Presentation to the Kansas Summit on Natural Gas
Oct. 2, 2003
Carole Jordan
Kansas Department of Agriculture

Today’s meeting is timely, perhaps even critical, to deal with the issues of natural gas prices and their effects on Kansas agriculture.

I take every opportunity to remind people that events and circumstances which are detrimental to Kansas agriculture are detrimental to every corner of this state and, often, to consumers across the world. And the connections between agriculture and oil and gas production are very real. I was struck by the chart referred to earlier showing an almost uncanny correlation between the value of gas production and cash receipts for all Kansas crops from 1953 and 2001. This is published in the Kansas Energy Plan of 2003 on page 15.

In the past we have successfully harvested our energy resources to harvest our agricultural resources. Any action we can take to be energy independent in the future will benefit our harvests of tomorrow.

Kansas has moved from an exporter of energy to an importer since the end of the 1990s. I was born in the 1950s in Russell, Kansas. One of the first things I remember is my mom telling me and the other kids not to play on the oil well in the middle of our block in the middle of town on Fossil Street. In Russell in the 1950s it was just taken for granted that oil and gas were a part of our lives and the economy. I think we may have taken this resource for granted across the state for many years since.

In 2001 both cash crops in Kansas and the value of oil and gas production were around $2.5 billion. As oil and gas production shrinks, so does one of the legs of that famous three-legged stool of the Kansas economy. Something is going to have to be produced to fill the gap of lost oil and gas production.

In the department of agriculture we don’t have direct regulatory responsibilities with energy, but of course what happens to the farm economy affects our resources for consumer protection, water, environmental protection and food safety activities. And in our role as advocates for Kansas agriculture, we are keenly aware of how fragile the farm economy and many of our farm families really are.

My presentation today reflects my conversations with and facts shared by a number of Kansas farm groups, by KDA employees in the field, and Kansas State University, and I thank them for their help. I urge you to listen to Steve Irsik, whose story will be of more interest because he is living, farming and ranching where the situation strongly affects Kansas agriculture.

We are at a crossroads. It’s a dangerous one. Over the last 10 years the demand for natural gas has increased by nearly a fourth. Supply is basically stagnant. Production is decreasing. Prices continue to rise, and projections show the demand for natural gas could grow by half again in the next 25 years. Supply is colliding with demand.

Many segments of agriculture and agribusiness are very dependent on natural gas supplies, and have little flexibility to switch to other energy sources. This means direct effects on small family farmers, large farms and feedlots, and non-farm residents who work in energy dependent industries. And for the family farmer there is the double whammy of being natural gas consumers at home and in their business.

One of the most obviously energy dependent parts of agriculture is the fertilizer industry. Natural gas supplies more than 90 percent of the energy for the production of anhydrous ammonia. There is little or no flexibility or substitute. A natural gas price increase means an increase in fertilizer production cost, a decrease in supply, and a resulting increase in ammonia and nitrogen fertilizer prices to farmers.

For farmers and horticulturists, including the nursery and turf businesses, this means higher prices to buy fertilizer, or even difficulties in finding the supplies they need. It costs more to produce grain or other products. And usually grain producers cannot increase their prices to make up for higher input costs.

The ethanol industry is growing in Kansas and presents great possibilities for markets, for jobs and for the environment. Yet natural gas is an input into most ethanol production facilities and increased prices could negatively affect this promising segment of our economy.

Jeffery Williams, Richard Nelson and Michael Langemeir of KSU studied the impacts on production of higher energy prices in 2000 and 2001 compared to 1999. They found that higher prices for fuel, irrigation energy and fertilizer in those years raised production costs and lowered net farm income in 2001 by $8,059 per dryland farm and nearly $27,000 per irrigated farm. These are ominous numbers to contemplate for the upcoming growing season and into the future.

With high gas prices and related fertilizer and other input price increases, farmers have to work even harder to cut the costs of their operations. They must reevaluate their fertilizer use and carefully monitor their soil through soil testing. In some cases they can reduce the amount of fertilizer on a given crop. In other cases, it will be impossible to cut the amount of fertilizer used without also cutting their crop yield. They must make these and other decisions very carefully.

For the fertilizer industry, increased natural gas prices mean layoffs, production cuts, or in some cases, shutting down production or selling natural gas reserves. In Kansas these are important rural jobs that affect the fabric of our economy. For the country, this means increasing imports of fertilizer. I find it very troubling to increase our reliance on other countries to provide such an important input to our abundant agricultural production. To me, this brings up powerful issues of food security and, in fact, national security in these troubled times.

One of the factors that transformed Kansas into a powerful agricultural state is groundwater and the ability to irrigate, especially in western Kansas. In 2001 our farmers grew irrigated corn on nearly 1.5 million acres. Irrigation results in higher yields, so the costs of inputs are lower per bushel. In times of drought, irrigation is the only hope for a crop in a good part of the state.

Traditionally, natural gas has been the energy source of choice for running irrigation engines to draw groundwater from wells to irrigate the crops. It was readily available and reasonable compared to other energy sources. Electricity, propane and diesel are other possible energy sources, but until recently their comparatively higher costs, combined with the costs of buying or retrofitting equipment to run on a different fuel, made a change unpalatable.

But despite its long popularity as an energy supply, the Kansas Corn Growers say we are approaching the time that more of their growers are strongly considering a switch to diesel or electricity. Some already have done so, with economics reluctantly driving change.

According to Mark Rude, the water commissioner in the Department of Agriculture’s Garden City Field Office, in west central and southwest Kansas, 75 percent of the active wells still use natural gas, 20 percent use diesel, four percent electricity and one percent or less use propane. He believes there is a significant shift from natural gas to diesel fuel, with another five to 10 percent discontinuing irrigation entirely because gas prices are too high.

He believes producers will continue to produce corn if they have 450 to 500 gallon per minute wells in a pivot irrigation system. Higher pumping costs require bigger wells to keep profitability the same. In western Kansas, higher energy prices are pushing landowners to make decisions on whether or not to re-drill wells to improve yields. This is happening earlier than it would have without the increased gas prices.

Price and availability of natural gas have a significant effect on the operational choices made by many producers. They are questioning their options if gas prices remain high. Two drought years have also made irrigators realize the physical limitations of their irrigation systems and more cautious about continuing to rely on natural gas.

In addition to modifying their systems to use a different power source, some producers are making different crop choices. In some cases they are growing less irrigated corn, replacing it with milo, wheat and cotton. The price and availability of corn affect our important beef industry, with 100 car unit trains now importing corn from other state to supplement the markets in Western Kansas and fill the gap left by lower in-state corn production.

Our feedlots contribute greatly to Western Kansas and all of Kansas. We are consistently one of the leading beef production and processing states. Increasing natural gas prices affect the supply of feed to the feedlots, they affect their activities that are associated with irrigation, grain drying and feed manufacturing. Beef prices may be quite healthy now, but it’s been a long time coming. Increased input costs cut into profit margins. Feedlots and beef processing mean jobs and vitality in western Kansas.

It is important to note that cotton, once unheard of in Kansas, is becoming a choice for more farmers. Cotton production has increased greatly, with 28 Kansas counties growing more than 73,000 bales in 2002. Cotton requires significantly less water than traditional Kansas crops. Mark Rude says some producers in the southwest are producing good cotton crops after applying only four or five inches of irrigation water early in the growing season.

What’s keeping things together economically in Western Kansas? The low cost of debt. Despite high energy costs, the interest rate is low for operational loans as well as for capital improvements. The picture would not be pretty if interest rates were 8 to 12 percent. This also is helping maintain land values, but values may begin to decline in Grant County or other locations where declining water levels meet up with the loss of natural gas well head pressure or lack of alternative supplies of energy.

Agriculture is facing changes and challenges to deal with increased energy prices and decreased supplies. This is nothing new, but it will affect the bottom line for the entire state. Changes will occur. In the long run, some may be good changes but some will further stress our family farms, rural communities and job creating agribusinesses.
Earlier this week I had the good fortune to attend the Wind Energy Conference and the Prosperity Summit in Wichita. At those meetings I heard some debate about whether gas prices will stay high or go back down. Considering the fact that we are now an energy importing state, I would have to bet that they will stay high. We have a $2.5 billion production gap to fill and we’re not going back to the way things used to be with a young and abundant oil and gas industry.

That sounds dour and negative, but I am not. At the wind conference and the prosperity summit, I heard optimism, ideas and enthusiasm. We are moving into new terrain. New ways of harvesting natural gas and coal methane, ethanol, wind energy and biomass offer great and renewable ways to fill the state’s energy gap. Next week the Governor’s Rural Life Task Force will have its first issue team meeting, and that is the group which will discuss energy and infrastructure.

Any action we can take to decrease our imports of energy can benefit agriculture and us as a state. There is an incredible human energy buzzing in the state right now—with teamwork from SERC—the state energy resources coordination council, the Prosperity Summit, the Rural Life Task Force—I feel the state is ready to work together in a way I haven’t seen before to harness the energy we need to for successful harvests in years to come.

Thank you.