Book Farm Diesel Effectively to Manage Price Risk

May 30, 2013 10:27 AM
 

Farm diesel is an expense that can be managed with a little consideration. Historical data gives clues to the general annual path of farm diesel pricing, but those generalities can easily fail. The solution is to have a long-view plan to fuel your operation profitably.

Farm diesel has shown a tendency over time to increase in price through the summer months and into early harvest, and fall sometime around Christmas. Projections for 2013 are for Farm diesel to average $3.40/gallon, and the current price reported to your Inputs Monitor is just above that at $3.423 -- trending lower since March. farmdieselchart

If you believe that prices will increase as the growing season progresses, think about booking some farm diesel today. But filling all of your needs for the entire year can be tough to figure, and can have you gritting your teeth two weeks later if the price falls off sharply.

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

The price of farm diesel has shown no correlation to the price of corn. WTI crude is about the best indicator I have found so far, but again, no 'true' correlation exists there either. It is true 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 at random. This is no way to go.

Do not get greedy, and do not kick yourself if you pull the trigger on some farm diesel and prices fall the next day. Sometimes, that's the way she goes. But if you filled only a portion of your needs just before a price decline, you are still ahead and can book a little more.

If industry pricing expectations are correct, farm diesel is almost at a projected annual low. Read the Monitor's 'Gasoline and Diesel Weekly: Farm Diesel Stays Put' for a look at how your state measures up to the regional average and view a three week table of farm diesel pricing in the Corn Belt. That report points out that eight of the twelve states in our survey were unchanged from the week before, and upward movement was confined to 2 cents or less. This is a strong signal that prices may have found a bottom.

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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