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November 14, 2012

Will America’s Boom in Energy Production Give Manufacturing a Boost?

Falling prices for natural gas have encouraged those who believe that manufacturing activity will rebound in the years ahead. While abundant supplies and dampened prices for natural gas are certainly positive developments for U.S.[1] manufacturing, the impacts may be modest in sum. Energy materials and fuel costs are important to many types of manufacturing processes and industries, but such factors are not always commanding considerations in manufacturing production and siting decisions. Additionally, while the outlook for domestic energy production looks robust, the outlook for large price declines may be limited because of the competing uses for natural gas, both at home and abroad.

The domestic recovery of fossil fuels—especially that of natural gas—has been on the rise in recent years. Since the middle of the previous decade, technological breakthroughs in natural gas recovery have boosted natural gas production and supplies. These enhanced recovery techniques include horizontal drilling through shale rock in search of gas deposits, accompanied by pressurized fracturing of shale rock, which releases gas (and energy liquids) for recovery. Accordingly, natural gas production from shale deposits has expanded rapidly, increasing its share of overall U.S. gas production to 23% in 2010 from less than 7% in 2007. One long-term forecast concludes that this trend will continue—more specifically, under the assumption that current laws and regulations will stay the same over the projection, shale gas production is predicted to rise “from 5.0 trillion cubic feet per year in 2010 (23 percent of total U.S. dry gas production) to 13.6 trillion cubic feet per year in 2035 (49 percent of total U.S. dry gas production).” As a result of this additional fossil fuel recovery, it is projected that overall domestic gas production will expand by 30% on an annual basis by the year 2035.

So far, expanded production of natural gas has translated into falling prices. Earlier this year, prices for natural gas on the spot market (i.e., the cash market, in which this commodity is traded for immediate delivery) plummeted following a period of extensive exploration and recovery activity.[2] From the late fall of 2009 to the spring of 2012, the spot price for natural gas per million British thermal units) fell from $6 to $2 (see the chart below). Since that time, drilling and recovery activity have been curtailed in response to plummeting prices, so that prices have recovered to some extent. The firming of prices has also been bolstered by the greater use of natural gas (instead of coal) in generating electric power.

Source: Wall Street Journal/Haver Analytics

Whether or not enhanced natural gas production will translate into lower domestic prices for industrial users over the long haul will depend on several factors. For one, as just mentioned, natural gas can be substituted for competing fuels in other sectors. Currently, for example, natural gas is being substituted for coal in the electric generating industry. Competing demands such as these may tend to buoy the price of natural gas, even as overall supplies are increasing.

The transportation sector is the largest fuel-consuming sector in the United States (outside of the electric power generating sector), and it is almost wholly dependent on gasoline derived from petroleum. In the event that a larger percentage of cars and trucks were modified so that they could use natural gas, the competing demand for this fuel might also sustain upward pressure on its price. Currently, natural-gas-powered vehicles consume a small fraction of the transportation sector’s overall fuel use. The service fleets of vehicles that are maintained by commercial businesses and governments account for most of the natural gas consumption within the transportation sector. However, the technology to adapt vehicles for natural gas consumption is well developed.[3] The major impediment to broader modification of vehicles so that they are powered by natural gas is the additional infrastructure required to transport natural gas from wells and pipelines to commercial filling stations across the country.

The ultimate impact of rising domestic production of natural gas on our manufacturing may also be affected by international demand for natural gas. A set of complex dynamics will affect whether the nation imports or exports (on net) natural gas. To date, the United States has been a net importer of natural gas from neighboring countries. However, in the event that domestic production continues to grow rapidly, market conditions may one day encourage U.S. producers to export the product. If so, the price of U.S.-produced natural gas would then become more in line with global energy market prices.[4] To the extent this were to happen, the use of natural gas as a domestic input to manufacturing would be discouraged by the higher prices that could be commanded in international markets.[5]

Even if we assume that natural gas prices remain depressed here, we may still ask if the fuel is an important part of the cost structure for manufacturing. If natural gas turns out not to be a major factor in this cost structure, then the choices in the siting of manufacturing plants that favor the United States would be somewhat limited.

Undoubtedly, industrial processes (including those of the manufacturing sector) consume large quantities of natural gas and other fuels. For 2011, industrial uses accounted for one-third of overall U.S. natural gas consumption; and the industrial sector counted natural gas as its single largest fuel source, just ahead of petroleum (see below).

Source: Author's calculations based on data from the U.S. Energy Information Administration

However, as a share of industrial production costs, energy inputs are a somewhat modest component at the present time.[6] The chart below illustrates the energy content of overall U.S. manufacturing as measured against output (i.e., “value added”). The manufacturing sector’s overall consumption of all energy-type products—including electricity, energy product feedstock, and natural gas—amounts to close to 8% of value added in 2010. (Natural gas alone makes up a smaller share, nearly 3%.) In contrast, labor costs makes up almost 26% of value added in 2010.[7]

Sources: Census Bureau/Haver Analytics and U.S. Energy Information Administration

Though energy costs do not make up, on average, a large share of the overall value added of the U.S. manufacturing sector as a whole, this is not the case for certain manufacturing subsectors. The first table below ranks U.S. manufacturing subsectors from highest to lowest according to non-electricity fuel intensity from all sources. The highest ranking industry subsector, nitrogenous fertilizer, is a huge user of energy material, most of it being natural gas (see second table below). The nitrogenous fertilizer industry spends 125% of value added on non-electricity fuel products and 117% of value added alone on natural gas—principally as a feedstock into the production of fertilizer. However, many of these energy intensive subsectors are small and do not make up large shares of overall U.S. manufacturing production at the present time. All told, for example, the top 15 most fuel-intensive industries account for less than 10% of total U.S. value added in manufacturing. The top 15 natural-gas-consuming industries account for less than 4% of total U.S. manufacturing production.

Click to enlarge.
Source: Author's calculations based on data from the U.S. Energy Information Administration
Note: Both consumption and expenditure exclude purchases of electricity.

Click to enlarge.
Source: Author's calculations based on data from the U.S. Energy Information Administration

Despite this modest share of energy-intensive industries in overall U.S. manufacturing, low energy costs (and the greater availability of energy) in certain states do tend to attract the most energy-intensive industries. The table below ranks those states having the most energy-intensive mix of industries as measured by the consumption of fuel product per dollar of manufacturing (second column). Energy-producing states tend to dominate the list because energy products are abundant there and because fuel prices are lower closer to the point of production (on account of the lower transportation costs). In contrast, although much more overall manufacturing activity is located in the Seventh Federal Reserve District relative to the nation (last column), the District’s industry mix tends to be less intensive in average fuel use.

Click to enlarge.
Source: Author's calculations based on data from the U.S. Energy Information Administration
Note: Physical energy includes raw energy materials consumed in the electric generating process. Expenditure includes purchases of electricity.

The table below specifies the employment concentration of the nation’s 25 most natural-gas-intensive industries. Many of these industries have tended to locate in the Seventh District, and they may choose do so to a greater extent in the future should natural gas become cheap and abundant here.[8]

Click to enlarge.
Source: Author's calculations based on data from the County Business Patterns, U.S. Department of Commerce.

The boom in natural gas production in the U.S. will undoubtedly encourage some manufacturing activity. However, under several scenarios, the benefits of abundant natural gas are likely to be spread broadly across the U.S. and Midwest economies rather than being concentrated in the manufacturing sector alone. In particular, natural gas usage will likely make inroads into many sectors, such as electric power generation and transportation. In this way, the (lower) price effects, should they come about, will also be distributed across many sectors. If so, these competing demands will tend to limit the potential price decline of natural gas and the associated upside in manufacturing activity. Similarly, the possibilities for exporting natural gas will tend to buoy its price for domestic purposes, including those for the industrial sector (dampening its increased level of activity).

Note: Thanks to Norman Wang for excellent research assistance, and to Han Choi for editorial work.


[1] See, for example, “Europe Fears U.S. Energy Gap,” Financial Times. (Return to text)

[2] Note that most natural gas is not sold on the spot market; rather, it tends to be sold under longer-term contracts. Accordingly, these prices do not generally reflect the average prices paid for natural gas consumed. (Return to text)

[3] See Conference on “Energy Use in the U.S. Trucking Sector,” Resources for the Future. (Return to text)

[4] The U.S. Department of Energy’s baseline forecast expects that because of the expansion of natural gas production, the United States will eventually become a net exporter of natural gas by early in the next decade. Longer-term projections by the U.S. Energy Information Administration (EIA) predict that real prices will remain largely flat over the next ten years. (Return to text)

[5] However, high transportation and production costs of domestic natural gas for export would mean that its price would remain somewhat lower for domestic use. And again, there are large infrastructure investments to be made to achieve capacity to export natural gas.+(Return to text)

[6] This qualification may be an important assumption. Presumably, if energy costs fell very dramatically, the industry mix of manufacturing in the United States would shift, perhaps decidedly, toward those types of products and processes that heavily consume energy. (Return to text)

[7] Note also that the energy efficiency of U.S. manufacturing (blue line) has been increasing over time. Here, we take a broad view of energy intensity—i.e., including all fuels rather than natural gas alone—because fuel substitution may be widely feasible in many production processes. (Return to text)

[8] For a current map of the location of both feasible shale rock formations, along with “current plays” in producing natural gas, see here. (Return to text)

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November 2, 2012

Farmers’ Markets and Local Foods Flourishing in the Midwest

By Rhiannon Jerch[1] and David B. Oppedahl

As Americans’ eating habits have evolved, so have our Thanksgiving feasts. Despite the holiday’s grounding in tradition, popular trends reinvent even the most common menu items. Cranberry sauce appeared on the American table after it was fed to Union troops during long stalemates of the Civil War.[2] Whipped cream appeared ubiquitously on pumpkin pie after the handheld mixer became a mainstay in the American kitchen.[3] Today, farmers’ markets and other direct channels are bringing local heritage turkeys to our dinner tables.

Likely, you have seen a farmers’ market pop up in your town square, neighborhood park, or in a vacant parking lot. Every week in over 6,000 neighborhoods across the countr y, people are going to farmers’ markets. Today there are over 4.5 times as many farmers’ markets throughout the U.S. as there were 20 years ago, according to the Agricultural Marketing Service (AMS) of the U.S. Department of Agriculture (USDA). Just in the past year, the number of farmers’ markets has increased 9.6% to a total of 7,864. Considering these numbers account for only documented markets, the actual numbers may be much higher.[4][5]

What is motivating this rapid growth? The popularity of farmers’ markets is more of a renewal than a new phenomenon. Vegetable and produce markets have been a mainstay of American communities from the beginning. America’s first recorded farmers’ market appeared in Hartford in 1643 as a mandate by the General Court of Connecticut. The farmers’ market was, in some senses, a precursor to nationhood.[6]

Today, policymakers, academics, and farmers alike are enthusiastic about the rural and community development potential of direct farm marketing. Thomas Vilsack, the Secretary of the USDA, proclaimed the nation’s first Farmers’ Market Week (August 5 to 11, 2012) “to further awareness of farmers’ markets and of the many important contributions farmers make to daily life in America….”[7] Farmers’ markets have been touted as community revenue generators that simultaneously strengthen economic ties between metropolitan consumers and rural producers. Not to mention, they bring fresh vegetables, freshly baked breads, and sometimes home-made nonfood items, like soap and candles, to eager metropolitan patrons. The USDA estimated the U.S. local food market to be worth $4.8 billion in 2008, half as much as Starbucks’ entire international net sales in the same year.[8]

How do the five midwestern states of the Seventh Federal Reserve District[9] measure up against the rest of the country in direct farm sales? Michigan and Illinois ranked fourth and fifth, respectively, among all 50 states for total farmers’ markets in 2012. Michigan has 294 documented farmers’ markets this year, while Illinois has 264. California, New York, and Massachusetts led the nation with 661, 332, and 305 farmers’ markets, respectively. All Seventh District states registered above the national average of 139 farmers’ markets per state. Indiana, Iowa, and Wisconsin reported 152, 208, and 211, respectively, as of 2012.

[MAP 1 – National Map of Farmers’ Market Locations and total markets per state as of July 2012]

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Since the AMS began documenting farmers’ market trends in 1994, the period between 2009 and 2011 witnessed the highest national two-year growth rate to date: farmers’ markets expanded by over 36%. During this time, Michigan experienced the highest growth of all states. The number of markets nearly doubled, from 163 markets in 2009 to 322 in 2011. The only other states with growth over 80% were Oregon and Massachusetts. Average growth across the nation was 22.5%. Like Michigan, Wisconsin and Indiana have seen many new farmers’ markets pop up in the past two years at growth rates of 30% and 40%, respectively, while Iowa and Illinois saw little change.[10]
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[MAP 2 – National Map of Farmers’ market growth by state from 2009-2011]

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Within the Seventh District, farmers’ markets are most concentrated near major cities, such as Des Moines, Cedar Rapids, Madison, Chicago, Indianapolis, and Ann Arbor. Not surprisingly, Chicago’s home county, Cook County, with 93 markets, has the highest number of farmers’ markets of all Seventh District counties.

[Map 3 – Seventh District Map of Farmers’ Market Locations and total markets per county as of July 2012]

Click to enlarge

However, this pattern shifts when viewing direct farm sales per person. Crawford County in southwest Wisconsin, with two farmers’ markets and a population of approximately 17,000, claimed the highest direct farm sales per resident at $92 as of 2007.[11] Wayne County, Michigan, with 26 farmers’ markets—the county with the second largest number of markets in the Seventh District—had substantially lower direct farm sales per capita at $0.90 per resident.[12]

It is not surprising that farmers’ markets concentrate in highly urbanized areas; aggregate demand is highest near major cities and farmers can reach a greater customer base by selling at urban markets.

However, individual demand for fresh fruits and vegetables appears more idiosyncratic. Counties containing major metropolitan areas, such as Des Moines, Indianapolis, Detroit, and Milwaukee, reported less than $5 per capita in annual direct farm sales as of 2007. Average shoppers tended to spend more outside of the larger cities. Crawford, Door, and Vernon counties in Wisconsin rank in the top five counties with highest per capita direct farm sales, and each has fewer than 30,000 inhabitants.

[Map 4 – Seventh District Map of Direct Farm sales per capita by county]

Click to enlarge

Why are per person sales so much higher in these more rural counties? If cities draw the most farmers to market, why aren’t urbanites also spending more than their suburban and rural counterparts? Agritourism may be part of the answer. Berrien County, Michigan, has the highest agritourism revenue in the Seventh District, grossing over $2 million in 2007, and also has the second highest direct farm sales per capita.[13] Door County draws many visitors each year to its fruit orchards and wineries; Door County had the seventh highest agritourism revenue in the Seventh District, grossing over $680,000 in 2007. However, this does not explain Crawford County, where residents spend over $90 each per year at farmers’ markets, despite the fact that agritourism is negligible. The dynamics of farmers’ market patronage likely involve several crosscurrents, including residents’ incomes, community organization, awareness of environmental and health issues related to food, educational attainment, and proximate land quality.

[Map 5 – Seventh District Map of agritourism sales by county]

Click to enlarge

The nation’s heartland has been a leader in the ongoing evolution of fresh food marketing. Seventh District residents spent slightly more at farmers’ markets in 2007 than the average American—about $8.50 per person versus $8.00. Future opportunities for the District’s market goers are strong. Growth trends may widen the gap. Between 2009 and 2011, Seventh District counties added 38% more farmers’ markets on average, a rate twice as high as the national average of 18.4%. Considering national growth in farmers’ markets has remained above 10% for the past five years, we can expect to see more farmers stacking baskets of peaches and bunches of kale under tents in our town squares and parks, as well as more patrons enjoying the local bounty.


[1] Rhiannon Jerch is a graduate student in the Department of Agricultural and Consumer Economics at the University of Illinois at Urbana-Champaign. Her research interests include consumer behavior, choice theory, spatial econometrics, and food policy. Rhiannon interned with the economic research department of the Federal Reserve Bank of Chicago in 2012. Previously, Rhiannon worked in transfer pricing with Ceteris US, LLC in Chicago and in transaction services with PricewaterhouseCoopers in Cairo, Egypt. Rhiannon received a bachelor's degree in economics from the University of Illinois at Urbana-Champaign. (Return to text)

[2] “Thanksgiving, The Civil War, and Cranberry Sauce.” Julia Sexton, Westchester Magazine. October 20, 2010. (Return to text)

[3] “Early rotary egg beaters,” Home Thing Past. (Return to text)

[4] USDA Agricultural Marketing Service. Farmers Markets Search. (Return to text)

[5] USDA Agricultural Marketing Service. “Farmers Market Growth.” (Return to text)

[6] Masiunas, John B. Class Lecture. Local Food Systems. University of Illinois at Urbana Champaign, Department of Crop Sciences, Urbana IL. Spring 2012. (Return to text)

[7] link (Return to text)

[8] Starbucks Corporation Fiscal 2011 Annual Report. (Return to text)

[9] The Seventh Federal Reserve District comprises all of Iowa and most of Illinois, Indiana, Michigan, and Wisconsin. (Return to text)

[10] USDA Agricultural Marketing Service. “Farmers Market Growth.” (Return to text)

[11] Total value of farm sales direct to consumers (including sales from roadside stands, farmers markets, pick-your-own, door-to-door, etc., but not sales of craft items or processed products, such as jellies, sausages, and hams) divided by the number of residents of the county. USDA. Food Environment Atlas Documentation. July 2012. (Return to text)

[12] Per capita direct sales were unavailable for Cook County. (Return to text)

[13] USDA. Food Environment Atlas. July 2012. (Return to text)

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