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Rising Diesel Prices Complicate Farmer's Fuel Buying Decisions

Rising Diesel Prices Complicate Farmer's Fuel Buying Decisions

By Katie Micik Dehlinger

Reid Thompson spotted a missed opportunity in the thick of the COVID-19 pandemic: Farm diesel prices tumbled, but he couldn't take advantage because he couldn't take delivery.

He added 20,000 gallons of fuel storage to his central Illinois farm before the 2022 season began, and when diesel supplies tightened up right before harvest season, he was able to take delivery of two semi-truck loads.

"The idea of bulk storage is you're in control, not only of your inventory so you can get a crop put in, but you're controlling the price," he told DTN in an interview. "To take the unknown off the table and know what your cost is, that's a big deal right now."

Farmers are facing elevated production costs for the 2023 growing season, with University of Illinois economists estimating that it will cost $854 to produce an acre of corn on high-productivity soil in central Illinois. That's up from $761 last year.

"We've seen fuel costs increase quite dramatically," University of Illinois agricultural economist Gary Schnitkey said on a webinar. "They're significant enough that they begin to matter in our budget."

Current retail diesel prices are hovering around $1 higher than last year, and experts expect prices to stay elevated amid production capacity shortfalls, Europe's tightening restrictions on Russian oil and refinery products, and China's decision to drop COVID-19 travel restrictions. However, the threat of recession, both globally and in the U.S., complicates the outlook.

Traditionally, January and February are good months for farmers to buy their fuel needs, Kansas State University agricultural economist Greg Ibendahl said in a recent webinar. (You can find that webinar here: https://www.agmanager.info/…)

"To me, there's a lot more risk of prices going way high than there are of prices going much lower than what we're seeing currently," he said.

DTN refined fuels analyst Brian Milne said when the market presents that many competing variables, he usually advises gradual purchases.

INTEREST RATES COMPLICATE BUYING DECISIONS

In Colfax, Illinois, Thompson is still learning the nuances of the fuel market and is discussing potential ways to hedge with his fuel supplier since contracts on the future board cover more gallons than his farm needs.

But for now, the focus is on buying when the time is right. He missed an opportunity last week to buy farm diesel for less than $3 per gallon -- his target -- because his advisor suggested waiting.

"I should have said, no we're where we want to be. It's like waiting for $7 corn and then deciding you want $7.50," he joked.

There's another aspect to the fuel buying equation that Thompson didn't consider when he expanded his storage: interest rates.

"The cost of carry is a lot different than it was in January last year," he said. Diesel might cost "$3.50 two months from now, but that's no different than what it could have been if I bought it six months ago and carried it on my line of credit."

He uses a spreadsheet to track the profitability of various farms and updated the interest expense figure earlier this year, bumping it up from a 4% to 7% average rate.

 

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