Book Farm Diesel

July 30, 2013 09:56 PM

Effectively manage price risk

Farm diesel expenses can be managed with consideration. Historical data gives clues to the general annual path of farm diesel pricing, but those generalities can easily fail, says Davis Michaelsen, Pro Farmer Inputs Monitor reporter.

The solution, he says, is to have a long-view plan to profitably fuel your operation. Michaelsen points out that farm diesel has shown a tendency to increase in price through the summer months and into early harvest, falling around Christmas.

Farm diesel projections for 2013 are expected to average $3.40 per gallon. The price reported to Pro Farmer is just below that at $3.35, trending lower since March.

"Farmers who believe prices will increase as the growing season progresses should think about booking some farm diesel today," Michaelsen says. However, it can be tough to figure your yearlong needs.

In an effort to manage risk, he advises farmers to book as much as they are comfortable booking in the spring. "Try booking 25% to 50% of harvest needs and plan to fill the rest as you go," he says. "This will spread out the price risk and give you ample opportunity to watch prices and make purchases when the market turns your way."

Before booking, Mercatus Energy Advisors recommend that farmers crunch the numbers first. "Whether you’re buying or selling a swap, option, futures contract or entering into a contract with a supplier, run a ‘what-if’ analysis so that you know how the contract will impact your cash flow and bottom line in various price environments," says Michael Corley, founder and president of Mercatus Energy Advisors.

Farm Diesel Levels

The price of farm diesel has shown no correlation to the price of corn. WTI crude is about the best indicator, but again, no ‘true’ correlation exists, Michaelsen explains, acknowledging that forward booking inputs and fuel can be risky.

"Some folks will hold out until they are low on fuel, hoping for lower prices but get caught in a
‘gotta-have-it’ scenario where they are forced to pay spot prices," he says.

Farm diesel is almost at a projected annual low. Eight of the 12 states in the Pro Farmer survey were un­­changed from the week before, and upward movement was confined to 2¢ or less.

"This is a strong signal that prices might have found a bottom," Michaelsen says. "If history is any indication, and it isn’t always, prices are expected to move higher through the summer. Examine your appetite for risk and book a percentage of harvest diesel as you see fit."

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