Cattle feeders can use futures and options to “hedge” against high or low corn, feeder cattle or fed-cattle markets. But when costs increase dramatically on the primary fuel used to steam-flake tons of grain, to feed tens of thousands of cattle, two or three times a day, a natural hedging tool is out of range.
A steady diet of natural gas (NG), priced at $6-$7/mcf (1,000 cubic ft.) to run feed mill boilers 24/7, makes putting pounds on steers and heifers a higher price than feeders and feedyard operators want to see. And like others in virtually all levels of agriculture, yard managers are steamed over high-priced diesel, gasoline and electricity.
Do they pass those costs on to their feeding customers and face losing them to rival feedyards, take the hit themselves or spread the risk?
“That's a tough question. There's not a lot a feedyard can do to offset high energy costs and other inputs,” says Michael Kelsey, Nebraska Cattlemen executive director, Lincoln. “Mills have to run. Feed trucks have to run. Forward contracting fuel is a mouthful in itself.”
For feedyard managers like Warren White, Mc6 Cattle Feeders, Hereford, TX, the 3,500 to 4,000 mcf needed to run a feed mill every month easily tops $20,000. But NG futures contracts, traded via the New York Mercantile Exchange, are sized at 10,000 mcf.
Mini-NG contracts are just 2,500 mcf, but only go out two months and aren't much more of a hedge than using the spot market.
“It's an issue we all have to deal with,” White says. “We can't really use NG futures to hedge our energy costs. We have to take different approaches. We sometimes broker deals with individual gas companies to find the best prices. We have forward-priced NG in this manner before and likely will do it again if we see an opportunity to lock in what we feel is a good price.”
Greg Zuercher of Delvar Energy, Denver, CO, works with feedyards and other industrial NG users to both secure and forward price the commodity.
“The NG futures contracts are easier to use for large industrial users,” says the energy broker/consultant. “Feedyards, though they use a lot of NG, are more ‘retail’ in size. So we work with them to aggregate their numbers to facilitate purchases and forward pricing.”
Bill Thompson, vice president of marketing for Fowler Energy, Austin, TX, adds that in working with feedyard members of the Texas Cattle Feeders Association and other feeder organizations, he sees the concerns of yards.
“We work with feedyards to help them secure the best price available,” he says. “But there's no science to these things, with the large amount of speculative and fund activity in the futures market.”
Mc6 is like other yards that have invested in making their feed processing more economical. The 55,000-head-capacity yard has a 250-hp boiler powered by NG. It can steam flake at least 25 tons of corn/hour, based on an industry standard of 1 ton of flaking for every 10 hp of boiler size.
“But we're beating that average now with the addition of two new, 72-in.-diameter steam chests,” White says. “They have nearly doubled the capabilities of our old chests.
“In addition, we've added a separate heating chamber mounted on the boiler, which heats water to 130°F. before it enters the boiler. That means less NG is used to heat water to steam-flake grain. It's increased our efficiency by 10% or better.”
The process has enabled Mc6 to go from three rollers to two in its grain processing.
“We're using less electricity and get better overall utilization out of our boiler and other grain-processing equipment,” White says.
Feed-processing equipment companies like R&R Machine Works, Dalhart, TX, are working with yards to help improve energy efficiency.
“We've been concentrating on more energy-efficient steam chests and boilers,” says Wes Wood, co-owner. “We have several dozen newer models out (at feedyards) that use automated control valves to regulate steam usage to the steam chest. It's helping feedyards save up to 15% on their NG bill. That's a significant savings, and the payback (to feedyards) averages about 6 months.”
The R&R Automated Steam Value Assembly can be adapted to older systems or installed in a new system. The automated value monitors temperature in the steam chest and helps maintain a constant temperature of the flaked grain.
“You get a constant temperature of, say, 205°F, and don't have soft and hard grain going through the rolls,” Wood says. “You also have a constant moisture content of 21%.”
Keeping everything constant is important to feedyard operators. “This system helps obtain that consistency,” Wood says. “Its automation also saves manpower.”
Phil Petrakos, vice president of Ferrell-Ross Roll Mfg., Hereford, adds some newer steam chests are taller, such as one his company installed for White at Mc6; this allows them to get more out of the steam.
“The new Mc6 steam chest is 72 in. in diameter and 32 ft. tall,” Petrakos says. “In this type of system, the steam not used to actually cook the grain is floating up through extended layers of grain. It helps raise the temperature of the grain and cuts back on cooking time.”
Many mills have stopped using NG to put moisture into the grain. They use preconditioning water and additives to reach a 20-21% moisture content.
“Before, when steam was used to put moisture into grain, it tended to be lower pressure or ‘wet steam,’” Petrakos says.
“Now, with the pretreatments, mills can run higher pressure or ‘hotter’ steam, which cooks the grain better and faster.”
Petrakos says more feedyards are seeking assistance in learning how to properly cook and steam-flake grain. For increased efficiency, many yards have switched from a single 75-hp motor to dual 30-hp motors, or from a single 125-hp motor to dual 50s or 60s to operate rollers.
Better electrical efficiency is achieved through proper maintenance, which often includes an annual infrared testing process to find hot spots in electric motors and other feedmill components.
The process whereby infrared cameras locate hot spots is called “thermography.”
“We have a thermography inspection every year as preventive maintenance, which helps lower our insurance premiums,” White says. “It provides a safer work environment and prevents downtime. Downtime in a feedyard is expensive, no matter where it is.”
Nebraska Cattlemen's Kelsey says member feedyards often enquire about solutions to high energy and fuel costs. “There's not a lot we can tell them,” he says, “other than to maintain mills and other equipment so it operates as efficiently as possible.
“Some buy fuel in bulk, like they do with other inputs…Feedyards are primary users of diesel, and the cost of shipping cattle is impacting them. Increasing their feed markup is a difficult decision. But feedyards have to look at what their ‘yardage’ is, where they can offset some of the expense.”
Should you forward price NG?
The $6-7/mcf price seen in mid-summer looked pretty good, compared to the $12 or higher prices seen last fall following Hurricane Katrina and Rita. But they are still considerably higher than the $2 price seen only a few years ago, a price feedyards and other industrial users complained about even then.
Barring another major tropical storm, Fowler Energy's Thompson doesn't see a major increase in NG prices. That's why he is skeptical about early 2007 NG futures prices at $10-$11/mcf.
“Basically, I think we are looking at lower prices the remainder of this year,” he says. “After the mild winter we saw, NG storage has continued to fill. Short of some big hurricane activity, storage is going to continue to fill.
“I think the $10 prices we're seeing for the (2007) winter months probably won't happen. I believe $5-$6 gas is probably what we are going to live with, with the ability to briefly spike to $9-$10,” Thompson says.
“Users like feedyards might hold off a bit more in buying too far out until prices come down. But again, there is no science to this thing. The NG market may continue to be highly volatile.”
Zuercher from Delvar Energy agrees the “record amounts” of NG in storage are holding down prices. “We would probably see NG even lower if the price of crude oil ($70+/barrel) and heating oil were not as nigh as they are right now,” he says.
“If we saw crude at $50-$60, we would probably see NG below the $5 level.”
Joe Scott, manager of Sublette Feeders, Sublette, KS, faces a unique position, in that the 42,000-head feedyard company also owns several NG wells.
“We used to have enough NG for the feedyard and for running irrigation engines for our farm,” Scott says. “Now we run the farm off our own NG and purchase it for the feedyard during peak irrigation periods. Then, at the first of September, we start using our own NG at the yard. We try to keep an eye on NG prices to determine if we want to price several months ahead or not.”
Scott says it's hard to do much with the efficiency of NG.
“We changed our flaking product to softened grain,” he says. “That will make a small difference. We just have to keep track of the boilers and make sure they are maintained properly.”
Meanwhile, White says it's a no-brainer when deciding whether to forward price NG at those early '07 prices that are $4 higher than in late July.
“Locking up something that costs nearly twice as much as it is today is hard to do,” he says.
Larry Stalcup is an Amarillo, TX-based freelance writer.