ap/apa = -n x/p ap/Bpa' 1 f ap/apa + p(faa aa/apa + fab ab/apa), a C II fb ap/apa + p(fab Ba/apa + fbb Bb/apa). Making use of (2), (3) and (4), we have: xn ap/apa + pa aa/apa + pb ab/apa = 0, 21 xo ap/apa - b/a pb aa/apa + pb ab/apa = xp/pac, xo ap/apb + pa aa/apa - a/b pa ab/apa 0. This produces three linear equations in three unknowns, ap/apa, aa/apa and ab/apa. The values of these partial de- rivatives can be found and written: aa/Bpa -a/pa (apa/xp n + bpa/xp o) and ab/apa -ab/xp (n-o). Write Ea/Epa = pa/a aa/apa and Eb/Epa = pa/b ab/apa for the elasticities of demand for the factors with respect to pa and ka = apa/xp and kb = bpb/xp (ka + kb = l) for the proportions of total receipt going to the factors. Then Ea/Ep = -(kbo + kan) and Eb/Epa = ka (o-n). The interpretation of these results given by Allen is: If the price of the factor A rises, the demands for both factors are affected, and in two ways. In the first place, the cost of production is increased, the product is dearer and (for a decreasing demand law with n positive) less of the product is bought. There is then a proportional decrease in the demand for both factors. This is shown by the negative term (-kan) in the expression for both elasticities of demand. Second- ly, the factor B is now cheaper relatively to the fac- tor A and it pays to substitute B for A in production as far as possible. The demand for B thus increases at the expense of A, as is shown by the positive term (kac)in the expression for one elasticity and the nega- tive term (-kba) in the other. The total effect on de- mand is found by addition. The demand for A falls in any case, but that for B may rise or fall according as the substitution effect is stronger or weaker than the effect through the demand for the product.1 I Let it be clear, however, that in this study, what the above economic theory explains will not be strictly followed. 22 That is, in the very short-run (one season), it will be as- sumed that the same quantities and configurations of fuels will be used for production at each input price level. Al- though it is recognized, as Connor points out, that the energy used in agriculture has complementary relationships for some production technology (i.e., diesel fuel and trac- tors) and substitution relationships for others (i.e., ni- trogen fertilizers and organic fertilizer) in this static analysis, it will be assumed that the farmers will first be faced with the price increases and will not adjust imme- diately. A further word is necessary to explain the assumption that farmers cannot adjust immediately to energy price in- creases and why they are confronted with higher costs and not substitution possibilities. Substitutes do exist for some energy inputs, as Connor suggests, therefore when prices change only slightly relative to each other, it pays to adjust production plans quickly so as to utilize the cheaper of the two. As a corollary, it pays to keep a business so organized that it is easy to shift between the use of good substitutes when small changes occur in their relative prices. Yet, agriculture in the United States has become so energy dependent that farms are not organized to quickly shift from energy inputs to something else, or even between inputs. These adjustments may be made in the long-run, but a quick adjustment is assumed unlikely. 23 Furthermore, Connor also suggests that economic analy- sis of energy use in agriculture does not account for comple- ments in production. In fact, the existence of nearly per- fect complements also helps explain why farmers will not be able to react quickly to energy price increases. As capital has been substituted for labor in 0.8. agriculture, much of that capital requires direct, not to mention indirect, energy resources. Until other forms of engines are produced, trac- tors need a certain amount of diesel fuel to move. That is, when a production process utilizes two nearly perfect com- plements, it is unnecessary to keep the production process flexible with respect to the proportions of X1 and X2 which can be handled, as changes in relative prices will not have large effects on the most profitable proportion in which such inputs should be combined.* Methodology In order to analyze the impact of a change in the price of energy inputs, the price will be increased, holding the prices of other factors of production constant. In order to later change the variable costs of production, variable costs will be divided into three categories: 1. variable costs of production with no fossil fuel component; *The discussion on substitutes and complements is drawn from Bradford, L. A. and G. L. Johnson, Farm Management Analy- 318 (New York: John Wiley & Sons, Inc., 1953). 24 2. variable costs of production with a direct fossil fuel component, i.e., fuel for tractors, gasoline for trucks, etc.; and 3. variable costs with indirect fossil fuel components, i.e., fertilizer and pesticides. The cost formulas will be as follows: m m 2 (P.X ) = 2 C. i=1---m, all variable inputs with 0 l 1 0 l 1=l 1:1 no energy components (1) where: x = quantity of variable inputs with no energy component Pi = price per unit of all variable inputs with no energy component C. = cost of all variable inputs with no energy 1 component k k E (X.P.) = X C. j=l---k, all variable inputs with j=l 3 3 j=l 3 direct energy components (2) where: x. = amount of energy used with variable inputs 3 requiring direct energy components, i.e., electricity used to run irrigation pumps, fuel for tractors, etc. P. = price per unit of energy used with variable 3 inputs requiring a direct energy component. Since Xj will be some form of energy input, each P- will be the per gallon, per KWH, or per MCF price, depending on the type of energy used. C. = cost of all direct energy inputs, used in 3 those variable inputs with direct energy components t t Z (Xde) = 2 Cd d=l---t, all variable inputs with d=l d=1 indirect energy compon- ents (3) where: X = quantity of variable inputs with indirect energy components, i.e., fertilizer and pesticides 25 P = price per unit of variable inputs with in- direct energy components. Part of Pd will reflect the cost of the indirect energy com- ponent. Cd cost of variable inputs with indirect energy components. Therefore, the total cost formula will be m k t z c. + z c. + 2 cd + PC = TC (4) j=l 3 d=1 and the per unit cost of output will be: m k t 1/N 2 Ci + l/N X C. + l/N 2 C + l/N PC = l/N TC (5) 1-1 j=l 3 d=l d where: N = total output per state, per commodity. In order to analyze the impact of rising real energy prices, the following computation will be employed. Since m . C . 1' the variable costs with no energy component, and I=l fixed costs do not have an energy component that will change (since the indirect energy input to fixed costs has already been included before the price increase), they will remain constant. Since t C. represents those variables with i=1 3 direct energy components, i.e., LP gas, natural gas, elec- tricity, diesel fuel, it will be necessary to multiply each Xj by a new price, Pjvj where Vj in this analysis will re- present the percentage increase in the price of various energy sources. Therefore, equation (2) will be adjusted to read: C.* V. = % increase in energy (2? k 2 = l J 3 100 cost ”MW {Xj(PjVj)} = j 1 26 To account for increases in the indirect energy come ponent, a different measure is required, since the indirect energy cost in fertilizer for example, is merely a portion of the total cost of the input. Therefore the ratio P/BTU will be used in order to increase the price of the input by that proportion which is affected by rising energy prices. Here, the Xd in equation (3) is composed of (r) amount of BTU's. If for example, the BTU's in the input are all of the same energy source, P/BTU will be the ratio of the price of the energy source by the amount of BTU in that energy source. If the input is made up of different types of energy sources, the BTU shown in the ratio will be the average of each energy source. Since each input has (r) amount of BTU's in it, then P/BTU - r = S, where S = the indirect energy cost. To derive the proportion of indi- rectenergy cost to the price of the input, we have (S/Pd). To change the indirect energy price by a percentage in- crease then: (S-Vd) + (Pd-Ud) = Cd* where: S, Vd and Pd are as before. Ud = the quantity of variable input. Therefore equation (3) will be adjusted to read: t I {(S-V + P )U } = C * (3V d=l d d d d The new total cost formulas, incorporating the changes in energy price inputs will be: 27 k t 2 C.* + X C * + FC = TC* (6) 1 1 j=l 3 d=1 d and the per unit cost of output will be: k t C. + l/N Z Cj* + 1/N 2 C l/N 1 j=l d=1 i d* + 1/N PC = l/N TC* (7) "MS 1 By way of example, the method used to calculate indirect energy costs will be clarified. Referring to Chapter V for the precise figures, the total cost of fertilizer in Michi- gan apple production is $37.08 per acre. The energy embodied in fertilizer, nitrogen and potash,is 6685 BTU per acre (1000). The price of energy per acre in Michigan is $59.95 and the total BTU's per acre used in apple production is 31,922 (1000). To get the P/BTU ratio then, the two figures are divided: 59.94/31922000 = .0000018. To get the indirect energy cost in fertilizer, the above is multiplied by the BTU's per acre of fertilizer: .0000018 - 6685000 = $12.03. Subtracting these totals (S) from the total fertilizer costs (P), gives the non-energy costs: $37.08 - $12.03 = $25.05. Indirect Energy Costs in Machinery While this study includes only the indirect energy in fertilizers and pesticides, work has been done on the in- direct energy costs of producing farm machinery. While only a few such studies exist, Garnett Bradford, Vernon Eidman and Harold Jensen, University of Minnesota, have analyzed and modified these reports in a staff paper, "A Systems Model of the Indirect Energy Expended in Farm 28 Machinery Production and Use" (1978). In their report, Bradford et a1. calculated_the indirect energy requirements in terms of kilocalories of energy expended. As an example of their work, the following table represents modified esti- mates of the energy required to produce selected 1974 farm machinery, as modified from studies by Doering et al.10, Beny and Fels3 and Bullard et al.5. Table 1.--Indirect Energy in Farm Machinery. - _ - J I k Input-Output Modified Beny-Fels a Energy in Doering plus Machine Specification Intensity Results Doering Method Results (kcal x 106) Tractor, John Deere 4420 diesel, 2-wheel drive; 9926 lbs; $11,490 142.74 93.96 101.64 Combine, New Holland 13 ft 1400 self- propelled; 13367 lbs; $17,438 216.63 102.91 127.40 Forage Harvester, A1- 1is-Chalmers model 782, PTO; Base Unit, 3390 lbs; $2,913 35.66 22.14 26.77 Corn Planter, 400 cycle 1H, 6-row nar- row with strip til- 1ers and dry ferti- lizer applicators; 3521 lbs; $4,328 53.76 43.92 29.72 Disc Harrow, 18 ft tandem, 3800 lbs; $3,264 40.55 31.71 30.99 aPrices shown are for Spring 1974.4 29 In the long-run dynamic adjustment process, the farmer will find it necessary to account for the rise in indirect energy input prices into farm machinery. In this short-run analysis, the rise in energy input prices, both direct and indirect, will only affect the producers as they purchase those variable inputs such as fertilizer that must be ac- quired each season. Simply, the producer already has what farm equipment is necessary and the rise in the indirect energy input costs of farm machinery will not be of imme- diate concern. Factors of Distance An additional issue should be discussed here due to its relevance to the analysis: The effect of distance from the market on both costs and prices, i.e., transportation costs, and the impact of these transportation costs and distance on the economic return to land, that is, land rent. A situation where two products (Washington commodities and Michigan commodities) compete in the same markets, at different distances from that market site, produces issues surrounding transportation costs. The price received for a commodity at any particular point tends to vary directly with distance from the central market or consuming center.21 Under competitive conditions, the price to the producer would be the central market price less the cost of trans- portation services. Drawing from Heady's discussion21, in the absence of variations in costs of transportation services 30 between the production and consuming points, Figure 2 il- lustrates the geographic pattern of prices. The upper por- tion of Figure 2 assumes that (a) each producer has equal access to the consuming site, and (b) transportation modes are not more favorably situated for one producer than for another. Therefore, an "iso-price" boundary (circles P1... P6) exist for each point equally distant from the market. The price is the same for all producers on a given price line and is equal to the central market price less the cost of transportation. On boundary line Pl’ the producer price of $1.80 is the central market price of $2.00 less $.20 for transportation costs. The lower portion of the figure il- lustrates the nature of the decline in producer price as the point of production becomes more distant from the mar- ket. The location of production is also an important land- rent determinant.* Essentially, when crops produced for a central market are grown on lands of like fertility, the lands located nearest the market will enjoy a rent advan- tage over those located at greater distance. Here, land- rent is defined as the economic return that accrues, or should accrue, to land for its use in production. This economic rent is the surplus of income above the minimum supply price it takes to bring a factor into production. For example, if a commodity is worth $15.00 a ton delivered *This discussion is from Barlowez. 31 ooo moo boo woo woo Hoo o 8 O 1.00. has: umm muenm Distance from Market (miles) Figure 2.--Distance and Product Price. 32 at a factory and can be produced at an average cost of $13.80 a ton (including loading costs and a fair return on the operator's capital, labor and management), a surplus of $1.20 a ton will be available as land rent on those lands located at the market. With an average yield of ten tons per acre, this would result in a land rent of $12.00 per acre at this location. When the commodity is produced at a greater distance from the market, there exists a higher transportation cost and thus less rent is produced. With an average transpor- tation cost of three cents per ton-mile (once the commodity is loaded in trucks), the amount of land rent drops three cents a ton,or $.30 an acre for every additional mile be- tween the producing and consuming points; this is illus- trated with the use of land-rent triangles below. What this implies is that there can be only $6.00 in land rent per acre at locations 20 miles from the consuming point and the rent drops to the zero or no-rent point 40 miles from the market. Some production may take place beyond the no-rent point, but only with a reduction in payments that normally would go to labor. At points A and B below, the no-rent margin, rent stops and production costs ex- ceed total market value at all points beyond this no—rent margin (Fig. 3). Examining this with the use of cost curves, it can be seen that the further a tract of land used to produce a commodity is from the market, the more it costs to get 33 Market Price A Land 12 o '3 Rent Trans-l I0 I: portation ' >3 -_.__--.C.<3§.t§- _. u 9 ‘a ‘6 I 5 0:: Other Production. m "é'é & Marketing : «g 6 L)@ Costs l m . A ~4m l I (0 O I 3 I U | «I | E. I I I I I I l A l l L L 10 20 3o 40 miles 10 20 30 40 miles Distance to Market Distance to Market Figure 3.--Effects of Transportation Costs Upon Land Rent. products there, land rent is affected even on land of com— parable productive quality. The first diagram below (Fig. 4A)represents the land rent received by land at the site of the market; no transportation costs exist. As produc- tion is carried on further from the market site, shipping costs occur. Since shipping costs vary with output sold, higher shipping costs exist to transport 100 units as op- posed to 10, it may be treated as a price-depressing fac- tor, which lowers the actual prices received by producers at greater distances. As net price is lowered, the amount of land rent received also decreases, as shown in the shaded areas below. Thus, while the site 500 miles from the market is just as productive as that land at the market, 34 2:“ ”C 2 MC 2.. u. H H ::-p, . s /' s 4-J "T7." I _ , I A, . a: U .u :2 iii . Rent -_a; AC :2 AC :2 I 7ITTS"‘G-"/ . I,;/ 3 «a «a «.3 m m m u u u m m m o ' 8 8 0 Units of Output Units of Output Units of Output A B C Site of Market Site 250 Miles Site 500 Miles from Market from Market Figure 4.--Cost Curves and Transportation Costs. operators encounter a transportation cost that forces them to gear their production to a lower net price level, pos- sibly affecting the variable inputs that can be employed. CHAPTER IV INDUSTRY AND MARKET DESCRIPTIONS The purpose of this chapter is to establish an insti- tutional description of both the fresh apple and potato in- dustries, and a description of their various markets. The emphasis will be on presenting the regional distribution patterns of Washington and Michigan products. Apple Industry in Michigan and Washington: Interregional Competition While Washington is a nationwide supplier of fresh apples, Michigan sells predominately to markets in the Midwest: Washington supplies 35 percent of the nation's fresh apples; Michigan averages seven percent of the 0.8. market.32 Both the Michigan and Washington apple industries have some notable competitive advantages and disadvantages. As Ricks illustrates, those advantages in Michigan that re- late to the fresh apple industry include: 1. Lower transportation costs to eastern and.mid- western U.S. population centers. 2. Relatively less supply fluctuations such as wash- ington has with periodic severe winter freezes which can kill many apple orchards. 3. Lower costs for land in Michigan. 35 igan 6. 7. Some of the advantages which Washington has over Mich- 36 Little or no cost for irrigation in Michigan. More dependable water supplies in a year like 1977, at least compared to Washington's (1977) unusually bad situation. Little or no costs for orchard heating. A diversity of varieties of apples in Michigan. in the fresh apple industry include: 1. Favorable climatic conditions for growing apples. This results in: a) higher average yields per acre; b) high quality fruit for fresh market with regard to desirable color, finish and shaped Red and Golden Delicious; and c) lower spray costs. Higher average price per packed box of fresh ap- ples due to the conditions listed above. Ample amounts of irrigation water under normal conditions. A high percentage of orchards on size-controlled rootstocks in high density plantings. Lower transportation costs to substantial and rapidly growing markets in California and south- western U.S. Large volumes of fresh market Red and Golden De- licious which are continuously available to the buying trade throughout a year's apple marketing season. 37 7. Large and apparently quite effective advertising and promotional program.32 If these 14 items are examined, it can be seen that 11 of them deal with either quality/promotional aspects, or those related to energy use. The quality/promotional items may account for the popularity of Washington apples. On the other hand, the six items that relate to energy, mostly ir- rigation and transportation, may account for future competi- tive changes between Michigan and Washington apples. .In fact, Ricks reports that Michigan's most important competi- tive advantage is the substantially lower transportation 32 Furthermore, costs to eastern U.S. population centers. most Michigan apple growers have little or no cost for ir- rigation. Yet, before real energy prices are increased, the fact remains that Washington's fresh apples successfully compete with Michigan fresh apples. Although Washington apples must be transported long distances, Washington's product still accounts for a large share of the eastern market. Of 18 U.S. cities* which are major demand points for fresh apples, Washington and Michigan compete in 10. The cities where the products compete are: Chicago, Detroit, St. Louis, Cleveland, Houston, Minneapolis, Cincinnati, Buffalo, Dallas, and *These are: New York, Los Angeles, Chicago, Philadelphia, Detroit, Boston, San Francisco, Washington, D.C., Pittsburg, St. Louis, Cleveland, Baltimore, Houston, Minneapolis, Cin- cinnati, Buffalo, Dallas, Milwaukee. 38 Milwaukee. Of the other eight cities, washington supplies fresh apples, while Michigan does not. If only those cities where Michigan's and Washington's fresh apples compete are analyzed, the dark lines in Figure 5 indicate more apples on a percentage basis flow to every city from the Yakima Valley in Washington, except for Detroit. This is further indicated in Table 2. Other than the fact that Detroit is the only city where Michigan supplies more fresh apples than Washington, eight of the ten cities are essentially in the Midwest. Therefore, Michigan growers supply fewer apples to seven of eight midwestern cities than does washington. Figure 5.--Interregional Competition in Ten Major Demand Points: Apples. 39 Table 2.--Percentage of Market Accounted for by Washington and Michigan Apples in Ten Cities! City Where Washington and Washington's Michigan's Michigan Compete % of Market % of Market Chicago 48 28 Detroit 30 49 St. Louis 49 19 Cleveland 34 16 Houston 54 9 Minneapolis 69 5 Cincinnati 30 21 Buffalo 9 3 Dallas 56 6 Milwaukee 45 25 *Since the above 1969 figures were taken from a bar graph, the percentages are approximate. Of the other eight cities, Michigan does not ship fresh apples. Of the above ten, the percentages do not add to 100 percent because each city has other suppliers, i.e., New York, Virginia, West Virginia, North Carolina, Maine, etc. all supply apples to the eastern market. Source: 29. Due to this situation, one is led to assume that Wash- ington apples compete successfully with Michigan and in fact must either cost less to produce and ship or have much more marketable quality, or both. Potato Industryin Michigan and Washington: Interregional Competition Although this study is interested in the fresh potato market, the last 20 years has witnessed a hastened decline in per capita consumption of fresh potatoes corresponding to an increase in per capita consumption of processed potato products.35 At the same time, potatoes themselves have 4o shifted from a secondary crop to a highly specialized, pri- mary crop requiring large-scale production techniques.35 Sparks attributes 94.1 percent of total U.S. potato production (1970) to 19 states. Within these 19 states, washington potato production ranked third, contributing 10.3 percent of total U.S. supplies. Michigan ranks elev- enth nationally, producing 3.2 percent of U.S. supply. While Michigan production accounted for only 3.2 percent in 1970 and 2.9 percent in 1977, the potato industry in Michigan has averaged $45.5 million in value of production in 1975-1977*; in both states, the potatoe industry is sig- nificant. In order to analyze the flow of potatoes in the U.S., Sparks identified four major consumption regions: the Eastern region, the Southern region, and Midwestern region, and the Western region.** Forty-one cities were identified as regional demand points: nine cities in the Eastern region; 12 in the Southern region: 10 in the Midwest: and six in the West. Of these four regions, Washington and Michigan now compete in three, excluding the Western region. Figure 6 as suggested by Sparks35 divides the country into four demand regions. While Sparks lists a number of cities in each region, a representative city was chosen for *28, page 21. **See Sparks35, for further information on data compila- tion and limitations. 41 Region I: Eastern Region--Representative City: Philadelphia Region II: Southern Region--Representative City: Dallas Region III: Midwest Region--Representative City: Chicago Region IV: Western Region--Representative City: Denver Figure 6.--Interregiona1 Competition in Four Major Demand Regions: Potatoes. each region in order to calculate transportation distances. As with apples, the dark lines in Figure 6 indicate which state ships more potatoes to the regions in which they com- pete. Washington supplies 950 carlots of raw potatoes to the Eastern region (1971), while 668 carlots are shipped from Michigan. The 668 carlots, however, is an aggregate figure including unloads from Michigan, Oregon, North Dakota, Minnesota, Texas and Alabama. Thus, Washington supplies the Eastern region with far more raw potatoes than does Michigan. Similarly, Washington supplies more raw potatoes to the 42 Southern region. From Washington, 864 carlots were trans- ported to the South in 1971, while 871 came from a number of states including Michigan (Oregon, New Jersey, Michigan, Virginia, Pennsylvania, North Carolina). It is only in shipments to the Midwest region that Michigan supplies more fresh potatoes than Washington. Michigan unloaded 4774 carlots of raw potatoes in the Midwest in 1971, compared to 858 from Washington. Finally, Michigan and Washington do not now compete in the Western region. In fact, the Western region is unique in that all major suppliers of raw potatoes are located within the region.35 As with apples, Washington's products compete success- fully with Michigan potatoes, even in markets near Michigan. Although Washington must transport its potatoes greater distances to the Midwest and East, they supply more in the -East and a significant amount to the Midwest, as compared to Michigan. It therefore appears possible that when energy prices increase, particularly in diesel fuel for transpor- tation, Michigan may find its competitive position improved. That Washington is able to transport significant amounts of their commodities to directly compete with Michigan products indicates that farmers in Michigan should be interested in the effects of changing real energy input prices. CHAPTER V 1976 COSTS OF PRODUCING APPLES AND POTATOES IN MICHIGAN AND WASHINGTON INCLUDING ENERGY COSTS Potato Budgets Construction of both potato and apple budgets will fol- low the methodology outlined in Chapter III. The variable costs of production are divided into three categories: 1) variable costs of production with no fossil fuel energy component; 2) variable costs with a direct fossil fuel com- ponent; and 3) variable costs with indirect fossil fuel components. The fixed costs and those variable costs such as labor that do not have a fossil fuel component, will be considered the factors of production to be held constant. All of the budgets used in this analysis will take the form of Table 3 which is a partial budget including only those costs that will not be changed when energy prices are increased (which explains the blank spaces). In order to construct the entire budget, the cost of fossil fuel inputs for a base year of 1976 will be added to Table 3, and the costs of these inputs will be increased until reaching a threshold price which shifts the competitive cost structure between regions. The question will be: How high do energy prices have to increase before this shift occurs? 43 44 Table 3.5-Partia1 Estimated Cost of Production, $/acre: Potatoes. Including Only Costs to be Held Con- stant. Base Year, 1976. ESTIMATED COSTS WASH. MICH. Variable Cost 1. Without Energy Component Seed $117.04 $112.50 Equipment Repairs 37.65 31.24 Labor 40.13 32.26 Irrigation Repairs 6.60 6.60 Irrigation Labor 6.40 6.40 $207.82 $189.00 2. With Direct Energy (in- cluding irrigation) Gasoline Diesel Electricity 3. With Indirect Energy Fertilizer Indirect Energy Cost Non-Energy Cost $ 96.70 $ 85.11 Total Cost Pesticide Indirect Energy Cost Non-Energy Cost $152.78 $104.51 Total Cost Total Variable Cost, per acre Total Variable Cost, per ton (excluding transportation) Fixed Cost Equipment Costs Depreciation $ 48.07 $ 48.07 Interest 45.18 45.18 Sprinkler Irrigation Depreciation 27.98 27.98 Interest 34.03 34.03 Operating Capital 16.35 23.86 Land Costs 86.07 56.63 Total Fixed Cost, per acre $257.68 $235.75 TOTAL COST, per acre TOTAL COST, per ton (excluding ' transportation) TRANSPORTATION COST (by truck) TOTAL COST PER TON TO CHICAGO 45 With regard to potatoes, the data has largely been adopted and indexed to a base year of 1976 from Greig.19 Greig estimated the cost of production of potatoes for Aeight regions, covering the major Fall crop-producing areas, including the Columbia Basin of Washington and Ore- gon, and Michigan. Cost estimates were established using published data from each of the areas and calculated under a standard formula. 1. Variable Costs with No Fossil Fuel Component. Seed: Seed potato prices were obtained by Greig from.USDA price reports, by state. In Washington 19 cwt of seed was applied per acre at a cost of $6.16 per cwt. For Michigan, 17 cwt was used at $6.60 per cwt. Equipment Repairs: In Greig's study, this cate- gory also included equipment operations, and thus in- cluded the cost of gasoline and diesel fuel used to operate the farm equipment. Since the interest here is only in those costs of production with no fossil fuel input, the cost of gasoline and diesel fuel has been subtracted. Equipment costs were standardized because operations are essentially the same in all areas, and reliable data was not available regionally. Therefore, the equipment costs for Michigan and Wash- ington were listed as $53.24 per acre. In order to count only equipment repair costs, the cost of gaso- line and diesel fuel in Washington ($15.59) and 46 Michigan ($22.00) has been subtracted, resulting in equipment repair costs of $37.65 per acre in Washing- ton and $31.24 in Michigan.* Labor: The quantity of labor used per acre was standardized at 12.7 hours and the price of farm labor was obtained from USDA data under the heading "all hired farm workers", at 1976 wages. In Washington, 12.7 hours of labor per acre was used at a price of $3.16 per hour; in Michigan the wage rate was $2.54. Irrigation Repairs and Labor: As with equipment costs, only irrigation repairs and labor are included here; when variable costs with a direct energy com- ponent are examined, the water and fossil fuel costs of irrigation will be included. The irrigation costs used by Greig assumed that surface water was supplied to the farm by an irrigation district and that circle or center pivot systems were used. The cost of irri- gation labor and repairs has been standardized here because Greig's data includes only the Washington figures. Although Greig assumes Michigan farmers do not irrigate, irrigation does take place, albeit at a much lower level than is necessary in Washington. *The figures for gasoline and diesel fuel prices and amounts used will be introduced below, when variable costs of production with direct fossil fuel energy inputs are con- sidered. 47 2. Fixed Costs. Equipment Costs: As was the case with equipment repairs, the depreciation and interest costs on equip- ment have been standardized due to unreliable regional data and the similarity of operations. Depreciation was calculated at $480.07 per acre, capital cost de- preciated at ten percent per year, yielding the $48.07 figure for both states. Interest on equipment was cal- culated at $480.74 per acre at a 1976 interest rate of 10.64 percent, yielding $45.18 fixed cost in interest per acre. Sprinkler Irrigation: Due to the fact that Greig assumes no Michigan irrigation, capital costs for sprinkler irrigation have been standardized so as to include this category in the cost of production budget. Data shows that of the 41,184 acres of potatoes har- vested_in Michigan in 1974 (data from 1974 Census of Agriculture, Vol. 1, Part 22), 16,227 were irrigated-- 40 percent. What is more important however, as indi— cated in Table 5, is the difference irrigation makes on yields. The figures used for Michigan potato yields are not statewide averages because irrigated land produces higher yields. For example, in Montcalm County where 90 percent of the potato crop is irrigated, yields are 13.5 tons per acre. In Monroe County where 88 percent of the potato crop is not irrigated, the yields are 8-9 tons per acre. Depreciation on sprinkler 48 irrigation is estimated to be $319.80 per acre, minus $40 per acre salvage value, depreciated at ten percent a year, resulting in a depreciation cost of $27.98 per acre. At the $319.80 capital cost, interest was calculated at the 1976 rate of 10.64 percent, pro- ducing an interest cost of $34.03 per acre. Operating Capital: This was taken at ten percent for six months at 1976 rates for both Michigan and Washington. Land Costs: Land costs were estimated by multiply- ing the value of land per acre by a 1976 land interest rate of 9.06 percent. For Washington then, land costs are estimated at $950 at 9.06 percent, to be $86.07 per acre. In Michigan the estimated value per acre is $625 at 9:06 percent for a $56.63 land costs. In agri- culture, the calculation for value of land per acre is generally in terms of the next best alternative use of that land. As indicated by Table 3, the variable costs of production with no energy component have been esti- mated to be $207.82 per acre in Washington and $189 in Michigan. The fixed costs for potato production are estimated to be $257.68 per acre in Washington and $235.75 in Michigan. Although costs with no energy components are indeed variable costs (such as repairs), both those and fixed costs will not change when energy input prices are increased. 49 3. Variable Costs of Production with Direct Energy Component. Table 4 shows the entire 1976 base year potato budget. For purposes of distance figures, Washington's potatoes are transported from the Columbia River Basin, and Michigan's from the southwestern area of the state. In order to derive the cost figures for potato pro- duction, it is necessary to first start with the amount of energy used on the farm, Table 5. The data from USDA research39 includes all energy directly used on the farm for crop production purposes: field opera- tions, irrigation, crop drying, mechanized feeding, space heating, farm business auto use, etc. To find the cost figures of Table 4 the total amount of energy used will be multiplied by a set of 1976 price para- meters and divided by acres (Table 6). When the amounts of energy used are multiplied by the appropriate per unit price, the cost of energy figures in Table 7 are derived. Finally, when each category in Table 7 is divided by the acres harvested as shown in Table 5, the result is the variable cost of production with direct energy. Note that because the use of fuel oil, LP gas, natural gas, and coal are at such low levels (less than 500 gallons/one-half million cu. ft.) per year, the cost figures were not calculated. Due to the amount of electricity used to irrigate in the Columbia Basin, Washington's direct energy costs are $73.17 per acre, Michigan's are $38.35. 50 Table 4.--Estimated Cost of Production, Including Energy Costs. $/acre: Potatoes. Year, 1976. ESTIMATED COSTS WASH. MICH. Variable Cost 1. Without Energy Component Seed $117.04 $112.50 Equipment Repairs 37.65 31.24 Labor 40.13 32.26 Irrigation Repairs 6.60 6.60 Irrigation Labor 6.40 6.40 $207.82 $189.00 2. With Direct Energy (in- cluding irrigation) Gasoline $ 9.92 $ 12.93 Diesel 5.67 9.07 Electricity 57.58 16.35 $ 73.17 $ 38.35 3. With Indirect Energy Fertilizer Indirect Energy Cost $ 33.39 $ 25.35 Non-Energy Cost 96.70 85.11 Total Cost $130.09 $110.46 Pesticide Indirect Energy Cost $ 3.00 $ 1.22 Non-Energy Cost 152.78 104.51 Total Cost $155.78 $105.73 Total Variable Cost, per acre $566.86 $443.54 Total Variable Cost, per ton (excluding transportation) $ 25.19 $ 38.40 Fixed Cost Equipment Costs Depreciation $ 48.07 $ 48.07 Interest 45.18 45.18 Sprinkler Irrigation Depreciation 27.98 27.98 Interest 34.03 34.03 Operating Capital 16.35 23.86 Land Costs 86.07 56.63 Total Fixed Cost, per acre $257.68 $235.75 TOTAL COST, per acre $824.54 $679.29 TOTAL COST, per ton (excluding transportation) 36.65 58.81 TRANSPORTATION COST (by truck) 14.52 1.51 TOTAL COST PER TON TO CHICAGO 5 51.17 6 60.32 51 .uwc: waszmco :mcu mmmd muc0a0:« mwzmco .OCMpcsou Ou mop xauocxm a: ppm uoc >cE mumnEo: one .whmH .mofiuwaucum amusuasofium< Cowmcwnmmz Eouu camp muoc you pawwx can Omumw>umn mmuoob .uxou osu :w oc:Ow ma cmmwcowz Ce mpaowa oucuoo uo cOMuccmHoxw nocuusu <6 mma.v~ mamm mmm II II II II Nvma Hoaw nmc0u m.- o.v~H mmODHDOA .mez vao.m~ mama ha II II II II HooH Hana mmcou m.- o.~v m00unuom .cofiz .oooav AHHfibV AHHAE. AAHMEV Aoooav Aoooav AQOOHV Aoooav Acoo~v wuom moo n.39m .omam acou mco .ucz now mo ago Hook ammowo mco ouoc pmumo>ucz n.38m deuce mo 23x uo mcoe mo .um .30 we .Hmo uo .Hco no .HMO mo .Hco uoo mama» mouo< .ommm «baa «has mumcm Houoa xuwofiuuoo~m moo an HMO doom memwo oanOmmo .mcwpcsou Cu .co«u0360um wanna :a on: >mumcm wo umou wanII.mH manna mop >Huocxm a: con uoc me mumnE32 .uwc: wamcIoco :ccu mmoa .3oaon pocwcaoxm on Mae: whom non mpuowx mo cofiumHsoflcOc mmvvm hahm com III III and Odom mmvo AHBN vh.o~ mod mm~ma< .emmz Nmmam mmma A III III NAN mwmm damn mmma cv.m mm mmaaad .cow: Aoooav Adawnv AHHAEV AmawEv AGOOHV AcooHv Aoooav AoooHv mmCOu AOQOHV muoc Moo n.39m .owam Hmoo moo .umz now mo ago doom memwo moo muoc omumm>umz n.39m HMuOE no 23! mo mCOE wO .um .30 w0 .AMO HO .Hmo uO .HMU NO .HMU MOQ Came» mmuud .Ommm mama thd (Om: "cofiuospOum w~oo< :e mm: >mumchI.v~ manna 66 and cost of electricity used to irrigate in Washington is much higher than in Michigan: $77.78 as compared to $0.69. 4. Variable Costs of Production with Indirect Energy Components. Recalling the derivation of the costs employed the formula P/BTU-r = S, where P = the cost of the energy per acre, r=BTU's per acre of fertilizer and pesticide used, and S = the indirect energy cost, the constant non-energy cost is derived by subtracting (S) from the total cost given by Kelsey and Doran. The total cost of fertilizer and pesticide use is given in Table 13: $16.25 and $37.08 for fertilizer in Washington and Michigan respectively; and $149.19 and $99.65 for pesticide. Table 16 shows the amount of energy used in fertilizer production. Table 16.--Energy Use in Apple Production: Fertilizer. Nitrogen Phosphate Potash BTU per lbs. (P205) lbs. (K 0) acre (1000) (1000) (1800) (1000) Mich. Apples 12064 --- 2934 6685 Wash. Apples 7560 --- --- 2177 Source: 39. Dashes = less than one-half unit. 67 From Table 13, the price of energy per acre is given at $133.41 for Washington and $59.94 for Michigan. From Table 14, the total BTU's per acre used in apple production as listed is 31,922,000 in Michigan and 34,422,000 BTU's per acre in Washington. The P/BTU ratio for each state is: Washington==$133.41/34422000 = $0000038, and Michigan==$59.94/31922000==$.0000018. The indirect energy cost in fertilizer is multiplied by the BTU's per acre of fertilizer from Table 16: Michigan = 50000018-6685000 = $12.03, and Washington==$.0000038- 2177000 = $8.27. Subtracting the total (8) from the total fertilizer cost (P), gives the non-energy costs: Washington = $16.25 - $8.27 = $7.98, and Michigan = $37.08 - $12.03 = $25.05. The procedure is repeated for pesticide costs, be- ginning with the total costs of Table 13 and the amounts of pesticides used in Table 17. From Table 13, the. price of energy is divided by the total BTU's per acre from Table 14. The indirect energy cost in pesticide I is: Michigan==$.0000018-5986000 = $10.77, and Washing- ton==$.0000038-4584000 = $17.42. Subtracting this from the total costs leaves constant non-energy costs of $131.77 for washington and $88.88 for Michigan. 5. Total Costs and Transportation Rates. Referring to Table 14, the apple yield per acre in Michigan is 8.4,and 20.74 tons in Washington. Dividing these figures into the total variable cost per acre 68 Table l7.--Energy Use in Apple Production: Pesticide. Herbi- Insec- Fungi- cide ticide cide Other BTU per lbs. lbs. lbs. lbs. acre (1000) (1000) (1000) (1000) (1000) Mich. , Apples 80.4 2957.6 1417.7 —-- 5986 Wash. Apples 438.5 2874.5 --- 467.7 4584 Source: 39. Dashes = less than one-half unit. gives the total variable cost per ton, excluding trans- portation, of $47.24 in Washington and $67.58 in Mich- igan. When total fixed costs per acre are divided by yields, Washington's growers face fixed costs of $64.54 per ton while Michigan's growers face a per ton fixed cost of $93.13. Washington can produce a ton of fresh apples at about 69 percent of the cost in Michigan. Using the same transportation model as was eme ployed in the potato budgets (Tables 10 and 11), Table 13 shows that Washington can still produce and ship to the Midwest at a lower cost, but at 84 per- cent of the cost of Michigan production. Similarly, before transportation, Washington produced potatoes at 62 percent of Michigan's cost and 85 percent after adding transportation. Thus, relative to Michigan's 69 cost, transportation raised Washington's apple costs 15 percent. In both cases, production and transportation costs calculated are for fresh apples and potatoes only, no storage or other packing and handling charges have been included. It is as if the produce was harvested on the farm directly to trucks that transported the goods to the market distribution center in the Midwest. The reason for excluding packing, handling and storage charges are twofold. First, what data does exist in- dicates that these costs do not vary greatly between regions. Second, useful comparative cost data between the two regions in this area does not exist. While a standard transportation model was adequate, no such method exists to estimate packing, handling and stor- age costs. Finally, it must be remembered that the cost data employed here are estimates and do not neces- sarily represent averages or exact costs that various farmers in either region may face. CHAPTER VI THE IMPACT OF RISING ENERGY PRICES ON INTERREGIONAL COMPETITION The analysis of the impact of rising energy prices on interregional competition will take place in three steps: 1. An examination of the apple and potato enterprise budgets of Chapter V to analyze the proportion of total pro- duction costs accounted for by energy inputs, both with and without transportation costs. What is to be determined is whether Michigan or Washington, in either or both commodi- ties, is relatively more energy intensive as a proportion of total costs. Does the proportion of energy costs change greatly when transportation costs are added and does this affect interregional competition? If so, although irriga- tion, chemical use and farm machinery account for much of the energy cost in agricultural production, it is funda- mentally the cost and distance of transportation, and its dependence on diesel fuel, that accounts for regional varia- tions in the impact of rising energy prices. 2. To establish various threshold energy prices where the cost differential shifts in favor of the previously dis- advantaged state. That is, how high must the input price of energy go before the competitive situation is altered? Real energy prices will be increased, holding all other input 70 71 prices constant, until a point is reached at which the cost of differentials disappear. The margin at which this occurs is also the point at which the farmer would probably shift into the "next best" production possibility. 3. The above will be repeated in each of the markets in which Michigan and Washington compete in each commodity. Thus, not only will a set of threshold prices be established, but the "threshold distance" will also be found at which transportation costs cause a shift in the cost of supplying a market region. While the threshold prices and distances will be expressed in terms of specific values, they repre- sent only estimates of the strength of change in energy in- put prices needed to shift cost differentials. 1976 Energy Cost-Total Cost Ratios Referring to Tables 4 and 13, total cost of the produc- tion of apples in Michigan, excluding transportation, was $782.31 per acre, in 1976 prices. Washington's total cost per acre in apple production has been estimated at $1338.57. When total and variable costs are taken on a per ton basis, Washington's total cost per ton is 69.3 percent of Michigan's. That Washington can produce a ton of apples at a much lower cost due to higher yields, accounts for the fact that Washington is able to ship its fresh apples to Chicago, over 1900 miles, and compete with Michigan apples, shipped only about 200 miles. When transportation costs are added to Table 13, apples from Washington remain less 72 costly to deliver to Chicago per ton ($79.06 and $94.64 for Washington and Michigan respectively). Although transpor- tation cost from Washington (to Chicago) is more than 960 percent above Michigan's, Washington still produces and ships apples at 83.54 percent of Michigan's cost. The total cost of potato production, excluding trans- portation, was $824.54 per acre and $679.29 per acre in Washington and Michigan respectively, in 1976 prices (Table 4). As a proportion of total costs, the variable cost structure for potatoes is different than for apples. While each state exhibits approximately the same variable cost/ total cost ratio in apples, the potato production budget shows Michigan's variable costs to be approximately 65.3 percent of total cost, while the ratio goes to 68.8 percent in Washington. This 3.5 percent difference will mean that when real energy prices are changed, the difference in total cost in the base budget will close more rapidly in potatoes than in apples. Thus, it will take a smaller rise in real energy prices to reach a threshold in potato production costs, compared with apples. While Washington's potato costs are 121.38 percent of Michigan's, per acre, the difference in yields per acre be- tween Washington and Michigan once again make it less costly to produce potatoes in Washington. Potato yields in Wash- ington of 22.5 tons per acre are nearly double the 11.5 ton yields in Michigan. When total costs are taken on a per ton basis, Washington can produce potatoes at a lower cost than 73 Michigan ($36.65 versus $59.07). Recalling that on a per acre basis, Washington's costs are 121.38 percent of Michi- gan's, the figure is now reversed, making Washington's cost only 62.05 percent of Michigan's. Even adding the cost per ton of transportation, Washington's costs remain less than Michigan's, at 84.47 percent. The above information is summarized in Table 18. Table 18.--l976 Total Cost-Variable Cost-Relative Cost and Yield Comparisons With and Without Transporta- tion Costs to Chicago. Apples Potatoes Cost Category Mich. Wash. Mich. Wash. Total Cost per acre --no transportation 5 782.31 1338.57 679.29 824.54 Variable Cost $ 567.63 979.69 443.54 566.86 Variable Cost/Total Cost - % 72.56 73.19 65.29 68.75 Relative Total Cost per acre - % 58.44 171.10 82.38 121.38 Yield per ton 8.40 20.74 11.50 22.50 Relative Yield - % 40.50 246.90 51.10 195.65 Total Cost per ton $ 93.13 64.54 59.07 36.65 Relative Total Cost per ton - % 144.30 69.30 161.17 62.05 Transportation Cost per ton to Chicago $ 1.51 14.52 1.51 14.52 Total Cost per ton-- with transportation $ 94.64 79.06 60.58 51.17 Relative Total Cost per ton - % Deliv- ered Product 119.70 83.54 118.39 84.47 74 Examining further the proportion of total production costs attributed to energy inputs (Tables 4 and 13) will illustrate the intensity with which Michigan and Washington producers employ fossil fuel energy inputs. Separating the costs with and without transportation charges, the in- formation on the proportion of energy costs to variable and total costs is summarized in Table 19. Two points can be made from Table 19. First, as a percentage of both variable and total costs, Michigan is relatively less energy inten- sive in both apple and potato production. As a proportion of variable costs, energy costs are 14.58 percent of apple costs and 14.64 percent of potato costs. On the other hand, 16.24 percent of apple costs and 19.33 percent of potato costs in Washington are accounted for by energy inputs. Similarly, the proportion of energy costs to total cost, undelivered, is 10.58 percent in Michigan apple production and 9.56 percent in potatoes. In Washington the figures are 11.88 percent and 13.29 percent respectively. Thus, in both cases, as real energy prices rise, with all other costs constant, production costs to Washington producers will go up faster than to Michigan. Recalling that while Washington can produce and ship both apples and potatoes at a cost less than Michigan, the relative cost of producing apples, as compared to Michi- gan is higher than in producing potatoes. Without trans- portation costs, Washington produces potatoes at a variable cost 65.3 percent that of Michigan, while this goes to 68.8 75 Table 19.-~1976 Energy Cost/Total Cost Comparisons With and Without Transportation Costs to Chicago. Apples Potatoes Cost Category Mich. Wash. Mich. Wash. 1. No Transportation VC/acre $ 567.63 979.69 443.54 566.86 VC/ton $ 67.58 47.24 38.57 25.19 Var. P./acrea $ 82.74 159.10 64.92 109.56 Var. E./tonb s 9.85 7.67 5.65 4.87 Var. s./vcc - % 14.58 16.24 14.64 19.33 TC/acre $ 782.31 1338.57 679.29 824.54 TC/ton $ 93.13 64.54 59.07 36.65 Var. s./'rcd - 2 10.58 11.88 9.56 13.29 2. With Transpor- tation to Chi- cage TC/ton $ 94.64 79.06 60.58 51.17 Var. E. + Trans. Energye $ 11.36 22.19 7.16 19.39 Relative Energy Cost, per ton°% 12.00 28.07 11.82 37.89 aVariable Energy Cost/acre = VC with direct energy + indirect energy in fertilizer + indirect energy in pesticide. For example: Var. energy cost in MI apples = $59.94 + $12.03 + $10.77 = $82.74 (figures from Table 13). b acre. For example, acre/ton yield = $82.74/8.4 = $9.85. Same method as above, except figure divided by yield per for MI apples: Var. energy cost per cVariable energy cost/variable cost is for both ton and acre since they come to the same percentage. That is, MI apples per acre - $82.74/567.63 a 14.58%, and MI apples per ton = $9.85/67.58 = 14.58%. dHere still using the variable energy cost figures because we have yet to add energy cost of transportation. Therefore, since no energy cost exists as fixed costs, we still use var- iable energy cost, figured as in ff c. Again, the same percent- ages exist on a per ton or per acre basis, as explained above. eTo account for all energy used, including transportation, add variable energy cost above and transportation cost from Tables 4 and 13, since these transportation costs reflect just diesel fuel costs. 76 percent in apples. When looking at total costs, Washington produces potatoes at 62.05 percent of Michigan's cost while this goes up to 69.30 percent in apples. Thus, while Wash- ington has an absolute cost advantage in both commodities, it costs relatively more to produce apples. Only after adding transportation cost does this change. When the energy cost/total cost ratio is examined prior to adding transportation costs, the difference between commodity ratios indicates that Michigan potato growers spend less on energy relative to Washington potato growers than do their apple-producing counterparts. Thus, as real energy prices increase, while Michigan potato farmers produce at a more costly rate, the cost differential will close faster in potato farming than for those producing apples. Energy price increases will affect the competition in potato pro- duction between the two regions faster than in apple produc- tion. The second thing to note in Table 19 is that while the percentages