Significant Fuel Price Risk Abounds | Advice

Posted on 06/28/2019 1:05 PM

 

Farm Diesel -- With this week's sharp drop in farm diesel prices, we recommend farmers reward the setback by topping off at least a modest percentage of fuel burned thus far in the growing season. Tensions with Iran have added support to crude oil futures and heating oil futures have followed crude higher. If tensions flare further or military action ensues in or around the Persian Gulf, look for crude oil and heating oil futures to respond higher.

There is also the matter of the Philadelphia refinery that will be shut down and sold after an explosion and fires severely damaged the facility. That complex was the largest refining facility on the eastern seaboard, processing around 335,000 barrels of crude oil daily. Distillates were among the products produced there, and we have observed the East Coast's hefty reliance on heating oil during the winter months in the past. The lost production will have to be made up somehow, and it is likely supplies from around the nation will be reshuffled to answer demand, especially this fall.farm diesel price chart

Concerns over sluggish world economic growth have kept a lid on crude oil and heating oil up until now, but if supply-side concerns overshadow declines in demand, retail diesel prices could respond sharply higher with little warning.

Manage your fuel price risk and top-off at current prices as we foresee significant upside risk for harvest prices. It is difficult to tell you exactly how much to book now as some farmers have made far fewer trips across fields than they had hoped at planting, and we do not want to get too aggressive in a down-trending market. I will say we will be watching carefully for a "V" bottom in farm diesel as a cue to book very aggressively for harvest supplies. Once farm diesel begins to firm -- and it will -- we do not expect prices to break back to this week's regional average of $2.42.

I say again to stress the importance here, there is significant upside risk in farm diesel between now and harvest.

  • Our regional average farm diesel price softened 8 cents per gallon this week, falling to a price point dead-even with our five-year average price.
  • Illinois, Wisconsin and Ohio all posted double-digit declines in their respective statewide average farm diesel prices.
  • According to EIA, national distillate stocks fell 2.4 million barrels per day in the week ended June 21, still 8 million barrels above the same week last year.
  • EIA also reported U.S. refinery capacity set a new record as of January 1, 2019 at 18.8 million barrels per calender day -- the figure includes both active and idled production capacity.
  • Manage upside diesel price risk and top-off at current prices.

Propane -- We have mentioned before the risk to propane prices at harvest, but I will briefly reiterate here by propane price chartsuggesting demand for propane, and to a lesser degree natural gas, is expected to be very high at harvest. Some will argue that yields will fall well short of most growers' APH, limiting the number of bushels to run through the dryer. Prudence would suggest we proceed as if this were to be a normal year.

The axiom goes, "don't count the bushels until they are in the hopper." That should apply equally to expectations of high yields and of low yields. Your operation's corn acres that WEREN'T planted should drive that thought process more than yield expectations. Maybe I'm giving too much credit to modern seed varieties and their ability to weather storms and nitrogen loss, and I understand production budgets are growing ever tighter.

We have seen a sharp pullback in propane prices this week, and I do not want to let the opportunity to get away. But I am also more willing to let propane run to the downside for a few weeks before I advise pulling the trigger. But as with diesel -- which we advise you top off right away -- a "V" bottom will be our sign to book aggressively for harvest and winter supplies. At that time, as has been our policy, we will advise you book total harvest and winter needs at that time and fill your on-farm storehouses to capacity.

  • Our regional average propane price dropped 11 cents per gallon on the week.
  • Illinois, Indiana, Wisconsin, Michigan and Kansas all posted double-digit declines on the week.
  • According to EIA, national propane stocks firmed 1.403 million barrels in the week ended June 21, now 17.501 million barrels above the same time last year.

Fuel
6/10/19
6/17/19
Week-over Change
Current Week
Fuel
Farm Diesel
$2.52
$2.50
-8 cents
$2.42
Farm Diesel
LP
$1.32
$1.31
-11 cents
$1.20
LP

Our farm diesel/heating oil futures spread compares the weekly average retail farm diesel price with front-month heating oil futures as of the close on the previous Friday. A move below the "line in the sand" indicates pending upside risk. A move above our "line in the sand" indicates downside potential.

This week, our spread analysis indicates limited, waning near-term downside potential for retail farm diesel.


heating oil futures/farm diesel spread chart

 

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