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Hedge to Cut Energy Costs

January 9, 2013
By: Ed Clark, Top Producer Business and Issues Editor
Farmers who negotiate fuel price discounts are able to reduce fuel costs by at least 5%, reports USDA’s Economic Research Service. This is significant, as fertilizer and fuel costs average 12% of production costs across all U.S. farms.  

Winter’s the time to lock in cheaper diesel

Some inputs are on the rise, but when it comes to allimportant energy, prices are actually below year-ago levels and the price outlook for producers in 2013 is a buoyant one. Some experts question, however, just how much farm energy you should buy ahead, and in the case of propane, whether you should forward buy at all, given the supply/demand/price outlook.

For David Weitz, however, it’s not only about slashing prices. It’s also about locking in another cost, so he can become more perfectly hedged: crop prices against all inputs. In this way, he can take one more highly volatile variable off the table.

"Two years ago when we began hedging, we beat our budget by 35¢ through hedging diesel," the Pullman, Wash., wheat grower says. "That’s the equivalent of one fulltime salary for us."

This past year, hedging diesel contracts through his co-op rewarded him slightly less, but it was still positive relative to the spot market. It’s OK, however, if he doesn’t beat the spot market every year. "The more ‘X’ factors you can remove from your budget, the better. It’s no longer a floating expense," Weitz says.

Another advantage: He can store only 20% of his annual fuel needs, but through hedging he can lock in fuel without taking delivery.

The more 'X' factors you can remove
from your budget,
the better.

"It’s just like marketing crops," Weitz says, dealing with energy futures and basis. His co-op hedges futures on a New York exchange and a basis through a national cooperative, then offers contracts to growers so it is hedged.

As diesel fuel represents 7% of Weitz’ costs, knowing its cost offers dividends. That reflects a USDA study which found that from 2005 to 2008, expenses from direct energy use averaged 6.7%. Corn and rice have the highest per acre energy costs. Soybeans have the lowest.

Price Advantage. Roger Riggers, a wheat grower in Craigmont, Idaho, has been hedging diesel contracts through his co-op for nearly a decade and it’s put money in his pocket. He first started locking in contracts because of fuel shortages. "Then it became a price advantage," he says. "I got better deals than buying fuel weekly or daily."

Not having sufficient storage, he takes a load from his co-op to his farm daily. Overall, he’s in the positive, saving 15% to 25% off spot prices. It doesn’t work that way every year. Some years he’s saved $1/gal. through hedging, other years not nearly as much. Riggers likes to have his seasonal needs booked by February-March, depending on how heating oil use and thus prices—which correlate well with diesel—are fluctuating on the East Coast.

In most years, farm energy costs—both diesel and propane—are the lowest in the winter and see a spike in the spring, says Justin Fuller, director of refined fuels and pricing, CHS Inc. Fall, however, is typically when the greatest spike occurs.

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FEATURED IN: Top Producer - January 2013

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