Diesel fuel: Farmers discuss strategies to deal with price spikes

Issue Date: October 17, 2012
By Ching Lee

Analysts predict the recent surge in California gasoline prices will continue to ease, but say it is unclear whether this will translate to lower prices for diesel fuel.

With harvest season under way, heavy demand for diesel fuel tends to push prices higher this time of year. But unlike the huge spikes seen in gasoline—largely due to supply disruptions caused by temporary shutdowns of two California oil refineries—diesel prices have remained relatively steady in recent weeks, according to data from the U.S. Energy Information Administration.

Jay McKeeman, government relations director for the California Independent Oil Marketers Association, which represents small operators and fuel distributors, said so far the problems have mostly been on gasoline supply, with no reported issues on the diesel side.

"But once refiners start tinkering with their outputs, it's hard to know exactly how that's going to ripple out through the system," he said.

After running up sharply in early October, gasoline prices began to ease last week after the state Air Resources Board granted Gov. Jerry Brown's request to let refineries shift early to making less-expensive winter-grade gasoline.

Because gasoline and diesel are made from the same barrels, McKeeman said, if refineries decide to produce more gasoline, it could affect the production of diesel.

"Obviously, when you start making more of one, that means you make less of the other," he said.

For farmers such as Philip Bowles, who grows cotton, alfalfa hay, processing tomatoes and grain in Los Banos, any current price spikes in diesel will have little impact because of a fuel purchase the farm made earlier this year. Bowles said that should cover his needs through November.

"One thing I always try to do is keep my tanks on the farm pretty full in case there's some supply disruption, because in farming, time is much more valuable than any kind of fuel," he said. "We can't have the tractors run dry. We can't run triple shifts and get the time back that we lost."

Bowles' nephew Cannon Michael purchases the fuel for the farm, and said he was able to forward contract about 60 percent of the farm's fuel needs for the year when off-road diesel prices dropped below $3 per gallon in June.

With the wild swings in the market, Michael said it is often difficult to know when to lock in fuel prices. Gone are the days, he said, when farmers could wait for a lull during the winter to make their fuel purchases, noting that it was unusual that diesel prices dipped during the summer this year.

"Our strategy this year was to get a price we could live with and lock it in," he said. "You just have to be more creative these days, especially with the spikes and drops in all these different commodities. When you see an opportunity, you better take it, because you don't know what's going to happen."

Yuba County rice farmer Paul Baggett said he does not forward contract his fuel but buys it about three to four times a year "at opportunistic times." With a 10,000-gallon fuel tank on his farm, he said his current supply should last him through harvest and post-harvest ground work.

He noted he had an opportunity to buy a second 10,000-gallon tank but decided against it because of regulatory concerns. Another concern is that fuel stored at the end of the year becomes subject to personal property taxes, he said.

"The exposure that you have and the risk of liability and other things, it just doesn't make good sense to have additional storage," Baggett said.

Glenn County rice farmer Lee McCorkle, who also owns a trucking business hauling agricultural products, said he will definitely feel the pain of higher fuel prices on the farming side, but that he can pass on the extra fuel cost in the form of surcharges in his trucking business, which hauls everything from walnuts and rice to almonds and fertilizer.

During the fall, when his 25 trucks are running along with his harvesting equipment, his 12,000-gallon fuel storage tank will last about five days.

"The farming part of it, we try to absorb whatever it costs," McCorkle said. "Even my own products that I haul to the mill, it's going to cost more to get it there."

Currently harvesting walnuts and working the ground after corn harvest, Kings County farmer Leonard Souza said he doesn't have much fuel storage and has to bite the bullet and buy diesel even when prices are high.

On his hauling at least, he said he has a contract for most of his crop, and the buyer pays for the trucking. But he will have to cover the hauling on about a fourth of his crop that has not been contracted.

Souza and Baggett agreed that most farmers have done what they can to become more efficient and reduce fuel consumption, and said they do not plan to make any drastic changes to their current practices.

"Over the years, we've cut all the corners and basically our business plan is round now," Baggett said. "Fuel is just a cost of doing business and you'll bear that cost until you choose to get out of the business."

(Ching Lee is an assistant editor of Ag Alert. She may be contacted at clee@cfbf.com.)

Permission for use is granted, however, credit must be made to the California Farm Bureau Federation when reprinting this item.