Farmers Reeling From High Oil Prices

As the summer driving season approaches, drivers are already paying more for gasoline due to the oil price rally in recent months.

But higher oil prices affect not only the gasoline bills of retail consumers. The higher price of oil is also pushing up diesel fuel prices as the harvesting and planting seasons for various crops are already in full swing.

Farmers in the United States and around the world see their diesel fuel expenses jumping and eating into their profits that have been already constrained by depressed prices of some crops.

Ultra-low sulfur diesel is used for farming equipment and for transportation of crops, and the May price of that diesel is the highest it’s been since 2014, just before the collapse of crude oil prices.

“You just kind of all of a sudden realize, ‘Wow, it’s pretty high,’” farmer Glenn Brunkow from Wamego, Kansas, tells Reuters.

For next year, Brunkow is considering locking in diesel prices for the first time ever to save on future rises in diesel fuel prices.

This year, farmers are struggling with higher fuel costs as a result of the advance in crude oil prices in recent months.

In the U.S., where America’s farms output contributed US$136.7 billion—or about 1 percent of GDP—to the economy in 2016, total production expenses this year are expected to be flat on 2017, but spending on fuel and oils is expected to jump 10.2 percent, forecasts by the United States Department of Agriculture (USDA) show. Related: India To Saudi Arabia: We Need Stable And Moderate Oil Prices

Spending on fuels and oils, which accounts for nearly 5 percent of cash expenses, is expected to increase by 10.2 percent, or by US$1.4 billion, on top of a 13.9-percent, or US$1.7 billion, increase for 2017.

The 2018 forecast is driven in part by EIA’s forecast of higher diesel prices—by more than 30 cents per gallon on average this year, the USDA said in its 2018 Farm Sector Income Forecast.

In inflation-adjusted 2018 dollars, net farm income in the United States is expected to decline by US$5.4 billion from 2017—a drop by 8.3 percent. If realized, this would be the lowest real-dollar net farm income since 2002. Real net cash farm income is forecast to drop by US$6.7 billion, or by 6.8 percent, in 2018, and this would be the lowest real-dollar value since 2009.

Net farm income is a more comprehensive measure than net cash farm income, as it also includes non-cash items such as changes in inventories, economic depreciation, and gross imputed rental income.

“While the 2018 farm sector expense forecast is little changed from the 2017 forecast, this masks fluctuations in individual expense items. In nominal dollars, forecast declines in expenses for inputs typically produced on farms—including feed, livestock/poultry, and seed—are more than offset by forecast increases in fuel and oils, interest, and labor expenses,” the USDA said.

Arkansas farmer Tim Gannon, for example, may have to pay up to 25 percent more—or an extra US$4,000—to refill a 7,500-gallon tank with diesel for which he had paid some US$17,000 in February.

“That’s a fairly significant amount of income to lose,” Gannon told Reuters. Related: The Double-Edged Sword Of High Oil Prices

Farmers in all other parts of the world are also feeling the pinch of high diesel prices—from Russia to France, to Brazil and Argentina. To contain higher fuel costs for trucking and farm equipment, farmers are already planning to cut costs elsewhere, and some are postponing investments or spending less on other farming products such as fertilizers.

“We’re seeing financial stress occurring in agriculture that we probably haven’t seen for a decade or so,” Scott Brown, director of strategic partnerships at the University of Missouri’s College of Agriculture, Food and Natural Resources, told Reuters.

“If diesel prices continue to go higher, it continues to put more pressure on.”

By Tsvetana Paraskova for Oilprice.com

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