AFBF: Rising fuel costs continue to impact farmers
Posted on Jul 13, 2022 at 0:00 AM
Like all Americans, farmers and ranchers are facing higher prices at the fuel pump, as well as on the farm. Growers felt these price increases throughout the spring as they worked to plant during one of the most important crop years in recent history, according to the American Farm Bureau Federation’s June 28 Market Intel. Growers have expressed concerns about the availability and delivery of diesel fuel when they need it most, especially as they have faced delayed planting in many areas. The window to plant crops this year was smaller than usual, so fuel delivery needed to be timely, but it also was very expensive.
Gasoline prices hit a new high, rising above $5.01 in June, according to the U.S. Energy Information Administration. Diesel prices rose to $5.72 per gallon in June, up $2.43 per gallon, or 74%, compared to $3.29 per gallon in June 2021. The current high price of diesel is more than two times the price paid before 2020. Looking back to the end of February, when Russia invaded Ukraine, the price of diesel jumped by $1.15 per gallon within the two weeks following.
The U.S. Energy Information Administration breaks down the costs within a gallon of fuel. As of April 2022, the most recent data available, 60% of the cost of regular gasoline is crude oil, 17% is the cost to refine, 11% is costs associated with distribution and marketing, and 12% is taxes, which vary based on the state in which you are pumping gasoline.
In April, the cost of diesel, the primary fuel option for farmers and ranchers, was made up of four parts – 49% is based on crude oil, 28% is refining, 12% is costs associated with distribution and marketing and 11% is taxes, which varies by state.
The U.S. supply of weekly crude oil stocks, similar to ending stocks of corn or soybeans, is at its lowest point since 2004.
While the U.S. is relatively behind its normal domestic production of crude oil and limited imports are causing supplies to be short, demand is rising, both domestically and globally. As noted, mid-March through the end of September is the peak demand time for gas and diesel, so it is normal for inventories to lower during this time. What makes the situation difficult this year is that the U.S. does not have the same quantity of additional supplies, like imports, to supplement the increased demand.
The East Coast will continue to see fewer imports. In addition, East Coast ports are likely to have an increase in exports as the U.S. supplements demand from European and Latin American countries that would normally secure supplies from Russia.
This dynamic, however, is creating a market force that puts U.S. consumers at a disadvantage. Crude oil, gasoline and diesel are all considered global commodities. Global market forces in the short-term are incentivizing suppliers to sell off inventory at the cash price today, rather than the lower posted future price. This creates a disincentive for suppliers to hold back any inventory that would likely move through domestic channels, thus shortening domestic U.S. supplies. It has been reported that the spread between current and future prices has been as much as $1 per gallon. This would mean that suppliers would lose as much as $1 per gallon if they were to hold on to inventory for 30 days or more.
Fuel prices have risen sharply since Russia invaded Ukraine, and high fuel prices continue to add to the conversation of high input prices for all agricultural producers. In 2020, fuel represented about 3% of total on-farm expenditures. Earlier this year, USDA expected fuel costs to increase more than 2% as part of net farm income projections compared to the cost of fuel in 2021 and we expect that increase to be larger when USDA updates those numbers in September. Since 2013, fuel has increased as a farm production expenditure cumulatively by 3%.
This expectation comes with the latest USDA cost of production data, which estimates that the cost of fuel, lube and electricity combined is projected to increase 34% in 2022 compared to 2021, after just a slight cost reduction, decreasing 1% from 2020 to 2021. A glimmer of hope for farmers is USDA’s estimate that the price of fuel may decrease about 18% in 2023 compared to 2022, but these projections are very early and there is significant uncertainty.
It is getting more costly to farm and while some – not all – commodity prices have increased, farmers are not necessarily making more money. In fact, with higher expenses, many farmers and ranchers are concerned they will not be able to break even, let alone make any kind of profit. And, if the market takes an unexpected turn that pushes commodity prices lower, farmers will likely not be able to make enough revenue to cover these high production costs.
Beyond the farm, diesel and gasoline are used to transport farm products to and from the farm. The rising cost of diesel and gasoline will inevitably increase the cost of the food consumers buy at the grocery store.
To read the entire Market Intel report, click here.