ENERGY RISK MANAGEMENT CONSIDERATIONS John Robinson Texas Cooperative Extension

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ENERGY RISK MANAGEMENT CONSIDERATIONSJohn
Robinson Texas Cooperative Extension

• Context of higher energy prices
• Hearings calls for government policy
  intervention
• On-farm risk mgmt. steps
• Evaluate the risk exposure
• Identify alternative strategies
  including hedging possibilities
• Evaluate the cost of each alternative
  (i.e., is it a good insurance buy?)
• Identify public private resources to
  implement alternatives

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Available Public Resources

• Extension crop budgets, energy crop profiles,
  and detailed machinery analysis, e.g,
• U. Florida series, http//www.agen.ufl.edu/fees/
  pubs/agcrop.html
• Purdue publication analyzing tillage systems
  http//www.agcom.purdue.edu/AgCom/Pubs/NCR/NCR-202
  .html
• Extension info. on energy saving tips, bmps,
  and new technology
• USDA-ERS OCE analysis of energy
  fundamentals/Ag impacts

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Help Producers Size Up Their Situation Energy
Inventory
Source Florida Energy Extension Service
http//www.agen.ufl.edu/fees/pubs/agcrop.html

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Evaluate Risk Exposure Total Energy Use in Btus

• Do an inventory of total energy use with a Btu
  Conversion Chart
• Gasoline 125,000 Btus/gal
• Diesel fuel 138,690 Btus/gal
• LP gas 98,300 Btus/gal
• Nat. gas 1,030 Btus/ft3
• Electricity 3,413 Btus/kwh
• Nitrogen 55.21M Btus/ton
• Phosphate 12.34M Btus/ton
• Potash 10.43M Btus/ton
• Pesticides 215.41M Btus/ton
• Source ERS

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Evaluate Risk Exposure Input Energy Use in DFEs

• Urea, solid 0.233 gal/lb
• 28 N liquid 0.229 gal/lb
• NH4NO3, solid 0.248 gal/lb
• NH4NO3, soln 0.225 gal/lb
• Anh. Ammonia 0.177 gal/lb
• Total N for typical corn 26.6 gal DFE/ac
• Machinery fuel (conv. til.) 5.0 gal DFE/ac
• Machinery fuel (no. til.) 1.8 gal DFE/ac
• Herbicides (conv. til.) 1.7 gal DFE/ac
• Herbicides (no. til.) 2.9 gal DFE/ac
• Source http//www.agcom.purdue.edu/AgCom/Pubs/NCR
  /NCR-202.html

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Evaluating Risk Exposure Sensitivity Analysis

• Repfarm analysis of higher natural gas prices
  and crop prices on irrigated farms Effects of
  Energy and commodity Prices on Irrigation in the
  Kansas High Plains (SRP611)
• http//www.oznet.ksu.edu/
  library/engy2/samplers/srp611.htm

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Agric. Energy Risk Management Alternatives

• Technology Approaches
• Reduced Tillage
• Proper equipment selection, RM
• Substitution away from crops with higher nitrogen
  requirements
• Purchase and storage of fuel
• Forward contracting and/or hedging input costs
  with energy futures/options

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Available Private Resources for Contracting
Alternatives

• Trading consultants and brokers
• Energy hedging consultants
• NYMEX exchange information
• Agricultural Cooperatives

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Theory Practice of Agric. Energy Hedging

• Correlation of fuel and fertilizer prices with
  NYMEX futures
• Natural Gas (very actively traded)
• Also a proxy for anhydrous ammonia
• Home Heating Oil (for diesel fuel)
• Propane
• Whole new set of fundamentals and seasonality
  considerations
• Scale Considerations

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Contract Information

• NYMEX Natural Gas
• Futures 10,000 million Btus
• Oct. 01 Futures 2.103/mmBtu
• At-the-money call 0.080/mmBtu, or about 800
  premium for one contract
• NYMEX No. 2 Fuel Oil
• One Futures Contract 42,000 gallons
• Oct. 01 Futures 0.7087/gal
• At-the-money call 0.024/gal, or 1,008 premium
  for one contract

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On-Farm Energy Hedging Considerations

• What is the impact of a 2X or 3X or 4X rise in
  natural gas or diesel price?
• Is the impact of this risk significant relative
  to other risks that need managing?
• Is hedging nat. gas or heating oil futures
  realistic in terms of type and scale of the
  enterprise?
• Is it feasible in terms of correlation between
  futures and farm-gate energy prices?
• What to hedging alternatives cost? Are they a
  good insurance buy?

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Example Diesel Fuel for Delta Cotton Operation

• Typical Delta operation with conv. tillage uses
  18.3 gallons of diesel per acre, or over 20 per
  acre.
• Need 2,300 acres to match the size of one No. 2
  heating oil contract
• An Oct. 01 at-the-money call on NYMEX No. 2
  Heating Oil futures costs about 0.44 per acre
• Questions How well does this contract track
  on-farm fuel prices, and what basis are we
  facing?

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Example Hedging Nitrogen costs

• Typical Delta operation uses 400 lbs of N32 per
  acre, or 37 per acre.
• Need 2,300 acres to match the size of one No. 2
  heating oil contract
• An Oct. 01 at-the-money call on NYMEX No. 2
  Heating Oil futures costs about 0.44 per acre
• Questions How well does this contract track
  on-farm prices, and what basis are we facing?