Many people in our community have been negatively impacted by our recent floods. I am sure I cannot begin to understand how hard it has been for those that were impacted directly. I know this flood has had significant impacts on many in our local dairy industry, and I am sure some of the negative effects will exist for years to come.
This flood has occurred during the same time that the dairy industry is already facing some unusually high costs of production. We have known for years that relatively inexpensive fossil fuel has helped drive much of our economy. However, things appear to be changing and increased fuel costs are significantly affecting the way we do business.
In the past year, we have seen the costs for grain and hay at almost record levels. Alfalfa hay is commonly purchased by local dairies from Eastern Oregon and/or Washington and fed in addition to other feedstuffs. Hay availability has been extremely short this year and consequently has increased in costs. Those costs have gone up 10-15% over the past several years. Increased transportation costs have been significant, but are only partially to blame.
Grain costs have also increased dramatically in the past few months. In September, corn was actively trading for just over $2.00 a bushel in the Midwest. Currently, December 2006 corn futures are around $3.60 a bushel. That is a 70% increase! Corn production this year was fairly good after 3 years of record production. So what has changed?
A recent report from Iowa State University highlighted the growth in corn-based ethanol production in the US and suggested this market is the primary reason corn supplies are tight. In their report, they have made preliminary estimates of the impact this market could have on corn and other grain products. It is estimated with the current ethanol tax policy, and if crude oil, natural gas and distillers grains stay at current price levels, the break even price for corn-based ethanol production is $4.05 per bushel. Obviously, this is still much higher than current corn futures trading prices. They estimate at this price, corn-based ethanol production would reach 31.5 billion gallons a year, or about 20% of the projected US fuel consumption in 2015. Even if their estimates are way off, increasing the number of ethanol producing plants in the US will continue to compete with animal agriculture for corn and affect all grain prices.
Locally Grown Forages
Those that know me know I like to ramble about things from time to time, but the subject I really want to talk about today is how valuable our locally grown grass production is and how significant a major flooding event can be to local producers. High quality forages are important for efficient milk production from dairy cows. Forages provide the effective fiber that is critical for good health and longevity. Inadequate effective fiber in the cow’s diet is one reason for acidosis and milk fat depression. Historically, as forage quality has changed, we have adjusted the forage to concentrate or grain ratio in dairy diets to compensate for reductions in energy and protein availability to the cow. Now that concentrate values are sky rocketing and alfalfa hay is in short supply, this flexibility has been drastically reduced, further emphasizing the necessity to produce as much high quality feed locally as we can. This need for high quality forages in our cows’ diet has placed a premium value on these commodities in the market place. As with all markets, the economic rules of supply and demand drive the prices paid for high quality forages.
What's Grass Really Worth?
This question has been debated for many years in Tillamook County. In the past, when hay was cheap and grain prices low, the answer was a lot different. You can look at this in several different ways. After you see how I compare it, you will understand doing an effective comparison is not simple and is debatable. My comparison is an example and I am using alfalfa hay as the most logical grass replacement. Choosing other feedstuffs like purchased corn silage would take another comparison.
First I would determine how much forage is typically produced and estimate the cost of production. The first cost of production is actually an establishment cost. Listed below is an example of prorated establishment costs. These are my estimates of what it will cost per acre to go back and plant fields that have been severely damaged due to flooding and sediment. Please note these costs do not account for the additional costs of log/debris removal, fences, culverts or other damages.
| Item | Price | Unit | Cost |
|---|---|---|---|
| Plowing | $50/hr | 1 hr | $50.00 |
| Discing 2x | $50/hr | 2 hr | $100.00 |
| Seeding | $30/hr | 1 hr | $30.00 |
| Seed | $1.50/lb | 40 lbs | $60.00 |
| Management | $10/acre | 1 acre | $10.00 |
| Total | $250/acre | ||
| Prorated (5 years at 10%) | $80.52/acre |
| Item | Price | Unit | Cost |
|---|---|---|---|
| Establishment over 5 years | $80.52/acre | 1 acre | $80.52 |
| Land | $150/acre | 1 acre | $150.00 |
| Mower | $40/hr | .5 hr | $20.00 |
| Chopper | $40/hr | .75 hr | $30.00 |
| Truck | $30/hr | .75 hr | $22.50 |
| Bagger | $40/hr | .75 hr | $30.00 |
| Site preparation | $150/bag | 1 bag = 12 acres | $12.50 |
| Bag | $300/bag | 1 bag = 12 acres | $25.00 |
| Total costs/acre | $370.52/acre | ||
| Total costs/ton bagged | $20.58/ton |
Comparing Local Silage to Purchased Alfalfa Hay
This number of $20.80 represents what I estimate the costs a producer might have in locally grown grass silage. Next, I am going to use some weighted averages to estimate what this silage is worth compared to one of the more common alternatives. In this example I am using alfalfa hay that is $170 ton delivered, 90% dry matter and 22% protein, compared to our local silage that cost us $20.58 ton and is 33% dry matter and 20% protein.
- Market price of reference hay: $170.00
- Dry matter of reference hay: 90%
- Crude Protein of reference hay: 22%
- Dry matter of forage you want to price: 33%
- Crude Protein of forage you want to price: 20%
- Divide line 4 by line 2: .4
- Divide line 5 by line 3: .91
- Multiply line 7 times line 6: .36
- Multiply line 8 times line 1: $61.20
- Estimated loss in storage: 20%
- Subtract line 10 from 100%: 80%
- Multiply line 9 times line 11: $49.00
Line 12 represents the value of your forage compared to one available commercially in the market place. It is important to remember we adjusted for only moisture, crude protein and loss in our storage system. So what I am arguing is that our feed locally costs us around $20.58 ton and it is worth approximately $49 ton compared to the most available alternative. This results in around $500 per acre per year net in grass grown for local dairies (49 - 20.58 = $28.42 X 18 tons per acre or $511.56).
Like all estimates, we make assumptions that don’t apply in some cases. However, I hope you can see that if you are milking cows in Tillamook County the value of locally grown grass has gone up. The economic hardship faced by many producers locally is extreme and will take a lot of hard work and investment to recover from. Conservative estimates are that at least 1250 acres of pasture that will need to be renovated this spring because on the recent flood. Using my numbers, after pastures are cleaned Tillamook County producers will spend ($250 acre X 1250 acres) $312,500 replanting their fields. If I estimate they can get these fields re-done and productivity is reduced by only 50% in 2007, we should see a reduction in pasture that is equivalent to another $319,715.
Natural disasters are serious, potentially devastating, and obviously costly. I am afraid these estimates are even too conservative to capture the full effect of the flood, but I hope this has helped you appreciate the value of locally grown forages and appreciation for those who are trying to make a living on the land.
