Prospects for Profitability in Louisiana’s Feed Grain Industry

Linda Benedict  |  10/30/2006 9:42:33 PM

Kurt M. Guidry

Over the past 20 years, the feed grain industry in Louisiana has generated an average farm gate value of roughly $136 million per year. Consisting of corn, grain sorghum and wheat production, the feed grain industry has been a significant contributor to the total agricultural industry in the state. During 2005, feed grains were produced in more than 30 parishes representing 540,000 acres and generating a farm gate value of more than $135 million. Corn was produced in 30 parishes in 2005 on 340,000 acres and generated farm gate values of roughly $101 million. Grain sorghum was also produced in 30 parishes but on only 90,000 acres and generated farm gate values of roughly $19 million. Winter wheat was produced in 31 parishes on 110,000 acres and generated farm gate values of roughly $15 million.

Despite being a significant component of the total Louisiana agricultural industry, the exact nature of the impact on the state by the feed grain industry has been unpredictable. Acreage devoted to feed grain production has been extremely volatile over the past 20 years as changes in government policy as well as marketing and production environments have either enticed land into or out of production. Corn acreage in the state has ranged from fewer than 150,000 acres to 700,000 acres over the past twenty years. Winter wheat acreage has ranged from 100,000 acres to 440,000 acres during this period. Grain sorghum acreage has ranged from 85,000 acres to 370,000 acres.

Several issues have contributed to change in feed grain production in the state. First, for many producers, feed grain production has traditionally been a complementary cropping enterprise to their primary cropping interest. As such, as market factors changed, so did the interest in feed grain production.

Second, changes in government policy have allowed for more flexibility in crop enterprise selection decisions. This again has allowed producers to more freely react to market signals with less concern about the potential implications of planting decisions on government program payments.

Third, improvements in technology and productive capacity have allowed producers to drastically increase production efficiency. Average corn yields over the past five years have increased by 18 percent compared to the 20-year average (See Table 1 on page 14). Likewise, grain sorghum and wheat yields have improved 15 percent to 17 percent over the same period. This has been instrumental in altering the economics of feed grain production in the state.

Finally, in the case of wheat production, its adaptability for double-crop systems and its ability to generate cash flow for operations throughout the winter months have increased producer interest. All of these factors led to a renewed interest in feed grain production over the past 10 years.

As with most agricultural commodities, however, the production and marketing environments for feed grains have changed over the past five years. Foremost to these changes has been the dramatic increase in input costs. Despite improved production, drastically increased input costs have reduced the profitability of feed grain production. While input prices have historically experienced average annual increases in the range of 3 percent to 5 percent annually, recent sharp increases in fuel and fertilizer have greatly affected profitability.

Costly Fuel
Over the past five years, diesel prices have increased by an average annual rate of 12 percent per year (See Figure 1). During this past year, however, diesel prices have increased more than 24 percent. Likewise, fertilizer prices have increased by an average annual rate of 6 percent per year over the past five years but increased more than 13 percent this past year. With fuel and fertilizer representing 35 percent to 40 percent of total variable production costs for feed grains, these increased input prices have resulted in estimated increases of $0.20 to $0.30 per bushel in total variable production costs at average yields. This tremendous increase in costs has definitely affected profitability, putting much more emphasis on efficient production and marketing management. Those producers with lower than average yield capabilities have and will likely continue to find it increasingly difficult to project profits under the current inflated input prices.

Stagnant Prices
Unfortunately, at the same time of rising input costs, commodity prices have been predominately stagnate. Comparing average annual marketing year prices over the past 20 years indicates that prices for corn, grain sorghum and wheat have, at best, remained stable. Given this market environment, it is easy to understand the moderation in feed grain acres in the state. For 2006, corn acres have been projected at 300,000 acres while grain sorghum acres are projected at 80,000 acres. Wheat acres harvested in 2006 are projected at 110,000 acres. Currently, prices for the 2006 feed grains have shown moderate improvement over the previous year. While an improved market situation will help to ease some of the increases in input prices, profitability will still likely be largely determined by production. For those producers who can generate above-average yields, the combination of strong yields and slightly improved prices should offer some profit potential. With the drought conditions that have beset much of the state, however, the potential for above-average yields may be limited.

The general consensus is that input prices will largely be at inflated levels for the immediate future, and the long-run projection for profitability in feed grain production will likely be highly influenced by the producer’s ability to effectively market the crop and take advantage of marketing opportunities. As with all agricultural commodities, prices are highly influenced by supply and demand conditions. Fortunately, for the feed grain industry, the outlook for supply and demand has improved with lower total production and improving demand expected to moderate total stocks. While these traditional supply and demand factors should continue to be expected to influence price direction, other market factors have developed that could alter historical price relationships.

Speculative Funds
Increased interest in commodity markets by speculative funds has changed many of the traditional relationships expected in the market. Research indicates that commodity markets have, historically, generated higher returns with less risk than many other investment opportunities. As such, nontraditional investors have increased their interest and activity in many commodity markets, including feed grains. This has predominately been a positive for the commodity markets because these speculative funds have generally viewed these markets as longterm investments. Given their long-term view of the market, they have helped to support prices at levels higher than traditional supply and demand conditions would suggest.

The negative to this new interest in commodity markets has been increased volatility. Previous research has indicated that for many commodity markets, volatility has increased as much as 20 percent over the past five years. While this volatility provides more marketing opportunities for agricultural producers, it also increases the amount of price risk faced by producers.

In addition, there has been some evidence to suggest that this new activity has also altered traditional cash basis relationships. Basis is the difference in prices in the futures market and the local cash market. While continued research must be done to determine the exact impact, the general hypothesis is that the increased activity of the speculative funds has resulted in a weakening of cash basis levels. If this is the case, the traditional basis levels that producers have come to expect may have or will soon undergo a substantial shift. This could have implications on the type of marketing strategies producers may employ in marketing their commodity.

Biofuel Production
Another major factor in the markets for feed grains has been the increased interest in biofuel production. Ethanol production, in particular, has experienced tremendous growth over the past five years. For example, corn used in ethanol production has gone from less than 5 percent of total corn use to nearly 20 percent expected for the 2006-07 marketing year. This expansion of an additional market for feed grains has helped to create a more favorable supply and demand situation for most feed grains. Expansion in biofuels production is expected as legislation at both the federal and state levels is expected to continue to spur further development. Current plans for expansion of ethanol capacity could mean additional demand of more than 1 billion bushels for corn. Local development and expansion of biofuel production could lead to increased marketing and value-added opportunities available to Louisiana feed grain producers.

The feed grain industry in Louisiana still faces many challenges. With rising input costs, profitability of these commodities will continually be in question. As a result, producers will have to continue to take advantage of technology that allows them to more effectively and profitability grow the commodity by either reducing input usage or by increasing productivity. Also, producers will have to become more aggressive in taking advantage of marketing opportunities as they exist, including the potential opportunities offered by value-added enterprises such as biofuels. As a result, it is likely that the industry will continue see the historical volatility in acreage as marketing and production environments continue to evolve and change.

(This article was published in the fall 2006 issue of Louisiana Agriculture.)
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