Home / Farm Management / Crude oil slide could be your farm's gain

Crude oil slide could be your farm's gain

STEVE JOHNSON 07/05/2012 @ 1:00pm Farm Management Specialist with ISU Extension housed in Polk County, Iowa. Areas of expertise include crop marketing, grain contracts, government farm programs, crop insurance, farmland leasing and other crop risk management strategies. Reach Steve by e-mail at sdjohns@iastate.edu.

No one can predict crude oil prices for this summer with a high degree of accuracy, let alone predict retail gasoline and diesel fuel prices. However, all fuels have shown a decline in price recently. A prudent risk management plan would be to book a majority of your fuel needs for this coming fall—including propane for grain drying—at these recently lower prices.

Since early April most commodity markets have been especially hard-hit by the escalation of the European Economic Union debt crisis. There is fear that Europe’s monetary problems could spread into a worldwide debt contagion. Shaky economic data coming out of the major industrial regions of the world (China, U.S. and the EU) are also bearish for commodity markets.

Commodity market bulls headed into 2012 actually thought this could be a banner year. They had very accommodating world economic monetary policies on their side (inflationary), and the world economic growth was improving.

Some market analysts projected that retail U.S. gasoline prices would approach $5 a gallon nationwide this summer, breaking the all-time record high from 2008 of $4.11 per gallon. The August futures contract prices trading on the NYMEX Crude Oil prices for the benchmark West Texas Crude Oil topped $110 a barrel on March 1, 2012.

A series of factors aligned to pressure crude oil prices lower, including global economic concerns that decreased demand, rising domestic fuel production (the highest since 1990) and selling by the commodity funds.

By late-June, the nearby August NYMEX Crude Oil contract had lost more than $30 a barrel and hit a fresh 8-month low. The nearby August chart reached chart objective support at $78 a barrel early the week of June 25th before moving higher.  

Summer fuel price forecast to hold steady. This is good news for U.S. farmers, who will use diesel- and gasoline-powered equipment to harvest millions of acres of crops this summer and fall, followed by preparation of soils for 2013 crop production.

Since most farm fuel and drying needs occur at harvest and during the fall tillage season, many farmers book their fuel and propane ahead. They book it during the summer months in anticipation of higher demand in the fall and seasonal trends that typically see a decrease in price for both types of fuel in the summer.

The political situation in the Middle East and U.S. relations with Iran and Syria will play a large role in what farmers will pay for diesel fuel and gasoline.

Supply also can be interrupted by bad weather, such as hurricanes or refinery or pipeline outages - all of which can occur domestically or abroad. When supply interruptions do happen, they often temporarily drive prices up until the disruption subsides.

On the other hand, sluggish economic growth, an increase in crude oil production and higher-than-normal crude oil stocks could continue the downward pressure on futures prices for fuel.

Recent developments in the economic crisis in Greece, Spain and Italy along with an apparent slowdown in China's economy could be important to this summer's fuel prices.

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