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50538

Good News: Diesel Prices Hit Multiyear Lows

As U.S. farmers digest the bearish USDA data pressuring commodities prices, the energy side of their cost sheets may provide the glimmer of hope.

Diesel prices have dipped to their lowest level since May 2009. For instance, wholesale diesel prices are running between $1.40 and $1.75 per gallon, with some regions under $1.00, compared with a $3.00 market between 2011-14.

“Farmers are seeing the cheapest diesel prices since the Great Recession,” says Tom Kloza, senior energy analyst at Oil Price Information Service.

Since 2013 and 2014, local prices farmers face have decreased significantly. In August 2015, the average price for a gallon of diesel in the Midwest is $2.54 per gallon, which is 32.8% lower than the August 2014 average of $3.78, and 34.4% lower than the August 2013 average of $3.87, according to IBIBISWorld, Inc, a research company that evaluates volatility in energy markets.

And there’s even better news, Kloza says. “I don’t see anything really pushing up prices, significantly, for another 90 days. There will be a catalyst when we get to the harvest season." 

Preprice Diesel

Despite fuel costs being a smaller percentage of a farmers’ overall costs, based upon commodities prices, farmers are urged to find any way to cut costs.

Specifically, fuel costs farmers about $5 per acre, less than 1% of the cost of production. Gas costs for drying grain can be as high as 50¢ per bushel.

Al Kluis, Kluis Commodities, suggested to his farmer-customers this week that they take advantage of this diesel price slump. “Buy 50% of this year’s diesel needs,” Kluis said in a text to customers.

“I watch the seasonal pattern for gasoline prices to bottom out after the summer drive season is over in late August or early September. The old rule was to buy when the kids went back to school and that timing is usually pretty good. The other prime buy time is usually in late March when home heating oil demand goes down and before the summer drive season begins,” Kluis says.

 

Supply Glut

Why are diesel prices so low? The market price of diesel fuel is largely determined by the price of crude oil, which has fallen to a 6 1/2-year low, as of Friday. 

"This drop in crude is a response to both increasing domestic production through fracking and easing demand from emerging markets like China," says Kevin Young, IBISWorld procurement research analyst.

World gasoline refiners have produced a glut of diesel supplies, as they try to fill the demand for gasoline. In the Middle East, there have been a number of refinery operations that have been commissioned in the last few years. Those countries are making diesel for export purposes.

The U.S. does export 1 out of every three gallons of diesel produced.

In addition, U.S. refiners are producing record amounts of diesel, Kloza says. “It (diesel) has been the magic molecule for refiners for the past 10 years. For refiners, diesel has delivered magic returns in high margins for a decade now. But they are worried now that the magical returns are fading. However, with crude oil scraping lows, diesel prices could continue to drop. There are a lot of deals out there right now.”

Looking Forward

IBISWorld forecasts that the price of diesel fuel (in the U.S.) will increase significantly in the three years leading to 2018, indicating that farmers should seek a long-term contract to lock in today’s prices in that time frame, Young says. "In the short-term, crude oil prices have been extremely volatile, so farmers with strict fuel budgets could benefit from locking in fall prices," Young says. For farmers, lower diesel prices should also translate into lower freight costs to ship expected large corn and soybean crops.

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