The Energy Spike

Feedyards are looking for ways to deal with higher energy costs and they're finding few answers. If the rising tide of energy prices hasn't washed away a lot of the fun in feeding cattle, count yourself lucky. John Rakestraw, CEO of ContiBeef, Boulder, CO, doesn't have to think twice when asked how rising energy costs have affected his company's bottom line. Increases in gas, petroleum and electricity

Feedyards are looking for ways to deal with higher energy costs – and they're finding few answers.

If the rising tide of energy prices hasn't washed away a lot of the fun in feeding cattle, count yourself lucky.

John Rakestraw, CEO of ContiBeef, Boulder, CO, doesn't have to think twice when asked how rising energy costs have affected his company's bottom line.

“Increases in gas, petroleum and electricity prices pulled 5.5% off our bottom line in the last three quarters of calendar year 2000,” he says. “For much of that period, energy costs were just beginning to rise — especially natural gas. Who knows what it'll be like when this all levels out?”

ContiBeef is one of the nation's largest cattle feeders with six feedyards in four states, including the massive Grant County Feeders in Ulysses, KS. In the last nine months of 2000, ContiBeef's costs for natural gas increased 67%. Meanwhile, fuel for feedyard fleets increased 48% and electricity increased 37%.

Large or small, feedyards across the country are feeling the energy crunch in every phase of the business — from procuring feed commodities to getting rid of dead animals.

Maintaining Margins

The rising cost of feedstuffs also has an impact on nutrition management, says Lanas Smith of Midwest Feedlot Nutrition, Longmont, CO. Smith works with about 25 feedyard clients in the West, Midwest and High Plains that feed about 2.5 million head of cattle each year. He says prices for components like urea, hay, tallow and molasses have seen the most immediate activity.

“Urea prices have almost doubled — and higher urea prices are driving up the costs of many of the natural proteins,” Smith says. While hay prices tend to swing with seasonal supplies and demand, hay prices — in some places double a year ago — may be here to stay.

“Some people were optimistic we could work our way out of these high hay prices,” adds Smith. “But the way it's looking, this could be a longer term thing now.”

The other hit comes with the cost of processing grain and moving feed. A year ago, the cost of natural gas for processing corn was running about 75¢-$1/ton. Today, that cost is $3.50-5/ton depending on the location. Given $100/ton corn — and with stream-rolled corn having about an 8% increased efficiency over dry-rolled corn — there's an $8-10/ton feed advantage in processing.

“Suddenly, we're giving up about half the processing advantage to energy costs,” explains Smith. “The feedyard manager needs to decide whether to maintain his margins and try to recoup that $3-4/ton, or lose all or some portion of that additional cost of running a feedyard.”

Rakestraw says gas prices would have to get a lot higher to get ContiBeef to stop steam flaking corn.

“We've got the fixed cost of equipment to consider, but you can bet we're looking at what we're doing — especially making sure we have good efficiency in our mills and aren't losing a lot of heat,” he says.

Energy's Effect On Grain

Natural gas futures markets help Rakestraw manage costs. “It's one way to protect us from price swings,” he explains. ContiBeef is also looking into alternative fuels such as diesel to power its boilers.

Today though, Rakestraw is more concerned about what's down the line for corn farmers. With nearly all of the High Plains corn production tied to irrigation, escalation of energy prices could significantly impact the corn base in some areas. This could cause a shift away from crops that need more water.

Rakestraw says if pumping costs are high for too long, farmers in areas of Kansas, Nebraska, Texas and parts of Colorado and Oklahoma may be forced to turn to non-irrigated crops or leave fields unplanted.

Hardest hit will be areas with deep aquifers. Kansas State University research indicates that a $1/thousand-cubic-feet-increase in gas prices increases pumping costs from a 500-ft. well by nearly $15/acre-foot.

“The $64,000 question is ‘What will be the cost of natural gas and electricity when High Plains corn farmers have to irrigate?’” says Rakestraw.

Compounding pumping costs is the cost of ammonia-based fertilizers, which are made from natural gas.

“This all could bring a big change in our grain base if it lasts too long,” he adds. “That's not something we'd look forward to.”

Some feedyards are waiting to see what's going to happen with energy costs before they decide how to deal with the added costs. There also are those who haven't responded to the issue at all, Smith says. This could place feeders in a tight spot down the road.

“Feedyards that know their numbers have passed the costs on, and some haven't. The result is significant differences in the cost of feeding,” explains Smith. “Three or four months down the road, it could cause some real customer issues. Some feeders will either lose the income or lose customers.”

The California Crisis

Gary Veserat, Woodland, CA, is a feedyard and dairy management consultant. Based near Sacramento, he's in the hotbed of the nation's energy predicament. The skyrocketing costs of electricity and natural gas are symptoms of a larger problem, says Veserat.

“We've had two rolling blackouts come through here, but one blackout is all it takes to make people very nervous,” he says. “Why would someone want to expand or relocate here with that threat?”

An example of one hidden cost to those in the livestock businesses is in rendering — a big energy user. Veserat says local renderers are now charging up to $80 to pick up a dead calf, up from about $25 last year.

“You start adding all the direct and indirect costs, and it can be devastating,” he says. “We need people like renderers to stay in business. They are a vital part of the infrastructure.”

Smith, the nutritionist, says he's beginning to look at feedyard nutrition in a whole different light.

“We have to do a better job of analyzing in order to pinpoint how we can save energy costs for our clients,” says Smith. “Do we make a lesser flake than what we have made in the past? Do we cook the grain less and settle for less starch availability? Do we try to make heavier flake weights to save energy costs?”

Then, managers must assign numbers to those compromises and determine the cost on the performance side to a change in feed components.

“We're going into an unfamiliar zone,” he adds. “Because energy issues have been so cheap in the past, we haven't had to look at many of these alternatives.”

In Southern California, cattle feeder Bill Brandenberg of El Centro is relatively unaffected by the West Coast energy crunch. Natural gas is unavailable in his area, and his boilers are powered by diesel.

A few years ago, he and other Imperial Valley feeders were asked to help expand a natural gas pipeline into the area — at a pretty hefty price. He's glad he opted to stay with diesel.

“Natural gas prices aren't going to stay this high forever,” adds Brandenberg, “but if I were in an area of higher energy costs, I'd be certainly looking at my options.”

As pointed out by Rakestraw, a big factor in the High Plains feeding region will be planting decisions and corn yields in 2001.

Steve Meyer, Lakewood, CO, analyst for the Livestock Marketing Information Center (LMIC), says current 2001-02 U.S. average corn price forecasts show average farm-gate prices of $2-2.50/bu., with $2.20 as the current estimate. Preliminary LMIC forecasts call for U.S. corn plantings in 2001 to decrease 1.7 million acres from the 79.5 million acres planted in 2000.

The Midwest is not the only breadbasket facing a changing crop base. In southern Idaho where waste potatoes are a feedyard staple, Idaho Power Co. (IPC) has asked regulators for permission to pay irrigators for letting their potato fields go dry.

With projections of below-normal stream flows for the Snake River dams this summer and a volatile Western energy market, IPC wants to buy back power now committed to irrigation pumps. This will reduce the need to buy expensive power on the open market this summer.

“The cost of power to raise potatoes this year will be more than the revenue the spuds will bring in,” says IPC pricing manager Maggie Brilz, Boise.

An open-bid process would be offered to irrigation customers who can commit to reducing energy consumption during the growing season, says Brilz. She estimates that 1,700 customers would qualify.

So, with the initial shock of the past winter's energy prices behind us, feedyard operators across the country are scratching their heads over what to do about long-term energy costs. While the outlook (see “Energy Outlook” on BF7) doesn't foretell disaster, steady increases in energy costs — with periods of volatility — are here to stay.