Western dairy plants grapple with energy costs, disruptions

3/29/2001 By Kate Sander, Chief Editor, Cheese Market News

SACRAMENTO, Calif. — Hearing complaints about energy prices is fairly common these days, but nowhere are the grumblings and concerns louder and bigger than in California, which again last week experienced rolling blackouts.

The energy situation in California, the largest milk-producing and second-largest cheese producing state in the nation, is complex, with the blackouts being caused by allegedly overcharged and definitely financially-strapped utilities struggling to buy electricity as well as a sometimes short supply of energy. It’s a combination of deregulation, rapid growth and lack of power plants being built that’s led to the problems.

The problems aren’t just limited to electricity. Natural gas prices continue to be well-above surrounding areas, says Larry Jensen, senior vice president, supply, distribution and business development, Leprino Foods, Denver, noting that natural gas prices for the company’s California facilities are averaging 60 percent higher than at the company’s Roswell, N.M., plant. The problems appear to be directly tied to gas transmission costs and market control, adds Rachel Kaldor, executive director of Dairy Institute of California, an organization that represents dairy processors.

And while it’s the electricity problem that’s getting a lot of the attention, “the natural gas situation is clearly the most critical to agriculture in California,” Kaldor says. “Natural gas is what’s killing us.”

The natural gas and electricity problems can’t be neatly separated, Kaldor goes on to say. Natural gas is playing a partial role in the electricity crisis in California because natural gas is used by the utilities to generate electricity.

Besides affecting the utilities and the dairy industry, natural gas prices are having a negative effect on the economy as a whole, particularly all segments of agriculture, Kaldor notes. Dairy, however, has perhaps felt the problem more acutely because it’s a year-round industry, she adds.

In some ways the industry’s hands are tied; it’s a situation that can’t be easily remedied.

“There’s a lot of turmoil and no immediate solutions,” Kaldor says. “It’s bigger than all of us, yet it’s so immediate.”

Because of the urgency of the problem, companies are doing what they can to make sure they are in the best positions possible as they grapple with high prices and potential blackouts.

Dairy interests are making sure that anyone who can have any effect on the situation is aware of the problems, Kaldor says. This has included working to bring information to the Federal Energy Regulatory Commission and federal legislators.

Many members of the agricultural community have banded together to address the ongoing concerns, adds Michael Boccadoro, executive director of the Ag Energy Consumers Association. The group is attacking the problems in several ways, he says. First, it is looking for funding from the state legislature to fund conservation efforts — including equipment to reduce power use — and longer-term energy solutions such as biogas digesters to generate additional energy from dairy waste. However, while the ag industry is looking for $140 million to fund these programs, so far only about $50 million is earmarked in California Senate Bill 5X, an energy bill that passed out of the state Senate Thursday. Efforts will now be made to add funding while the bill is addressed by the Assembly, Boccadoro says.

In addition, the ag group is concurrently working to develop demand management programs. Ag interests also are pushing for development of the state’s natural gas resources, Boccadoro says. While there is some question about the quality of the state’s available natural gas for residential use, it’s thought that it could be used for commercial uses including firing generators, he says.

Until there’s some resolution to the matter, parts of California’s dairy industry are looking for some type of pricing relief. Earlier this month, the California Department of Food and Agriculture (CDFA) rejected a proposal from Western United Dairymen to provide relief for the increases in diesel fuel prices and surcharges assessed producers and to increase the prices for Classes 1, 2 and 3 milk due to energy costs. In announcing its decision, CDFA said its analysis found that the prices received by California dairy producers were not significantly lower or higher than those of the last 10 years, and that energy costs total about 2 percent of a dairy farmer’s cost of doing business.

Now three California co-ops have filed petitions with CDFA requesting increases to the manufacturing cost allowances in Class 4a and Class 4b due to increased costs of natural gas and electricity. Humboldt Creamery and California Dairies Inc. (CDI) both call for increases in the Class 4a make allowances. In addition, Land O’Lakes would like a higher make allowance for cheese in the Class 4b formula.

CDI asks that the 4a formula make allowances be based on the difference between utility costs in the last manufacturing cost study using 1999 data and the most current available utilities data on a quarterly basis. Humboldt proposes the make allowances be indexed off the 1999 average utility cost and that CDFA gather energy cost data from nonfat dry milk and whole milk powder processors monthly and make adjustments if the average utility cost for the period is equal to or greater than a quarter of a cent. Land O’Lakes supports CDI’s proposal and also recommends that the make allowance for cheese be increased by 1.8 cents.

Higher make allowances result in lower milk prices to farmers, but the co-ops say that the high energy prices are detrimental to their businesses currently.

“Information obtained from the California Department of Food and Agriculture reveals that the price of natural gas for the Land O’Lakes operation has more than tripled since the last make allowance adjustment was made for cheese,” Land O’Lakes says in its letter to CDFA. “In addition, our invoices indicate that the cost of electricity has increased by at least 20 percent.

“We are recommending an immediate increase in the make allowance for cheese to reflect the increased energy costs as well as other costs,” the letter also says. “Land O’Lakes lost about $500,000 because of interruptions in power. The reason was that the entire operation was much less efficient when power was shut off. The requested make allowance for cheese does not make up for that loss.”

CDFA has said it will hold hearings on the issue, although a date has yet to be set. As expected, there will be two sides to the issue. Kaldor, who says the Dairy Institute board hasn’t yet fully addressed the proposals, is disinclined to support the co-ops’ proposals. She says this is because she believes that in order to retain their credibility, the make allowances need to be based on audited cost data that the department collects when it surveys plants. In addition, she is hopeful the energy cost problems will only be temporary.

“If it’s a long-term problem, it will show up in a cost survey,” she says, adding, “and it it’s not temporary, we’re in a heap of trouble anyway.”

Meanwhile, everyone in California is keeping a wary eye on what this summer might bring. While in various parts of the country public appeals to conserve energy during warm spells aren’t unheard of, the situation in California could be much more complicated.

“Here we had the situation where we had blackouts and it wasn’t really hot,” says Jim Tillison, CEO, Alliance of Western Milk Producers, about the blackouts last week that were attributed to power plants being off-line and an unexpected early warm spell.

Besides the high demands for energy that summer brings, also adding to California’s energy woes are the fact that the Northwest snow pack is extremely low this year, meaning there likely won’t be hydroelectric power available to export to California during the run-off months of April, May and June.

Run-off predictions are about 54 percent of normal, according to Rick Itami, manager of the Eastern power business area, Bonneville Power Administration (BPA). The situation is so bad at this point that in the Northwest some irrigators will be paid to not pump water from deep wells or other irrigation systems. One such program has BPA paying irrigators not to irrigate 75,000 acres in the Columbia Basin Project, which draws its water from Banks Lake at Grand Coulee Dam on the Columbia River. BPA will be paying irrigators $330 an acre and believes this program could result in significant savings not only from the water not having to be pumped from the Grand Coulee Reservoir but also from the water generating hydroelectric power downstream.

In other cases, irrigators will be cutting back on the amount they irrigate. It’s not yet known how much land will be involved or whether the programs will affect feed prices, although the potential is there.

Western companies outside of California also are looking at what they need to do to address the energy situation. Jeff Williams, executive vice president and director, procurement, logistics and business development, Glanbia Foods, Twin Falls, Idaho, says that Glanbia has some initiatives to address energy conservation as well as has some longer term interests in using waste to generate power. The company also is using the natural gas futures market.

And Harold Schild, president and CEO, Tillamook County Creamery Association (TCCA), says TCCA currently is trying to get an exemption for critical industries in case there are rolling blackouts in the Northwest. CMN

http://www.dairynetwork.com/content/news/article.asp?docid={26F5F92B-2435-11D5-A770-00D0B7694F32}&VNETCOOKIE=NO

-- Martin Thompson (mthom1927@aol.com), March 30, 2001

Answers

There's a farmer with 800 head of cattle in Minnesota. He's set up so his manure produces methane which poowers a generator. He sells 2/3's of his power to the local utility. I'm surprised the western GREENIES haven't figured this out yet.

-- John littmann (LITTMANNJOHNTL@AOL.COM), March 30, 2001.

To many of the California greenies don't think that way. They just know that they want the envir protected but never carry it beyond that by doing something like the methane. As long as they had power with the surrounding states providing it, they didn't need to think beyond that. Its the same as the energy policy of the nation. As long as you can buy it off shore so cheap, why do anything at home. No one looks beyond the next pay check or qrtly report. There is no long term committments anymore. The power lines that are in terrible shape across the country and the gas lines that are also old and in bad shape are examples of this type of thinking. The chickens are coming home to roost! Taz

-- Taz (tassie123@aol.com), March 31, 2001.