With the financial scars from last winter’s record-breaking natural gas price peaks still fresh in mind, many growers are looking to get smarter about buying fuel instead of getting burned again this winter.
But how to do this? Trading gas futures is a difficult enterprise, like picking a winner in stocks but without some of the clues (such as earnings, history, management etc.) that allow stock market investors to calculate a company’s true investment potential.
Even the big energy traders, staffed with meteorologists and political scientists, really know no more than the little guy. It makes for a playing field full of potential dangers.
“I could show you the NYMEX (New York Mercantile Exchange) numbers for the last 15 years, and I defy you to make any sort of sense out of them,” says Bob Bordone, a 32-year veteran of the natural gas industry. Bordone has spent the last decade as a consultant and third-party gas broker at New Jersey-based Woodruff Energy advising growers like Bill Swanekamp of Kube-Pak Greenhouses.
He explains that the deregulated utility system is both simple and complex, and begins with a simple premise. “When you deal with a broker, you can go out and buy your expected volume over a period of time, whether it’s one month or one year. At a time when you perceive the price to be at a relative low, you buy and lock in that low price for that time period,” he says. “This gives you price certainty. In these days of unstable and fluctuating prices, my customers perceive that as important.”
The further out you can buy, the better deal you can get. However, locking down a price is always a gamble. “Hopefully, we’re giving the customer a price that beats the utility price as it rolls up and down over the course of that year, but there’s no certainty to that,” cautions Bordone. “You’re not guaranteeing savings, but you are guaranteeing your budget.”
Obviously, usage of natural gas will vary based upon the weather, but that’s a comparatively small variable, one that Bordone marks as “usually less than a ten percent swing at the end of the year.”
Extreme Check Writing
Not surprisingly, the utility companies plan for extreme weather, adding more complexity (and more dollars) to the equation. “There’s a premium attached to the price of gas in winter months, and a fear factor that has gotten worse since last year,” notes Bordone. If nothing happens either weather-wise or geopolitically by fall, the winter premium could evaporate and leave those who purchased their winter fuel contracts earlier paying more for their gas than those paying month-to-month at the utility.
These days, however, such stability seems a remote possibility, and even if the premium evaporates, third party brokers can offer an average price between existing and future contracts. “If November comes around and there’s been no hurricanes, the Middle East is stable and the price is in the toilet, what I can do is look out at 2008-2009 and add next year’s price in,” Bordone says. “My customer can then buy next year’s gas at this low price. I’ll blend it with the higher price from this year and bring the overall price down.” Bordone points out that, unlike the utilities, his livelihood depends on the success of his customers, and that, also unlike the utilities, energy brokers like Woodruff operate lean enough to survive on what he terms “razor thin” margins.
Over A Barrel
To add further complexity to the matter, there are two separate components to natural gas pricing. The NYMEX price (the cost of the gas itself) is the same price across the country. However, a second component to pricing is transportation – in the Northeast it’s highest, while in the Southwest it’s the lowest. Utilities “bundle” these prices together, while third-party brokers are looking to save for themselves and their customers, whenever possible.
When the purchase is made, and when it is made for are both critical variables. Swanekamp, for example, made a purchase in February and set his price for the year and through 2007. Bordone observes that Kube-Pak’s dual-firing boilers and significant oil storage capability put Swanekamp in a different and better position than many business owners, who are “over a barrel” where fuel options are concerned. Because of this capability, Swanekamp decided to only buy gas from March through December, and skipped the two most expensive months of January and February (when those transportation costs are highest).
Knowledge Is Power
In deregulated states, growers can call their local utility and get a printout of their gas usage over the past 12 months. Armed with that information (and the Wall Street Journal’s futures page), a third-party broker can give an initial price projection. “That’s what was so critical to Bill (Swanekamp),” says Bordone, “This fuel futures purchase is now a part of his operating costs that he can plan for and not be exposed to fluctuating prices.” Although they’ve been doing business for a number of years, and Swanekamp is a recognized green industry authority on energy issues, even he got burned last year, relates Bordone. “Last May and June, we didn’t fix the price for the gas, we just fixed the price for the transportation. Then Bill got clobbered on the gas price after the the hurricanes.”
Maybe it’s due to his long association with Swanekamp, or those razor thin margins he spoke of, but Bordone sounds positively grower-like when he breaks down the greenhouse situation as it stands today. “Dirt is big, seed is big and labor is the biggest, but energy costs are growing all the time.”
For more information on fuel buying and Woodruff Energy Inc., visit www.woodruffenergy.com.