High Energy, High Anxiety

The rising cost of energy cut through the beef industry like a spring tornado. Ranchers struggled to pay for gasoline. Feeders braced for higher corn costs reflecting the cost of fertilizer and farm equipment fuel. But the sudden surge in energy prices earlier this year is part of a long-term series of energy shocks that are beginning to reshape the $50 billion beef industry and the way it does business.

The rising cost of energy cut through the beef industry like a spring tornado. Ranchers struggled to pay for gasoline. Feeders braced for higher corn costs reflecting the cost of fertilizer and farm equipment fuel.

But the sudden surge in energy prices earlier this year is part of a long-term series of energy shocks that are beginning to reshape the $50 billion beef industry and the way it does business.

Short term, the rising energy costs present an immediate challenge for ranchers and feeders — survival. Long term, the industry's challenge is to adjust to the rising prices by finding ways to use less energy and by becoming part of the energy production machinery through solar and wind power or energy produced from manure.

Economists warn that this year's energy price spike is inflicting multiple wounds on the industry. The first blow was the rising price of doing business. The second blow will likely be reduced income.

Packers and feeders are expected to try to cover their own higher energy costs by paying less for cattle, says Azzeddine Azzam, a University of Nebraska agricultural economist. Further fallout could be in land markets, he says.

Ranchers will want to pay less for land as a result of their own higher energy-related operating costs and the lower-than-expected income. Lower land prices would be a blessing for ranchers seeking to expand but would hurt ranchers seeking to cash in and retire.

Eventually, higher energy prices will impact cattle production by driving some producers out of business, Azzam says.

Although energy prices began to moderate in mid-summer, the grace period may be short. The OPEC oil cartel recently voted to cut production by 1 million barrels a day. In the meantime, the beef industry is struggling to cope with the immediate damage. Among those hit hardest are combined farm-ranch operations.

“Fertilizer costs almost twice what it was last year,” says Phyllis Gardner, who operates a farm-ranch-feedlot operation in western Nebraska with her husband. Diesel fuel hit $1.80/gal., she adds.

Although fuel prices have dropped substantially, the damage is already done. “You don't have any choice,” she says. “You've got to fertilize and plant at certain times. You can't put it off.”

The price spiral also has spurred ranchers to look for ways to cut energy costs, although this will prove difficult for many because they've already geared their operations to minimize the use of truck and other fuel-guzzling equipment.

“We can eat a lot of gas,” says Carol Hamilton, who operates a western Wyoming ranch with her husband. “But if we tried to do more by horse, it would take too much time. And the horses would use more feed.”

But some ranchers have found they can shift to more productive grazing plans and save gas at the same time. Tony Malmberg used to put 30,000 miles/year on his pickup truck, but now he drives half of that or less.

The lower mileage was a side benefit of a new intensive grazing plan. The plan allows Malmberg to graze up to 80% more cattle on his Wyoming ranch. Because his cattle are no longer spread over a large grazing area, he doesn't have to drive as much to keep track of his herd.

Other ranchers have been able to use alternative power to solve remote power problems on their spreads. For example, solar power offers ranchers a cheaper way to develop remote water sources or power electric fencing.

“It costs up to $16,000 a mile to run in a power line,” says Wyoming rancher Dennis Sun. “You can put in a solar well for about $5,000, if the well is less than 150 to 200 feet deep. If it's deeper than that, solar pumps are not efficient.”

Higher energy prices already have provided more royalty income to ranchers who are fortunate enough to control mineral rights on their property. Others may be able to earn cash by charging wind power companies for permission to put wind turbines on their land.

The potential for wind power is thought to be especially great on the Great Plains, a region often referred to as “the Saudi Arabia of wind.”

Cattle feeders may be able to capitalize on manure by teaming with energy companies to produce power from the mountains of manure generated each year. Duke Energy, a diversified energy corporation with nearly $50 billion in annual revenues, is among the innovators that want to turn cattle, hog and chicken manure into energy.

Scott Keeley of DukeSolutions, a Duke Energy company, says bacterial digesters can produce methane gas from manure while reducing the weight and volume of the remaining manure. Cutting the weight and bulk would lower costs to transport manure to farming regions where the soil enrichment is needed.

Capstone Turbine Corp. is also eyeing the manure energy market. The California-based company makes turbines that produce electricity from remote gas sources, such as the gas flared off in oil and gas field operations.

Spokesman Keith Field says Capstone believes its turbines also could run off gas from manure digesters. Capstone is now working with several hog and dairy farms.

These measures indicate that today's energy crisis may spur tomorrow's energy solutions for the beef industry. In a decade, ranchers and feeders may be producing beef with less energy, while helping to provide the nation's energy through wind, sun and manure, as well.

Doug McInnis is a Casper, WY, journalist specializing in business management topics.

Mineral Rights: Look Before You Leap

Ranchers who own mineral rights to their land may be able to tap into oil and gas revenues to supplement the up-and-down cash flow from ranching. But, experts advise you to proceed carefully before inking a deal to allow oil and gas exploration on your land.

Dennis Sun, a Wyoming rancher who also serves as a coordinated resource management consultant, suggests ranchers take a series of steps to ensure a square deal.

  • Get a good lawyer with expertise in mineral rights law.

  • Don't take the first money that comes along. Shop for the best deal.

  • Be aware that when you sign a deal, you are stuck with it.

    “What you do in that first lease sets the ground work for the whole development,” Sun says. “For example, when you sign a lease, you set the rules to cover surface damage. You also determine the location of wells and pipelines and their location relative to water wells or creeks used by cattle.”

  • Make sure the agreement includes reclamation provisions, such as reseeding.

    “Reclamation is pretty important,” says Sun. “It determines what you want your ranch to look like when they are done.”

  • Include provisions that cover your rights if the company fails to produce. For example, the company may drill so-called “shut-in” wells, which are drilled wells that aren't yet producing. Or they may not drill at all. Either way, the rancher gets no royalties.

Sun says the agreement should state that oil companies can't sit on shut-in wells or fail to drill for more than a specified period of time. If they do, they must give up the lease.

Exploration Spells Trouble For Some

Royalty income from oil and gas exploration is a gravy train for some ranchers. But, oil and gas exploration also can be disruptive.

Ed Swartz says his northeast Wyoming ranch, which has been in his family since 1904, is threatened by salty groundwater pumped to the surface during the recovery of gas embedded in the region's coal seams.

“These wells each produce 20 tons of salt a year, and gosh knows how many thousands of these wells are producing in this area,” he says. “My soil is heavy in clay, and it does not handle salt very well because it's already alkaline.”

Saltwater intrusion has damaged the grass-rich corridor that runs 20-50 ft. on either side of the 10-mile-long creek that runs through his ranch, Swartz says.

“It grew grass that was sometimes waist high, and I've lost all of that,” he explains.

And, he fears saltwater discharge may ultimately kill the alfalfa hay meadows that are critical to the ranch's existence. As it is, he is afraid to irrigate the hay meadows for fear the irrigation water has been tainted by salt. He has hired a lawyer, a soil scientist and a hydrologist.

“If this thing goes to court, it will probably cost me $150,000. If I don't do that, however, I'll probably lose my ranch,” he says.