Economics of Kenaf Production in the Lower Rio Grande Valley of Texas

1. INTRODUCTION
2. POTENTIAL ECONOMIC RETURNS
3. CONCLUSIONS
4. REFERENCES
5. Table 1
6. Table 2
7. Table 3
8. Table 4
9. Table 5
10. Table 6
11. Table 7
12. Table 8
13. Table 9

INTRODUCTION

Fibers, both natural and synthetic, are a mainstay of several major industries. The primary focus of the kenaf development to date has been on the newsprint industry with its annual world production near the 30 million tonnes level (Taylor et al. 1982). U.S. publishers and other users account for nearly half of the world's total consumption. Annual production of newsprint in the United States is approximately 5 million tonnes. Traditionally, imports have accounted for about 60% of U.S. consumption and demand has steadily increased at about 2.5% annually

Kenaf International has developed projections indicating that by 1998 the U.S. newsprint industry alone could require the kenaf production from more than 400,000 ha in the Southern United States without affecting significantly the volume of imports or the consumption of wood fibers. Kenaf fibers can also be used in the manufacture of a wide range of pulp, paper, and paperboard products and may be a substitute for fiberglass and other synthetic fibers.

The worldwide potential of kenaf as an industrial raw material could make it a major crop in local production areas. In addition, the crop provides excellent soil cover until field removal and could reduce the pressure and current political controversy regarding deforestation by providing an alternate fiber source for the pulp and paper industry that is managed as a low input agricultural crop.

What does this mean to farmers in the lower Rio Grande Valley of Texas? About one hectare of irrigated cropland in South Texas can generate enough fiber to produce about 12.25 tonnes of newsprint using the KTMP process developed by C-E Sprout-Bauer, Inc. and Canadian and Pacific Forest Products Limited (Kugler 1988). Kenaf International is working with several companies to develop the Kenaf Rio Grande Newsprint Project (K-Rio). K-Rio plans to manufacture about 235,000 tonnes of newsprint annually, requiring the production of about 19,200 ha of kenaf

About 60% of the Valley's 400,000 ha of cropland is irrigated. Given the size of the capital investment for a newsprint mill that will be completely dependent upon kenaf for its year round production, K-Rio expects to contract for at least 80% of its required acreage with farmers that are connected to the Valley's extensive irrigation system.

K-Rio is committed to supply good quality seed to local farmers, most of whom will enter into multiple year contracts to supply the mill with fiber. The farmer will be only responsible for growing the kenaf and the mill will harvest the kenaf and transport the field-dried kenaf stalks to its fiber yard. The critical challenge in this arrangement lies in creating an acceptable or advantageous economic situation for the production of kenaf while maintaining competitive prices for the finished product and attractive returns for investors.

POTENTIAL ECONOMIC RETURNS

The above experience made it possible to develop general farm practices for the area. Continued work by Rio Farms and the USDA/Agricultural Research Service at Weslaco should improve the current recommendations for production inputs and practices.

The development of farm budgets for new crops is by definition an inexact science subject to continuous revisions. However, it remains a crucial part of assessing the potential commercialization of a new crop. Information from research plots is useful, and must be tested against experience gained from growing the crop on a commercial scale in farmers' fields. Input from local farmers who are potential growers of the new crop is vital. By being candid and selective with key farmers, project organizers can limit the risk of unrealistic expectations that often accompany the "promotion" of new crops.

Projected input cost estimates for irrigated and non-irrigated kenaf production are listed in Tables 1 and 2. The estimations are based on direct field experiences over several seasons. The returns projected by these budgets indicate that the crop should be profitable based on what are believed to be average yields. The farmer would incur limited and known costs and realize a secure market. Only existing equipment is needed for land preparation and planting and no harvesting or hauling expenses will be incurred. The kenaf crop will require relatively little management compared to other crops grown in the Valley.

The actual price for kenaf will be determined at the time of contract negotiations between K-Rio and local farmers. The price paid must consider the cost of growing kenaf, the comparable returns and risks of producing traditional crops, and the relative prices paid by competing newsprint operations for their fiber supply.

The primary variable for farmers in kenaf production will be yield. The price will be fixed contractually and the costs will be relatively uniform for local farmers aside from irrigated versus non-irrigated practices as input choices are minimal. Tables 3 and 4 examine the effect of five yield levels on the projected gross revenue, first net (gross revenue less variable costs), and second net (gross revenue less variable and land costs) for kenaf. The former is relevant to an owner-operator, and the latter is of interest to tenant operators.

In contrast to kenaf, current producers of white corn, grain sorghum (milo), and upland cotton face comparatively greater uncertainty as to yield and costs. Yields of these traditional crops are more vulnerable to weather, disease, and insects. Costs will vary as farmers attempt to control crop damage. However, prices for these established commodities constitute the principal variable for local farmers as they make their production plans. Tables 5, 6, 7, 8 examine the effect of five price levels on the projected gross revenue, first net, and second net of traditional row crops in the lower Rio Grande Valley

CONCLUSIONS

A direct comparison between projections for irrigated kenaf with the anticipated gross revenues, first and second net returns for white corn, milo, and cotton is shown in Table 8. Remember, yields were varied for kenaf and prices were varied for the three established crops. The table shows the differences between the returns for kenaf and those for the other crops.

The positive differences shown above for the first and second net returns indicate that farmers should keep more dollars per hectare by growing kenaf than they generally can expect to receive from corn, milo, and cotton. The kenaf crop requires fewer inputs and is less vulnerable to agriclimatic and pest factors. The other crops are generally at risk throughout the growing and harvest seasons.

Alternatively, the mean expectations for each crop under irrigated conditions (i.e., kenaf yield of 16.8 tonnes/ha, white corn @ $3.50/bu, milo @ $4.50/cwt, and upland cotton @ $0.60/lb) can be calculated as shown in Table 9.

These budget estimates help to provide a means of comparing potential returns from kenaf against their expected returns from established crops. While this approach has its limitations and must be viewed and interpreted with caution, it gives us preliminary information about the comparative riskiness of kenaf production and an analysis that can be revised as more accurate data are obtained.

Other considerations that must also be factored into the farmer's decision making include the new crop's probable impact on crop rotations, government programs, crop insurance requirements of agricultural lenders, and returns to landowners. All things considered, the introduction of a new crop into U.S. agriculture is neither simple, quick, or risk-free. Rather it requires thoughtful and courageous decision makers throughout the evolving production-marketing-consumption system to make reality out of visions.

REFERENCES

• Kugler, Daniel E. 1988. Kenaf newsprint: Realizing commercialization of a new crop after four decades of research and development. U.S. Department of Agriculture: Washington, DC.

• Taylor, Charles S., Gary L. Laidig, Robert S Puls, and Jon G. Udell. 1982. General feasibility study "Kenaf newsprint system." American Newspaper Publishers Association: Reston, VA.

Task			Unit	$/Unit	Mean $/ha	Mean ($/tonne)	% of cost
Land preparation:
	Chisel		1	14.83	14.83	0.88	3
	Disc only		1	13.59	13.59	0.81	3
	Disc/Herb./Disc		2	13.59	27.18	1.62	6
	Apply preplant fert.		1	8.65	8.65	0.51	2
	Bedding		1	16.06	16.06	0.96	3
		subtotals			80.31	4.78	16
Agri-chemical inputs:
	Herbicidey		1	14.83	14.83	0.88	3
	Preplant Fertilizerx		1	49.42	49.42	2.94	10
	Sidedress Fertilizerw		1	29.65	29.65	1.76	6
		subtotals			93.90	5.58	19
Seed & planting costs:
	Seedv		11	4.40	49.42	2.94	10
	Planting		1	19.77	19.77	1.76	4
		subtotals			69.19	4.12	14
Irrigation costs:
	Wateru		2	14.83	29.65	1.76	6
	Labor		2	12.36	24.71	1.47	5
		subtotals			54.36	3.23	11
Other operation costs:
	Apply sidedressing		1	8.65	8.65	0.51	2
	Cultivation		1	9.88	9.88	0.59	2
		subtotals			18.53	1.10	4
Total variable costs					316.29	18.81	65
Provision for land chargest					172.97	10.29	35
Total estimated costs					489.26	29.10	100
Projected return or profits					221.40	13.17	45

^zEstimates based on experience and conditions in the lower Rio Grande Valley of Texas.
^yBased on using Treflan at label rate for cotton. Product not yet cleared for kenaf.
^xBased on 225 kg of 9-29-0 in liquid form.
^wBased on 112 kg of Anhydrous Ammonia.
^vTo be supplied by Mill and deducted from payment.
^uBased on application of 6 acre-inches.
^tBased on value of cash rented irrigated cotton land.
^sComputed at 70% of Variable Costs.

Task			Unit	$/Unit	Mean $/ha	Mean ($/tonne)	% of cost
Land preparation:
	Chisel		1	14.83	14.83	1.10	4
	Disc only		1	13.59	13.59	1.01	4
	Disc/Herb./Disc		2	13.59	27.18	2.02	7
	Apply preplant fert.		1	8.65	8.65	0.64	2
	Bedding		1	16.06	16.06	1.19	4
		subtotals			80.31	5.97	21
Agri-chemical inputs:
	Herbicidey		1	14.83	14.83	1.10	4
	Preplant Fertilizerx		1	49.42	49.42	3.67	13
	Sidedress fertilizerw		1	29.65	29.65	2.20	8
		subtotals			93.90	6.98	24
Seed & planting costs:
	Seedv		9	4.40	39.54	2.94	10
	Planting		1	19.77	19.77	1.47	5
		subtotals			59.30	4.41	15
Other operation costs:
	Apply sidedressing		1	8.65	8.65	0.64	2
	Cultivation		1	9.88	9.88	0.73	3
		subtotals			18.53	1.38	5
Total variable costs					252.04	18.74	65
Provision for land chargesu					135.91	10.10	35
Total estimated costs					387.95	28.84	100
Projected return or profitt					176.43	13.13	45

^zEstimates based on experience and conditions in the lower Rio Grande Valley of Texas.
^yBased on using Treflan at label rate for cotton. Product not yet cleared for kenaf.
^xBased on 225 kg of 9-29-0 in liquid form.
^wBased on 112 kg of Anhydrous Ammonia.
^vTo be supplied by Mill and deducted from payment.
^uBased on value of cash rented non-irrigated milo land.
^tComputed at 70% of Variable Costs.

Assume:	Projected price:	$44/tonne
	Variable cost:	$316/ha
	Land charge:	$173/ha

	Returns per hectare
Yield level (tonnes/ha)	Gross	1st nety	2nd netx
14.8	$652	$335	$163
15.8	$696	$379	$207
16.8w	$740	$423	$251
17.8	$784	$467	$295
18.8	$828	$511	$339

^zEstimates based on experience and conditions in the lower Rio Grande Valley of Texas.
^yProjected net return after subtracting variable costs from G ross Revenue as viewed by an owner/operator.
^xProjected net return after subtracting variable costs and land charges from Gross Revenue as viewed by a tenant operator.
^wExpected average yield level for kenaf in the Valley under irrigated conditions based on experience to date.

Assume:	Projected price:	$44/tonne
	Variable cost:	$252/ha
	Land charge:	$136/ha

	Returns per hectare
Yield level (tonnes/ha)	Gross	1st nety	2nd netx
11.95	$526	$274	$138
12.70	$559	$307	$171
13.45w	$592	$340	$204
14.20	$625	$373	$237
14.95	$658	$406	$270

^zEstimates based on experience and conditions in the lower Rio Grande Valley of Texas.
^yProjected net return after subtracting variable costs from Gross Revenue as viewed by an owner/operator.
^xProjected net return after subtracting variable costs and land charges from Gross Revenue as viewed by a tenant operator.
^wExpected average yield level for kenaf in the Valley under non-irrigated conditions based on experience to date.

Assume:	Avg. yield:	85 bu/acre (210 bu/ha)
	Variable cost:	$450/ha
	Land charge:	$173/ha

	Returns per hectare
Price level ($/bu)	Gross	1st nety	2nd netx
$2.50	$525	$75	-$98
$3.00	$630	$180	$7
$3.50w	$735	$285	$112
$4.00	$840	$390	$217
$4.50	$945	$495	$322

^zEstimates based on experience and conditions in the lower Rio Grande Valley of Texas.
^yProjected net return after subtracting variable costs from Gross Revenue as viewed by an owner/operator.
^xProjected net return after subtracting variable costs and land charges from Gross Revenue as viewed by a tenant operator.
^wExpected average price level for white corn in the Valley under irrigated conditions.

Assume:	Avg. yield:	111 cwt/ha
	Variable costs:	$378/ha
	Land charge:	$148/ha

	Returns per hectare
Price level ($/cwt)	Gross	1st nety	2nd netx
$3.50	$389	$11	-$137
$4.00	$445	$67	-$82
$4.50w	$500	$122	-$26
$5.00	$556	$178	$30
$5.50	$612	$234	$85

^zEstimates based on experience and conditions in the lower Rio Grande Valley of Texas.
^yProjected net return after subtracting variable costs from Gross Revenue as viewed by an owner/operator.
^xProjected net return after subtracting variable costs and land charges from Gross Revenue as viewed by a tenant operator.
^wExpected average price level for grain sorghum (milo) in the Valley under irrigated conditions. No provision made for government support payments.

Assume:	Avg. yield:	809 kg/ha
	Variable costs:	$741/ha
	Land charge:	$173/ha

	Returns per hectare
Price level ($/kg)	Gross	1st nety	2nd netx
$1.10	$890	$148	-$25
$1.21	$979	$237	$64
$1.32w	$1,067	$326	$153
$1.43	$1,156	$415	$242
$1.54	$1,245	$504	$331

^zEstimates based on experience and conditions in the lower Rio Grande Valley of Texas.
^yProjected net return after substracting variable costs from Gross Revenue as viewed by an owner/operator.
^xProjected net return after subtracting variable costs and land charge, from Gross Revenue as viewed by a tenant operator.
^wExpected average price level for upland cotton in the Valley under irrigated conditions. No provision made for government support payments.

		Gross revenue	First net	Second net
Yield/price level	Crop compared with kenaf	(kenaf minus other crops, $/ha)
Low	White corn	127	260	260
	Grain sorghum	263	324	300
	Upland cotton	-238	187	187
Med. low	White corn	66	199	199
	Grain sorghum	251	313	288
	Upland cotton	-283	142	142
MEAN	White corn	5	138	138
	Grain sorghum	324	301	276
	Upland cotton	-328	97	97
Med. high	White corn	-56	77	77
	Grain sorghum	228	290	265
	Upland cotton	-373	52	52
High	White corn	-117	16	16
	Grain sorghum	216	278	253
	Upland cotton	-418	7	7

NOTE: Positive numbers indicate an advantage to kenaf, negative numbers indicate a disadvantage for kenaf.

	Mean projections ($/ha)
Budget category	Kenaf	Corn	Milo	Cotton
Gross revenue	740	735	500	1,067
Variable costs	-316	-450	-370	-741
1st net return	423	285	122	326
Land charges	-173	-173	-148	-173
2nd net return	251	112	-26	153

^zComparisons of mean projections from previous budgets; i.e., kenaf @ $44/tonne & 16.8 tonnes/ha, white corn $3.50/bu & 210 bu/ha, milo @ $4.50/cwt & 111 cwt/ha, and cotton @ $1.32/kg & 809 kg/ha. Based on actual crop experience in the lower Rio Grande Valley of Texas, 1987-88.