Monday, March 17, 2008

Energy Markets

Natural gas futures fell about 8% today across the entire 12-month forward strip, while oil fell at least 4% for the same range. Even in energy markets, these are pretty volatile price moves. The big sell-off may reflect recession fears, unwinding of speculative positions, or new supply data--I don't know which. We do watch the long-term trends, though, since both oil and gas prices affect Farm Power. Fuel costs impact our farmers in many ways: milk haulers raise their rates, tractors cost more to operate, and the general population has less money to spend on cheese. High oil prices function as a sort of tax that cuts even further into the precarious dairy profit margin. However, it is the price of natural gas that sets the boundaries for profitable operation of anaerobic digesters, Farm Power's core business.

While hydroelectric, nuclear, and coal plants provide baseload power, the primary fuel for the final kilowatts added to the grid is natural gas. Electricity production consumes roughly one-quarter of all natural gas delivered in the United States. Modern gas-fired power plants can achieve around 50% efficiency with low maintenance demands, so we can figure the price that utilities pay for their marginal power with a simple formula based on the cost of natural gas. Anaerobic digesters were not economical in the late 1990s, when gas turbines could produce power for less than $0.03/kWh. Today, we know the utilities are facing costs at least double the levels of ten years ago; we have seen corresponding increases in the rates paid to digester projects. Power from heritage hydro, nuclear, and coal is just as cheap as ever, but high natural gas prices have completely changed the prospects for renewable energy.

Natural gas influences agriculture directly through fertilizer production. Almost all of the world's nitrogen fertilizer is synthesized from the air with the help of copious quantities of natural gas--around 3-4% of global production. The United States imports much of its fertilizer from natural-gas-rich regions like Russia and Trinidad & Tobago, outsourcing the demand for raw gas, but the fertilizer prices still move with North American gas demand. The most popular nitrogen products have tripled in price. Since anaerobic digesters can break down more than just manure, co-digestion of nitrogen-rich food processing remnants starts to make a lot of sense. Fossil fuel price volatility should not be allowed to wreak havoc with our food supply, and Farm Power will do its part to help agriculture through this time.

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