Will Falling Fuel Costs Offset Lower Grain Prices?
Amidst a fairly gloomy crop profit potential picture for 2015, there is one bright spot: Fuel prices are falling, and they're expected to stay on the low side through the next year. What will that mean to your overall crop profits?
You are likely to see continued savings on nonland costs because of lower fuel prices, but don't expect that alone to bump you out of the red and into the black, revenue-wise, says one economist. The good news is that the fuel cost cut will likely last a while, and the longer it lasts, the more apt you are to see a positive effect on the cost side of your crop farm's balance sheet.
"Crude oil prices have decreased in recent weeks, leading to decreases in gasoline and diesel fuel prices. Lower fuel for production corn and soybeans in 2015 will occur if fuel prices remain lower through the 2015 growing season," says University of Illinois Extension ag economist Gary Schnitkey. "However, fuel costs are a low proportion of total costs of producing corn and soybeans. As a result, oil and fuel price declines will have a small impact on 2015 production costs,"
The per-gallon savings over the last few months has been fairly dramatic; in the first half of this year, retail gasoline prices were around $3.70 per gallon, while diesel was scraping $4 a gallon. In early November, on the other side of the spectrum, retail gasoline averaged $3.08 per gallon and diesel was just over $3.60 a gallon. Brent crude oil fell below $100 a barrel earlier this fall, continuing an almost year-long price decline. And, Schnitkey says crude oil will likely stay below triple-digits through the next year.
"A number of factors have contributed to this decline including increases in North American oil production, hesitancy by Saudi Arabia to cut its own oil production, drops in Asian demand for oil due to slower growing economies, and concerns about demand for oil in Europe due to the potential of economic recessions," he says, adding that this normally volatile market could periodically buck the longer term downward trend based on world events. "Currently, the outlook for oil prices continues to be below $100 per barrel for 2015. Prices on Intercontinental Exchange (ICE) future contracts for Brent crude oil are in the low $80 per barrel for all contracts with expirations in 2015."
Though cost cuts like these are welcome sights for farmers fighting to maintain crop profitability in the face of sliding grain prices, it likely won't be enough on its own to kick revenues above the overall average breakeven point, Schnitkey says. But, combined with other key inputs -- some of which are directly influenced by the price of crude oil -- oil's fall could eventually add up to boosting grain profits into the black.
"Declines in fuel costs could lower other production costs, such as fertilizer and seed. If there is an impact, these costs likely have a lagged relationship to fuel costs. As a result, crude oil price decreases likely will be felt not in 2015, but in 2016 and years thereafter if prices decreases persist," Schnitkey says. "Drying costs also could decrease. However, drying costs are more related to natural gas prices than to crude oil prices. Natural gas prices do not always follow crude oil prices."
Yet, there's also a likelihood that continued low oil prices could have the opposite effect. Right now, ethanol production is running high. If fuel prices remain low, however, there will be lest cost incentive to make the corn-based fuel.
"A countervailing impact of lower costs may be the impact that lower crude oil prices have on ethanol prices," Schnitkey says. "Lowering crude oil prices could reduce the price of ethanol, which could lower commodity prices. Whether these impacts happen will be traced out over time."