Horticultural production in Japan that takes place in an enclosed system, like greenhouses, relies heavily upon petroleum products, such as fuel oil and kerosene, for lighting, heating or power. Recently, the costs of direct energy use in farming have increased considerably because of sustained price increases in crude oil and the weaker yen, whereas an increase in fuel prices is not passed through to commodity prices quickly, leading to financial difficulties in farm management. Since somebody must bear the oil price variation risk, both policy makers and farmers need to understand the nature of price risk in this time of unstable imported oil prices. Hence, it is necessary to grasp the effect of crude oil prices and exchange rates on closed system horticulture, but little literature has focused on the relationship between the price of energy and horticulture.
The objective of this paper is, first, to figure out the current economic situation of Japanese closed system horticulture by interviewing six horticultural farmers in Moka city, Tochigi Prefecture. Then, we investigate if a long-term relationship exists between the prices of imported crude oil and fuel oil, using the Johansen co-integration test. The co-integrating equation, which describes the long-run relationship between variables, is estimated using the VECM model. We use this to calculate farm fuel expenses for different combinations of the international crude oil prices and the yen/dollar exchange rates, and uncover their impact on farm management.
Our results show that the linkage between imported crude oil prices and fuel oil prices is strong, and the deviation from the equilibrium is relatively quickly adjusted. Thus, the co-integrating equation can be used to predict the levels to which the actual fuel oil price will approach. If Dubai crude oil prices remain high and the government continues to favor a weak yen policy, the price of fuel oil could easily rise above the level reached in the summer of 2008 when many farmers struggled with high fuel costs. Under the most pessimistic scenario, the fuel oil price is highly likely to reach new record highs of around 140 yen per liter, which will have a serious negative impact on farm management. Policy makers as well as farmers should recognize this fact and prepare for sudden changes in international oil prices and exchange rates.
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