Many farmers, who for years have serviced feedyards and other operations with grain and silage, are more interested these days in crops that yield fodder for the textile mill — not the feed mill.
Natural gas prices are nearly double those of early 2005, and triple what they cost farmers — and feedyards — two to three years ago.
The typical western Kansas, and Texas/Oklahoma Panhandle, farmer depends on efficient irrigation to produce corn crops that average 200-220+ bu./acre, something Iowa growers only dream about. But to make those yields, up to 30 in. of supplemental irrigation water must be applied. And with natural gas running $10/mcf (1,000 cu. ft. of natural gas) or more, there's virtually no way even a 220+-bu. crop will pencil out.
As a result, many former irrigated-crop growers have become cotton farmers. They're chancing the risk of not having enough heat units to grow cotton, which thrives in hot weather, as long as there's enough water. Growers who have switched to cotton also are impacted by the higher irrigation fuel costs, but that crop can make super yields with virtually half the water needed for corn. Irrigation inputs per acre are slashed by up to 50%.
Other growers have switched to cotton because their irrigation wells, fed from the vast Ogallala Aquifer that stretches from South Dakota to Texas, are running short on water, even dry in some cases. New irrigation technology has enabled good managers to get the most out of their water, but even that leaves some wells short for producing a solid corn crop.
Already a grain-deficit area that ships in virtually half of its corn via unit rail cars, regional feedyards face further dependency on the Corn Belt grower to furnish the goods. That can spell less timely deliveries, possibly a higher cost per bushel, and the end of a cozy relationship with many neighbor farmers who were always eager to truck their corn directly to the feed mill.
Mutt Schuman, a Cactus Feeders commodity buyer in Amarillo, TX, says area feedyards and grower operations can expect to see a change in the availability of regional grain from farmers who had been steady, reliable suppliers of corn and silage.
“Our (Cactus Feeders) two Kansas feedyards receive nearly 100% of their corn from regional growers,” Schuman says. “Our four northern Texas Panhandle feedyards receive about 65% of their corn and silage from regional farmers. But for our three southern Panhandle feedyards, about 95% of grain is already railed in.
“At some point, we'll be more grain-deficit in the north plains (northern Panhandle and Kansas) and will have to depend more on supplies of corn railed in from the Midwest,” he adds.
With continued low corn prices and higher input costs, Steve Amosson, Texas A&M University Extension economist in Amarillo, says he hasn't seen a cost/price squeeze like the one faced by farmers heading into the 2006 growing season.
“We're faced with the highest projected energy costs ever, so things are going to have to be penciled very closely,” he says. “With $10 gas, it's almost double what we faced last year, and it will severely hurt the feasibility of irrigation crops.”
By reviewing his data on estimated crop costs and returns, it's easy to see why more growers in the region are switching to cotton. And, as the figures show, even applying half the irrigation water for cotton may still generate a loss.
In his 2006 estimates for the Texas Panhandle, Amosson says gross returns for a 210-bu. corn crop at a price of $2.65/bu. (including government payments) will be about $556/acre. That includes application of 21 in. of irrigation water. But variable costs are $590, producing a loss of about $34/acre. Continued dry weather in the region could easily add the cost of 5 in. more of irrigation water to input costs.
Cotton actually doesn't look much better, Amosson says. At a 52¢/lb. government loan price and an 850-lb. yield (just under 2 bales/acre), the gross return is about $502/acre. But only 12 in. of water is applied, holding variable costs to $526, for a loss of about $24.
But with better cotton varieties on the market, and Roundup Ready herbicide technology available, some growers are seeing three-bale or higher cotton. The extra 485 lbs. of lint will pencil to an extra return of $220-$250/acre. And with the government marketing loan program for cotton, and the potential for additional payments for higher quality, much more could be added to the 52¢ price.
No wonder five cotton gins have been built in the region in recent years, four in the Texas Panhandle and another as far north as Moscow, KS, in the state's southwest corner. Those 60,000-bale capacity gins can process 250,000-300,000 bales/year.
With a yield of two bales/acre, that totals about 150,000 acres, many of which previously produced corn for area feeders. Meanwhile, existing gins are being refurbished to meet growers' cotton-production demand.
Fortunately for stocker operators, high feeder-cattle prices mean farmers haven't been shy about irrigating wheat pasture. Unfortunately, the drought that's burnt up the region since early fall 2005 has required more supplemental water to produce any forage at all for grazing. Amosson's cost-return breakdown shows a $34/acre loss for a farmer producing 65-bu. wheat from 15 in. of irrigation at a price of $3.45, with an extra $45 coming in from grazing fees.
Many farmers profit from running stockers on their wheat. Many don't start a combine and completely graze out the forage. Other growers have long been successful in producing milo, another feed grain supply for area feedyards, but milo also fails to yield a profit in many cases.
Competition for corn
Finishing and growing yards also are competing with an influx of dairies into the region, as well as plans for several new ethanol plants. The latter includes two plants in Hereford, TX — where ADM already has a unit train set up to keep yards supplied with Midwest corn.
Schuman says there likely will be more corn price volatility with the ethanol plants, which annually will require about 40 million bu. of corn each for production. The two Hereford ethanol plants each will require approximately eight, 110-car shuttle train shipments of corn/month, in addition to what the area already receives.
“The railroads can likely absorb that kind of demand, but we'll probably see more volatility in the corn basis,” Schuman says, adding that basis could increase by about 10¢/bu. in some areas. That's good for local farmers likely to have some corn in their rotations, but bad for feedyard closeouts.
Schuman says his approach to buying grain will be more as a supply-chain manager than a commodity buyer.
“I have to rely more on an elevator in the Midwest to get farmers there to contract corn, then have it railed in, then make sure delivery is as timely as possible,” he says.
Steamflaking costs rising
While higher natural gas prices are sending growers from corn to cotton, it's sending feedmill operation costs through the roof. That means less profitability.
“I'm not sure about the economic threshold for natural gas needed to steamflake corn vs. dry-rolling it,” Schuman says. “With lower corn and other feed grain prices, I doubt most yards will stop steamflaking.”
Andy Rogers, co-owner of Rogers and Sons, Ltd., an 11,000-head capacity feedyard in Dimmitt, TX, says he's seen the cost of natural gas to run his feedmill jump 30%.
“We haven't stopped steamflaking,” he says. “We just raise the feed markup to cover the increase.”
Thus, a closeout bill for a 700-lb. steer on feed 150 days this winter could see an additional $1/cwt. cost increase.
“Sometimes, that $1 can be your profit,” Rogers says. “But if your costs increase, you have to pass it to the customer. All our costs have increased, feed, pipe, equipment, etc.”
Surcharges also are common for grain transportation to the feedyard. Schuman says the per-gallon surcharge on diesel has been 15-18%, and even higher following last fall's hurricanes when fuel prices surged to their highest levels.
“That 15-18% probably adds only about 50¢/head to the cost of finishing an animal,” Schuman says. “Most feeders probably won't notice that, but it's still an example of how high energy prices are impacting our industry.”
Larry Stalcup is a freelance ag writer based in Amarillo, TX.