Author: Dennis Brothers

Comparing Liquified Propane to Natural Gas for Heating Fuel Cost Management in Poultry

As winter approaches the broiler belt, it brings with it increased heating fuel bills for poultry growers. Most modern poultry houses in the southeast use liquified propane (LP) or natural gas (NG) to keep birds warm during the winter months, as well as during brood phases year-round. In many areas of the southeast, growers can choose one fuel over the other. However, this is a long-term choice requiring equipment conversions and plumbing changes. The cost of heating their poultry houses is usually a primary driver of this choice. LP and NG prices have proven to be volatile at times. Historically, LP price lags but roughly follows crude oil price changes, as it is a by-product of crude oil production. NG prices also have a crude oil production component but react more to international events and trading. The development of domestic gas fracking has made it more available and advanced NG as a competitor to LP in the U.S. However, access to NG pipelines is a limiting factor for many poultry producers. Also, NG customers generally do not have the ability to lower costs via pre-purchase agreements, volume purchases, or other negotiated price strategies that LP users have. Natural gas users simply pay the provider’s price at the time of billing. LP users must monitor fuel stocks and schedule deliveries to maintain adequate supplies at the farm. NG users do not have this worry as they always have pipeline access to gas. Hence, there is also no storage cost to consider when using NG. Farm trials have shown that, if NG is readily available, and prices are at their normal comparative levels, it is generally less costly to heat a poultry house with NG. But with recent NG price volatility, this could vary.

When comparing the costs of these two fuels, it is important to compare them on an equal basis in terms of heat energy output per unit. For this, British Thermal Units, or btu’s per unit is used. (One btu is roughly equivalent to the heat of a single matchstick flame.) LP is traded and sold to growers by the liquefied gallon and contains approximately 91,452 btu’s per gallon, with slight variations in actual product delivered. NG is traded and reported in one thousand cubic feet (MCF) units, which equals one million btu’s. It is often sold to retail customers by the “therm” or CCF (one hundred cubic feet), which is 100,000 btu’s of energy. For a quick comparison, you can take the LP price, multiply that by 1.093 and get the rough equivalent price of NG on a per btu basis. For example, if NG is priced at $1.17/CCF or $11.70/MCF (current trend price in Fig 1a), LP would need to be priced at approximately $1.07 per gallon to be equal in cost per btu. LP has not been at that low of a price in the southeast in recent history. Conversely, $1.20/gallon LP (trend forecast price in Fig 2b) is roughly equal to $1.31/CCF natural gas. Recent history has shown that NG prices are trending below that level, but from the spring of 2022 to the spring of 2023, prices were well above the trend, with commercial rates hitting a high of $1.45/CCF in September ‘23. LP prices at that time were approximately $1.52/gal ($1.66/CCF equivalent). These were the national averages; some users may have paid higher local rates for either fuel. Some local providers have varying rates for farms versus residential or commercial for LP or NG. Although NG has generally stayed on the less expensive side of this relationship, it may not always be the case for a specific farm or specific providers.

When looking at these variations, it is important to note that LP prices tend to react more to locally occurring events like weather and the short-term impacts of those events on supply than NG. However, the overall U.S. supply of propane does affect the market prices nationwide, as seen in figures 2a and 2b below. Luckily for poultry growers using LP, the current U.S. supply is strong and suggests lower winter prices are possible this year. NG is widely traded internationally, and prices are more reactive to international events like the war in Ukraine or Chinese economic strength and purchasing of the commodity. Even so, NG prices are forecast to remain soft for the coming winter as U.S. production looks strong and growing (fig 1b). Overall, with propane stocks high and natural gas production strong, U.S. poultry growers may be getting a welcome relief this winter from the high fuel costs of recent years, no matter which fuel source they choose.

NOTE: Any poultry grower considering making a switch from one heating fuel source to another needs to consider all costs, both short and long term, like equipment changes, plumbing upgrades, and pricing flexibility. Click HERE for detailed information on NG conversion in poultry houses.

Fig. 1a & b: Natural gas prices have been volatile recently in response to international events and trading. However, long-term forecasts are lower than the high prices of 2022. U.S. production looks to be strong and increasing over time.

Brothers, Dennis. “Comparing Liquified Propane to Natural Gas for Heating Fuel Cost Management in Poultry.” Southern Ag Today 3(48.3). November 29, 2023. Permalink

November 29, 2023

New Commercial Poultry Breeder Housing Under Economic Stress

While the overall demand for chicken remains strong, a couple of production trends caught my attention last year that have continued into 2023. It seems there could be a new “normal” in the broiler industry – fewer chicks hatched per broiler-breeder hen placed. Breeder hens produce the fertile eggs that will be hatched to produce the broilers that are eventually slaughtered for chicken products. Figure 1 shows roughly a 6% drop from the long-term average in chicks hatched per hen per month. Multiplied across the industry’s breeder farms, that could result in millions fewer chicks per year. This could be caused by any number of factors. Whatever the cause, the industry needs the chicks to keep up with demand for chicken. To offset this loss, figure 2 shows that about 8% more hens are currently in the field than in the past. One could argue that this is the easy solution to make up the difference. However, that solution eventually requires additional breeder housing. That leads to a difficult economic situation for commercial poultry companies and their contract growers.

In my last article for SAT, I discussed the increasing cost of broiler housing and its impact on growers’ ability to build new farms or expand existing farms. Breeder growers are facing similar challenges. A typical breeder farm today consists of four to eight 40’ x 500’ houses with enclosed concrete hallways between the houses and cooled egg storage facilities. In addition to the normal environmental control systems, these farms have specialized equipment like nesting boxes, egg conveyors and split feeding / drinking areas for hens and roosters. The structures are also specialized for the task of keeping large hens and roosters comfortable and producing fertile eggs for 40+ weeks. To contend with labor shortages, growers and integrators have had to adopt labor saving equipment for egg collection and crating. All such specialized housing and equipment comes at a premium. Add the general increase in building materials and labor costs over the last few years and the resulting cost of a new four-house breeder farm in the southeast today is $32.50 per square foot or approximately $2.6 million or more. This does not include the cost of the land itself, extensive land prep, or any cost for ancillary equipment.

For example, if we assume a USDA Farm Services Agency guaranteed loan that reduces equity requirements down to 10% and include estimated additional costs and fees, a grower will need to borrow approximately $2,795,000 to get a new four house breeder farm up and running on land they already own. The corresponding annual payment (20-year loan, 8% APR) would be approximately $284,677. At an average annual income of $4.60 per square foot for new breeder farms (ref 2), the annual gross revenue would be $368,000. Annual operating expenses have been shown to cost approximately 25% of gross revenue on new breeder farms, or in this case, $92,000 per year. This leads to a shortfall in net revenue of ($8,677) per year for the grower. Integrators have recognized this is an untenable situation for growers and a barrier to obtaining additional breeder housing. In response, some have offered direct cash incentives that lower the effective cost of the new houses while others include additional pay per dozen eggs for new housing. These direct cash incentives must decrease loan amounts and increase net revenue to meet the typical bank requirement of a 1.30 debt service ratio if new loans are to be made. In the scenario depicted in table 1, a cash incentive of $7.00 per square foot combined with a revenue equal to $4.82 per square foot would result in a positive net return, meet debt service requirements, and allow for new farms to be built. It remains to be seen whether such incentives would support enough new housing to overcome what could become a serious challenge for some companies.

Figure 1:

Figure 2.

Table 1.

Four New 40′ x 500′ Breeder Houses		No Incentive	Incentive
Incentive Payment	$7.00 per Square Foot	$0	$560,000
New Farm Loan	20-year, 8% APR, 10% Eq.	$2,795,000	$2,215,400
Interest Paid Over Loan Period		$2,898,538	$2,297,468
Gross Revenue per Square Foot		$4.60	$4.82
Annual Gross Revenue		$368,000	$385,336
Annual Loan Payment		($284,677)	($225,643)
Annual Operating Expenses	25% of Gross Revenue	($92,000)	($92,000)
Annual Net Return		($8,677)	$41,923
Debt Service Ratio		0.97	1.30

Ref:

Livestock Marketing Information Center: www.lmic.info
New Farmer’s Guide to the Commercial Broiler Industry: Farm Types & Estimated Business Returns: www.aces.edu/blog/topics/farming/new-farmers-guide-to-the-commercial-broiler-industry-farm-types-estimated-business-returns/

Brothers, Dennis. “New Commercial Poultry Breeder Housing Under Economic Stress.” Southern Ag Today 3(40.2). October 3, 2023. Permalink

October 3, 2023

The Cost of Money and Commercial Poultry Growing

Historically, commercial poultry grower loans have been considered by lending institutions to be among the lowest risk agricultural loans due to the secure nature of the grower’s contract with poultry companies. However, the increasing cost of new facilities in the last few years has quickly outpaced the average farmer’s ability to obtain new loans without financial support. For example, a typical broiler farm consisting of eight houses, 54 feet wide by 550 feet long each (237,600 square feet), can easily cost $22 per square foot or over $5,000,000. This cost does not include a land purchase. A traditional 20% equity requirement would mean approximately one million dollars of mortgageable equity or cash influx would be required to secure such a loan. Thus, most of these loans now go through some government funded, farm-oriented program that helps growers obtain loans.

For example, the USDA’s Farm Service Agency loan guarantee program can effectively cut the equity requirement in half. There are fees and qualification guidelines for these loan programs, and not all applicants are accepted. Equity is not the only problem. Interest rates have become a significant obstacle. The FSA restricts the interest rates charged by banks for their guaranteed loans to a maximum of the 5-year constant maturity treasury (CMT) rate plus 5.5%.  Figure 1 illustrates the changes in this max rate since July 2022. According to farm financing institutions, loan rates for most growers in July of 2022 were averaging around 5%. Due to inflation and other uncertainties, as well as the rising CMT, the current average rate for poultry loans is now closer to 8%, with expectations of further increases by the Federal Reserve. A couple or three percentage points doesn’t sound like much, but in the case of these large loans over a typical 15-year term, it can mean an increase of 18-20% in annual payments, or over $100,000 per year.

At the same time, like all farmers, poultry growers are dealing with rising utility and labor costs. Higher loan payments combined with higher costs have a significant negative impact on the cash flow of new farms. Many potential new growers are unable to obtain funding at all due to the resulting low debt service margins. To help relieve the cash-flow pressure, many lending institutions have moved to offering 20-year terms on poultry loans. This decreases the annual payment but also increases the total interest paid over the term. If you combine increased interest rates with lengthier loan terms, the result has effectively doubled the overall cost of building a new farm from a year ago, making it extremely difficult for new growers.

To assist growers in securing the financing to build new housing, poultry companies are addressing farm cash-flow problems by supplying funding directly to the growers, either in the form of additional pay incentives over the loan period or in the form of up-front money used to pay down the initial loan, decreasing the equity required and the annual loan payment. These incentives have almost doubled over the last year due to the factors discussed (See Fig 2). Some obvious questions arise from the situation. For the industry, “How long can poultry companies continue to offer these increasing cash incentives before profitability begins to suffer?”, and for consumers, “At what point will housing difficulties impact supply, potentially increasing chicken prices?”

Fig 1: Farm Service Agency Guaranteed Loans Maximum Interest Rate

CMT: “Constant Maturity Treasury” rates as defined by the U.S. Treasury https://home.treasury.gov/resource-center/data-chart-center/interest-rates
Applies to loans with fixed rates of 5 years or more.  Actual lender rates may be less.

Fig 2: Comparing Cash Incentive Payments and Total Interest Cost for a New 8-house (54’x550’) Farm in 2022 and 2023 Resulting from Changes in Interest Rate and Loan Term

*The above numbers are estimates for informational purposes only. They are assuming $20/SF cost, average production returns, variable costs, integrator incentives and payment information.  They do not represent any specific farm or situation.

August 2, 2023
Heating Fuel and Electricity Concerns for Commercial Poultry

Spring weather in the southeast can indeed be a mixed bag. Environmental control systems are strained as poultry growers in the southeastern United States can easily see temperature swings approaching 60 degrees Fahrenheit over 48 hours. While most modern houses today are capable of successfully handling such temperature swings and keeping the birds inside comfortable, the growers themselves feel the strain in the form of utility costs. Historically, the two largest variable costs contract growers must contend with are heating fuel used to keep birds warm and electricity used to keep birds cool. Luckily, falling propane and natural gas prices accompanied the latest cold snap. A relatively mild winter across the US and Europe facilitated this, leading to decreased usage. The results are increasing stocks of propane in the US starting in November ’22 up to the beginning of March ’23 (Fig 1). Increased supply has led to falling prices for propane. Comparing the previous year’s weak supply numbers to the current strong supply situation could indicate that the upcoming winter may also be met with lower heating fuel prices. This is good news for growers heating chicken houses in the U.S. this spring. This could of course change quickly if the winter of ’23 shapes up to be harsh, or if the crude oil prices again rise to higher levels (as propane is closely tied to crude oil production and price.) Even so, going into next winter with a strong supply of propane is a good sign for poultry growers. Natural gas supplies are also predicted to be higher and long-term prices NG are predicted to be down accordingly.

Alternatively, electricity costs are not looking as promising going into the summer when most electricity is used on poultry farms. As poultry houses have become better insulated and better managed to control heating costs, electricity has become the most prevalent cost factor for many growers. Electricity prices saw a significant 10% increase in 2022. While the projection for 2023 is lower at 2.5%, the long-term pricing trend is upward (Fig 2). The causes of this continued increase are varied, from general inflationary forces, increasing demand for electricity met with the increased cost of new generation facilities, to the increased cost for utility companies to implement carbon neutral generation goals. This makes it imperative for growers not only to focus on housing and equipment for heating purposes but also focus on electrical energy usage efficiency. While any money spent on energy efficient upgrades to equipment must be analyzed closely looking at initial cost versus payback over time, electrical efficiency upgrades look to be becoming more and more important going forward.

Figure 1.

https://www.eia.gov/petroleum/weekly/propane.php

Figure 2.

https://www.eia.gov/outlooks/steo/images/Fig29.png

Brothers, Dennis. “Heating Fuel and Electricity Concerns for Commercial Poultry.” Southern Ag Today 3(13.2). March 28, 2023. Permalink

March 28, 2023
Fuel Price Volatility a Growing Concern for Commercial Poultry Growers

Even as we are in the middle of the heat of summer, contract poultry growers should be concerned about fuel prices going into this winter. Propane prices have remained at a high level through the spring and into the summer. Looking ahead, evaluating the world market demand for energy and current US inventories suggests that prices could increase drastically. According to an analysis by Propane Resources LLC, a leading US propane marketing company, growers should expect a very volatile six to nine months in propane prices. Much of this will be driven by a very active European market with much instability being caused by the Ukrainian conflict, which is stifling natural gas trading. To help fill that void, sellers of liquid natural gas that would normally supply Asia are rerouting that LNG to a European market. That LNG will likely be replaced in Asia by propane.

As supply and demand for propane becomes an even more global market, a look at the current and projected US propane inventory for 2022-23 does not give one a good feeling for the upcoming winter’s prices, or even into next spring. The current peak projected inventory for the US comes in at about 3.25 billion gals, and drops off from there, staying at or below the historical monthly minimum inventory over the last five years. This simply means that the supply of propane does not look to be ample for the next several months. For poultry growers, this means the time to secure future pricing is now. Waiting around for a mid-summer price drop will likely mean you will be paying more, not less, for your propane this winter.

Brothers, Dennis. “Fuel Price Volatility a Growing Concern for Commercial Poultry Growers“. Southern Ag Today 2(35.2). August 23, 2022. Permalink

August 23, 2022