Disentangling the Links between Energy and Agricultural Markets: The Shale Gas Phenomenon

Technological developments in recent years, especially the 'fracking' technique, have allowed for a economically profitable extraction of shale gas, evolving into an increasingly important source of energy in the United States. Agriculture is increasingly more linked energy markets, traditionally through the input side (i.e. energy and fertilizer costs), but since the 2000s also through the production of biofuels. To analyse the potential effects on agricultural markets of the 'shale gas boom', a scenario analysis is carried out with the Aglink-Cosimo model. This scenario depicts a situation where the North America (US and Canada) benefits from certain energy price advantage versus the rest of the world. Our analysis shows a sizeable gain in competitiveness for US crop producers, with average production costs in the US decreasing considerably over the baseline period. These lower costs of production are expected to trigger lower producer prices and higher production, especially for energy intensive crops such as maize, sorghum and sugar beet. However, the presence of uncertainty regarding the future development of crude oil prices can considerably affect these margins.