Higher diesel to slice into 2012 ag profits

Apr 20, 2012
by DTN

Gas guzzlers beware: Higher diesel prices could take some of the fun out of farming in 2012. Assuming an Illinois corn grower averaged $2.83/gallon for diesel in 2011, each $1/ gallon increase in 2012 will shave this year’s profit margins as much as 4.5 percent, according to Sam Bachman, a financial consultant with AgriSolutions, Brighton, IL.

His analysis of farm records in the AgriSolutions database shows some corn growers averaged 11 trips over the field last year, with diesel contributing 35 percent of their total machinery costs. In contrast, soybeans required only nine trips per season, so higher diesel costs would trim 2.8 percent off that crop’s profit margin for each $1/gallon bump.

Lingering concerns over Iran’s threat to block the Strait of Hormuz make oil prices harder to predict than normal. Hormuz is the narrow shipping channel that handles about 20 percent of the world’s oil and could be vulnerable to mining. If that happened, some economists forecast crude oil jumping from $100/barrel to $150 virtually overnight.

“There’s a lot of uncertainty regarding diesel prices due to Iran’s threats,” admits DTN Refined Fuels Editor Brian Milne. “In a worst-case scenario, we would top $5/gallon and head toward $6/gallon. I doubt that, though. It’s likely we’ll peak at no more than a $4.50/gallon U.S. average.” Milne notes the national average diesel price is at $4.14/gallon now and the Energy Information Agency pegs prices at a $4.15/gallon average for 2012.

If you haven’t booked all your 2012 supplies yet, you’re in good company, said Growmark’s Martin Wieland and Harry Cooney, who oversee risk management for the cooperative’s fuel retailers in 31 states and Ontario. So far this year, they’ve recommended that local co-ops book 20 percent to 35 percent of their spring and fall diesel needs and 30 percent to 45 percent of their gasoline requirements.

“Thanksgiving to Valentine’s Day is traditionally the best time to lock in diesel prices,” said Cooney, based on long-term seasonal averages.

But when Iran’s threats hit the news in January, “our orders exploded like fireworks,” Wieland said. “Now some of those contracts are under water.”

In normal years, diesel prices climb through April, giving buyers a brief chance to order fall needs before another summer run-up. At the moment, nearby heating oil futures (a surrogate for diesel) remain in the top 12 percent of their historic price range, so the fuel is likely due for a short-term correction, DTN analysts believe.

U.S. agriculture is more energy efficient than it was in the 1980s, so oil prices don’t hold as much sway as they did then. “Still, for a 2,500-acre corn farm, a $2/ gallon fuel increase could translate into $35,000 to $45,000 less to the bottom line this year,” said AgriSolutions’ Bachman. — Marcia Taylor, DTN