Farmland Industries, located in Kansas City, Missouri, is the largest co-op agribusiness cooperative in the U.S. In addition to the brand Farmland Foods, the company makes nitrogen- and phosphate-based fertilizers.
Because the company uses a tremendous amount of natural gas, it has its own risk management operation. Its energy traders evaluate the price situation, working with various commodity traders, and then take futures positions in the natural gas commodity market.
But Farmland wanted an expert to study the operations at its plants to identify ways to save energy. “The fertilizer industry is going through a downturn. Cash is scare, to say the least. And our engineering staff has been allocated to other projects,” explains John Prijatel, director of engineering for Farmland.
Farmland contacted several companies before selecting Reliant Energy Solutions, an energy services company affiliated with the electricity utility in Houston, Texas. Farmland’s commodity traders work with Reliant, so Farmland was familiar with the supplier. “Reliant supplied a source of engineering expertise and the funds for our projects,” continues Prijatel.
Outsourcing Supplier Invests in Capital Improvements
Some of Farmland’s plants were due for an upgrade. Some equipment was working well, but the company wanted to replace it with more efficient equipment that would cut its energy costs. As the outsourcing supplier, Reliant provided the cash needed to purchase the new equipment and relied on its own engineers — as well as Farmland personnel and outside contractors — to install it.
“Reliant completed the projects on time and within cost. The company has performed as expected or better,” reports Prijatel. The capital improvements took 12 months to complete at seven different plants.
Farmland could not have made these changes without outsourcing. “If we had a large engineering staff or more capital, we might have had a different perspective. But we were capital short and people short,” Prijatel explains.
Farmland paid a fee to Reliant for the assessment and installation and negotiated a split for the savings Reliant’s capital improvements generate.
Looking back on his energy outsourcing experience, Prijatel says, “This worked for us. We hope to do more of it.”
Lessons from the Outsourcing Primer:
- Outsourcing provides skilled engineers when your staff is assigned to other projects.
- Outsourcing suppliers will fund and manage capital improvements.
- Suppliers and buyers negotiate to share the energy savings generated by the new equipment.