March 21, 2003

 

War will Impact Farmers, NDSU Economist Says

War in Iraq will affect the region’s farmers financially, says a North Dakota State University agricultural economist.

"There are a number of ways that the situation in Iraq will affect producers," says Cole Gustafson. "The anxiety over war has influenced interest rates and the stock market. Rising energy rates are another factor."

In a rural state like North Dakota, increased energy costs translate into higher costs for all farm inputs, Gustafson says. "Those costs have increased, not only for fuel, but for many of the products that farmers use such as fertilizer and chemicals that require large amounts of energy in manufacturing."

Gustafson says the drop in interest rates is actually good news for producers, allowing them to refinance long-term debt at more attractive rates as well as reduce the cost of short term operating funds.

He notes that if the war is concluded quickly, the impacts will likely be reversed.

"What may be more troubling are the long-term prospects from this war," he says. "That is, how to pay for it?" Gustafson says analysts have estimated the war may cost $90-$100 billion. The Congressional Budget Office has identified 10 sources of revenue for that cost. "Three of the 10 have a direct impact on North Dakota. In addition to North Dakota having the highest burden in terms of number of people called up per capita, the state might also face the highest cost per capita," he notes.

One of the three is to increase the excise tax on motor fuels by 12 cents per gallon. "We’ve already talked about how increased transportation costs impact a rural state like North Dakota," Gustafson says.

Another proposal would reduce federal subsidies to agriculture. One targeted area is subsidies for alcohol fuel plants. North Dakota has two such plants operating and another on the drawing board. Minnesota has several ethanol plants.

"Lenders say continuation of the subsidies is make or break for those plants. In Minnesota, the industry is already looking at losing state subsidies because of the budget situation. This would be a double hit."

Additionally, the proposal would reduce the cap on farm subsidies from $210,000 to $75,000.

The Congressional Budget Office also identified reductions in export enhancement programs as a way to redirect revenue. "Cuts in those programs would directly impact the competitiveness of North Dakota products in the marketplace," Gustafson says.

So what can producers do? Not much, says Gustafson. "Producers have been aware of many of these prospects for some time. They may need to look at refinancing and re-evaluate their long-term situation with these considerations in mind."

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Source: Cole Gustafson, (701) 231-7096, cole.gustafson@ndsu.nodak.edu
Editor: Tom Jirik, (701) 231-9629, tjirik@ndsuext.nodak.edu

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