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Farm profits squeezed from both ends

Rising energy costs bump head-on with low commodity prices

OVER RECENT years, Charles Schlabs of Hereford, Texas, has reduced his annual corn acreage and increased his plantings of cotton.

Among the reasons for the crop shift at his farm southwest of Amarillo are low corn prices and the on-going concern that the farm's 22 irrigation wells are producing a tad less water with each passing season.

And now - wham-o - comes a doubling in just 12 months of the price of the natural gas he uses to power his irrigation pumps. The farm price now is $5.39 a thousand cubic feet (Mcf), compared to $2.71 Mcf in October of last year.

"If corn prices stay down and gas prices stay up, I may not plant a single acre of corn in 2001," says the Deaf Smith County producer. "I can water three or four acres of cotton on the same water it takes to irrigate one acre of corn. Our economic bottomline is under extreme pressure at both ends today - rapidly rising energy costs and low commodity prices."

A cotton crop can be grown with about five inches per acre of applied water per season, compared to 22 to 25 inches for corn.

Making an acreage change like Schlabs is considering is noteworthy because the Hereford area isn't in traditional "cotton country." It's corn country with nearby beef cattle feedlots. Cotton has gradually moved northward out of the South Plains over a decade as farmers have sought a lower-input commodity with emphasis on reduced water requirements.

This year Schlabs harvested a corn yield of 200 bushels per acre and close to 600 pounds per acre of cotton. This was very near normal despite the dry, hot weather.

"We had a perfect growing season up until the rains quit in June," he said.

Acreage this season included 1,460 acres of cotton, but a scant 75 acres were in corn. Schlabs estimates Deaf Smith County's corn acreage could be cut in half in 2001.

A Texas A&M University economist estimates the doubled price of natural gas has added $30 to $40 an acre to the cost of producing irrigated corn - depending upon irrigation method. "And the spooky thing is that we're hearing natural gas could go as high as $7 a thousand cubic feet soon," says Extension economist Steve Amosson of Amarillo. "That would really blow away the numbers. Thankfully, our irrigation season doesn't match the winter heating season in the United States."

Amosson has recently run up the current economics of crop production, with the higher fuel costs for irrigation pumping, for the House Agriculture Committee in Washington. The economist's budget last fall for irrigated corn production in the northern High Plains was $481.83, including an out-of-pocket outlay of $310. Now you can add another $30 to $40 per acre in natural gas fuel costs to that figure.

"The question now is how farmers are going to survive - if they can - at these cost levels," Amosson says. He illustrated that 200 bushel corn selling at $2 a bushel doesn't near pencil out a profit. The added fuel cost is equivalent to 20 bushels of corn at $2 a bushel.

But all energy costs, including electricity, fuel oils and natural gas affect everyone and are trending upward in price.

"Our irrigators are trying to figure out what their pumping costs are under the higher fuel price (natural gas)," notes Leon New, the veteran Extension irrigation specialist at Amarillo. He has been offering producers some up-dated guidelines at recent meetings, including a farm gathering in Hereford.

"The cost is pegged to a combination of gallons of water pumped per minute, the pumping lift (in feet), and the pump's operating efficiency," he explains. "Pump operating efficiency should be at least 55 to 60 percent." Generally, it takes 1,000 cubic feet of natural gas to pump one acre-inch of water from an average pumping depth.

New says one Mcf of natural gas provides approximately the same power as 65 kilowatt hours of electricity, six gallons of diesel or 11 gallons of LP gas.

He said High Plains growers are taking a "renewed look" at various alternative sources of fuels. The majority of irrigation wells on the Northern High Plains are powered by natural gas. Electricity is used in the shallow water areas of the South Plains.

Brenda Holland, a sales representative for Excel Energy in Amarillo, offered some projections on the "likely" increases in electricity costs for 2001. She said electricity costs are based upon two factors: the base rate and the fuel cost adjustment.

The base rate for farm irrigators is $.0462 per kilowatt hour in the company's Texas, New Mexico and Kansas service region.

The fuel cost factor is the cost that can change. The current cost (base rate plus fuel factor) is $.0642 per Kwh for irrigated farm customers.

The forecast total for 2001, she indicated, will rise to $.0780 per Kwh. She said the company's fuel for generating electricity is 70 percent coal and only 20 percent natural gas.

"Fortunately, the season when we use the most natural gas (in generating electricity) doesn't overlay on our crop irrigation season in the region," Holland noted.

Meanwhile, whether you only fuel up a car or truck, heat a home or pump irrigation water, all eyes are on fuel costs and the upcoming winter season. Fuel oil supplies nationwide are reported to be 65 percent lower than at this time a year ago. Along with predictions that natural gas prices could hit $7 Mcf, there is concern, because of world political turmoil, that oil might reach $50 a barrel.

IN DALLAS, TXU Gas and Electric estimates that its average bill for natural gas customers has climbed 26 percent since June, reflecting the higher price it is paying for natural gas.

Other U.S. utility companies are also warning their customers to expect much higher bills as cold weather arrives.

"I think it's going to be a pretty serious event," said Charles Matthews, a member of the Texas Railroad Commission. "I'm predicting that heating bills are going to be between 40 to 50 percent higher than last year. That's a serious issue for homeowners and owners of businesses and others who use natural gas."

A recent hearing by the U.S. Senate Energy and Natural Resources Committee focused on heating oil supplies in the Northeast, but Sen. Pete Domenici (R-N.M.) said people should be just as concerned about natural gas. "I would say to Americans who are sitting around, Americans reading about the energy crisis, hold on to your pocketbooks," Domenici said, "Because you ain't seen nothing yet."

Propelling the utility bills upward is the increase in natural gas prices this year. A unit of gas - a million British thermal units - closed at an all-time high of $5.36 on Oct. 12 on the New York Mercantile Exchange.

Meanwhile, the National Weather Service, a part of the National Oceanic & Atmospheric Administration, has projected temperatures should be close to normal. That means colder than the 1999-200 winter, the warmest on record. Texas is predicted to be warmer and wetter than normal, although not as warm as last year.

"We've probably forgotten over the last three years what a normal winter is like'" said NOAA Administrator D. James Baker. "With La Nina and El Nino out of the way, normal (defined as the period 1961-1990) winter weather has a chance to return to the United States this year."

Longer-range, the United States is moving toward de-regulation of the electric industry, including pricing. A study by Texas Tech University economist Phil Johnson suggested that such de-regulation likely will be "unfavorable" in terms of electricity costs to farmers who irrigate.

As to his corn and cotton production systems, producer Charles Schlabs says he "already has installed about all the technology (in irrigation) available."

He's a regular user of the LEPA (low energy precision application) irrigation system and his rows are laid out in circles for greatest water-use efficiency.

"I have done about all I can except to install sub-surface drip irrigation. Considering its high cost (of installation) and today's corn and cotton prices, I don't think I'm ready to go there just now."

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