No crystal ball when dealing with commodities

My previous column in this magazine focused upon my own recent experience with introducing irrigation to a previously dryland parcel. Mostly, it described my conning the neighbor into irrigating a portion of my adjacent pasture during a drought with his temporary traveling big gun system. I ended the column with some implication about becoming a test case for developing irrigation in a climate-changed region. A few weeks after publication, while talking to Chris Henry, PhD, PE, a University of Arkansas extension specialist, about irrigation in the Mississippi Delta, he unexpectedly asked if I had considered installing a pod system or one of several other relatively low-capital irrigation systems for my pasture. Surprised and totally empowered knowing that at least one, or maybe dozens, read this column, I have begun installing infrastructure for the system I will ultimately implement. As my own case study, I’ll report progress in a later column. 

The latter part of the summer was also spent helping renegotiate 2021 irrigation water leases between central Nebraska irrigators and the Platte River Recovery Implementation Program (PRRIP). Unsurprisingly, irrigation water lease terms are highly correlated to commodity prices, specifically for corn and soybeans in this area. Previous lease terms generally reflected the high commodity prices of the early 2010s and less the prolonged downturn since. As a result, the PRRIP’s irrigator lease program had become well-used and easily met its annual enrollment targets over the last few years. Over the summer, and with my confessed involvement, lease terms were revised to reflect more recent commodity trends, effectively dropping the program’s lease offer by over $100 per acre. As my weak defense, there was no reason to believe commodity prices were going to increase in the foreseeable future, and this was the PPRIP’s most expensive water source by a wide margin.

Unsurprisingly, irrigation water lease terms are highly correlated to commodity prices, specifically for corn and soybeans in this area.

Less than a couple of weeks after approval of these new lease terms by the PRRIP’s Governance Committee, and after five stagnant years, corn prices jumped by 33%, from about $3.00 per bushel to over $4.00 per bushel, at local elevators. Soybean prices increased by about 20%. Due to a combination of random events, these price increases created a welcome financial boost for operators at harvest time — enough of a boost to significantly reduce the pace of enrollment in the irrigator lease program.

Supporting analyses indicated that a $1.00 per bushel change in corn’s price causes a corresponding change of about $110 per acre in the economic value of irrigation upward or downward. Whether this condition will continue past a single year is uncertain, although the price increase is expected to continue into 2021, and the PRRIP is anticipating reevaluating the irrigator lease program (and its economic advisor) prior to the 2022 crop year. Some form of adjustments in the lease terms will likely be made to accommodate these volatile crop prices.

George Oamek, PhD, is an economist with Headwaters Corp. and is also on the staff of the Platte River Recovery Implementation Program’s executive director’s office.