Farmers were already feeling the financial squeeze as inflation skyrocketed to 7.0% in 2021. Now, with inflation at 8.5% (as of July 2022) – down from 9.1%, producing food and other agricultural commodities might get too costly. In addition to up to four-fold increases in fertilizer and herbicide prices, growers are dealing with the challenges of obtaining the diesel fuel to operate farming equipment. In many areas of the United States, fuel availability and timely delivery have been limited, delayed, and more expensive.
While economists point to several factors affecting the sharp uptick in fuel prices, the lasting effect of persistent financial pressures could result in fewer farms come 2023.
3 Reasons Fuel Costs are Surging
The U.S. Energy Information Administration (EIA) released a Gasoline and Diesel Fuel Update on August 8 confirming what many farmers already know — fuel prices inched slightly downward but remain high. In addition, the report provided a breakdown of diesel fuel costs based on June 2022 data.
Taxes (federal, state, county, and local government) = 10%
Distribution & Marketing = 14%
Refining Costs = 29%
Crude Oil = 47%
Since crude oil contributes to nearly half the cost of each gallon of diesel fuel, understanding the driver of this figure might help forecast when farmers can expect a decline in prices. Many economists point to:
- Ukraine War – Sanctions on Russian oil created a domino effect for investors, refineries, farmers, and consumers. Investors are buying more oil, driving up prices. This results in higher costs for refineries to produce fuel, which are passed on to farmers and other consumers.
- Supply vs. Demand – While the war is a contributing factor, it only tells part of the story. The uptick in diesel prices started before Russia launched its military invasion of Ukraine in February. The American Farm Bureau Federation noted in June, “This new high price of gasoline is nearly two times higher than the five-year average price of gasoline before 2020 when COVID lockdowns pushed gasoline demand way down.”
Lower U.S. oil production and fewer imports also reduce supply while demand remains the same or increases, especially during the travel season. When supply is less than demand, prices increase.
- Global Markets – Crude oil suppliers have less incentive to hold on to inventory for higher returns. Selling it today could help them avoid substantial financial loss.
The EIA also points to additional factors that influence the retail price of diesel fuel, such as transport costs, regional operating costs, and local competition. For example, the further the retail location is from the Gulf Coast, the higher the fuel prices.
Is There a Solution to Rising Fuel Prices?
While some highlight that “everything costs more,” including the cost of the commodities farmers bring to the market, they fail to understand the realities of operating an ag business. While higher costs are passed on to consumers, this doesn’t address the root cause of the problem.
Operating at a profit is necessary for the long-term success of most ag businesses. But many farmers find breaking even in the current environment challenging. High operating costs are eating up gains. In addition, there’s fear that lower commodity prices could push farmers further into the red.
Fuel prices can reverse course if there is a positive change to at least one area affecting the price surge:
- Ag businesses might see a decrease in diesel fuel costs if domestic oil production increases to meet demand, OR
- Oil refineries are provided incentives to ramp up production.
While some might point to a recent spate of lower prices at the pump as an early indicator of price stability, businesses and consumers should remember there is often more at play. For example, a slight downgrade in prices might be due to slowing demand for gasoline as consumers drive less to save on expenses.
The Future of Diesel Fuel Prices
Political instability, unfavorable governmental policies, and a severe hurricane season could create the perfect storm for farmers and ranchers in the new year. Unless the United States increases fuel production, fuel imports, or both, prices are likely to continue their upward trend.