HIGH commodity prices and the ability to become more energy efficient will enable farmers to adapt to rising fuel costs, says SNOW BARLOW.

The intrinsic links between the issues of energy, water and the potential impacts of climate change have become abundantly clear over the past 18 months.

While much has been written about climate change, water scarcity and, more recently, the impending emissions trading scheme, the price of oil has continued its inexorable rise.

The alarm that accompanied oil prices first reaching US$100 a barrel is long forgotten.

Now, despite recent falls in oil prices that are largely seen as temporary, the previously unthinkable figure of $US200 a barrel looms as a distinct possibility.

As a major export industry, Australian agriculture is strongly connected to global markets, both for its products and its inputs.

In general terms, there is global parity in oil pricing, so Australian producers will not be at any particular international disadvantage in terms of fuel, fertiliser and chemical prices.

But oil at $200 a barrel means diesel prices well in excess of $2 a litre and well on the way to $3 a litre.

Nitrogenous fertilisers and farm chemicals will follow, because of the similarity in the feedstocks used to manufacture them.

At $200 a barrel, the price of oil would have essentially tripled in less than three years.

Because of the varying input profiles of different industries, the potential impacts will vary considerably.

In 2006, energy and energy-dependent inputs made up an average 30 per cent of the farm sector's total input costs.

But individual industries varied three-fold in their energy dependency, ranging from 45 per cent for a broadacre cropping enterprise to 15 per cent for a beef enterprise, with mixed farming somewhere in between.

The exact impact of a tripling of energy costs on these cost structures is difficult to estimate, but in broad terms we may expect the farm input costs for cropping enterprises to almost double, with energy and energy-dependent inputs reaching as high as 70 per cent of total input costs.

On the other hand, the input costs of a beef cattle enterprise may increase by about 30 per cent, with energy and energy-dependent costs rising to 35 per cent of total input costs.

Whether farmers can remain viable at these input cost structures will depend on the prices they can achieve for their produce and products and how energy efficient they can become.

The developing and much maligned biofuels industry may be an important part of the answer to this key question.

As oil prices increase, the demand for biofuels will almost certainly rise, as will the price paid for feed stocks for biofuel production.

The other key upward pressures on world grain prices - the increasing demand for animal protein, population-related increases in food demand and, potentially, climate change-related reductions in production - will remain or intensify.

Recent international assessments from Goldman Sacks and OECD-FAO confirm that current high grain commodity prices are unlikely to be transient.

As long as this direct link between energy prices and grain feedstock remains, it is possible that farm profitability and competitiveness can be maintained in these enterprises.

The animal-based industries appear to be in an intermediate position with these lower energy and energy-related input costs, and therefore less vulnerable.

Pasture-based animal industries, such as dairy and beef, may be in a position to benefit from the oil shock and its influence on grain prices, because many of their global competitors will have a greater dependence on grain.

We would expect the grain-based chicken and pork industries to be as dependent on grain commodity prices as their international competitors.

As with climate change, adaptation to these new operating environments is not about being the biggest or the strongest, but how smart and nimble farmers can be in adapting.

These oil prices and the associated rises in input costs are a clear warning of the need to reassess our farming systems in terms of all inputs - water, energy, fertilisers and chemicals.

The quicker we begin planning our farming operations around the changing conditions, the better we will adapt to them and the more competitive we will be internationally.

We have every reason to expect international food commodity prices will remain buoyant in the medium term, and this should give us the confidence to invest in more energy and water-efficient framing systems.

Snow Barlow is Professor of Horticulture and Viticulture at the University of Melbourne.