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Aircraft owners, farmers cope with fuel costs

Issue Date: June 22, 2011
By Christine Souza
Rick Richter of Richter Aviation in Maxwell says high fuel prices that agricultural aviators are experiencing directly affect the cost that farmers pay for application services, in the form of a fuel surcharge.
Photo/Christine Souza
Nick Richter, who is also an aerial applicator for the family business Richter Aviation in Maxwell, fuels up an Ag-Cat with avgas that now costs just less than $5 per gallon.
Photo/Christine Souza

With demand for aerial applications increasing this year, farmers who rely on agricultural aircraft operators for crop treatments and seeding will face fuel surcharges on top of the regular fees they pay, as prices rise for both aviation gasoline (or avgas) for piston engines and for Jet A fuel used to power turbine engines.

Rick Richter, owner and operator of a small aerial application business in Maxwell, said he passes the added cost of fuel on to growers in the form of a surcharge, which he called a common practice. This has occurred with limited complaints, he said, because rice growers have been experiencing a strong price for their crop.

"It is a lot easier for growers to pay that surcharge with higher prices. What kind of challenge would it be if the prices were low?" said Richter, owner and operator of Richter Aviation Inc. "It is tough to stay in business if they are not going to use our services."

Ninety-five percent of Richter's business is taking care of Northern California rice acreage. Last year, he seeded and treated more than 33,000 acres of rice, including his own 450 acres. He also treats wheat, alfalfa, row crops and tree crops.

Richter reported that, generally, the state of the aerial application business in California is good, especially since there is a plentiful water supply.

"If you have water, fuel is not a problem because you've got plenty of work," Richter said.

Weather has slowed the growing season, which has resulted in an increase in demand for aerial applicators, said California Agricultural Aircraft Association President Terry Gage.

"This year, there's likely to be additional pest pressure because of the increased moisture, so I would anticipate that they would continue to stay busy throughout the summer," Gage said.

Fuel, which Gage notes is a significant operating cost for agricultural applicators, remains extremely high and has been taking its toll.

"Part of the concern is fuel is a significant upfront cost when you don't know what your season is going to be," Gage said. "Just like agriculture is very variable depending on weather, so is our industry."

In April, Richter, in his role as president of the National Agricultural Aviation Association, testified before a congressional subcommittee about the effects of high fuel prices. Richter's testimony underscored the challenges aerial applicators face with payment terms. Fuel typically must be paid for in 10 days, whereas applicators aren't typically paid for 30, 45 or 60 days. This causes challenges, he said, because fuel costs consist of approximately 20 percent of an aerial applicator's total expenses and applicators purchase fuel loads in the thousands of gallons, outlaying large chunks of capital for fuel.

Richter stressed to the subcommittee that this is a challenge "particularly when the price of fuel is high" and will be more of a challenge if, as expected, "higher interest rates return."

David Strickland, aviation fuel sales executive for World Fuel Services Inc., quoted last week's price for avgas at $4.75 per gallon and the price of Jet A fuel at $3.46 a gallon—about $1.25 higher than a year ago.

"The market has been steadily climbing the last several months. There's lot of reasons for that, such as unrest around the world, but it has driven the prices up quite a bit," Strickland said.

Prices have declined a bit from last month, when Richter said he purchased 4,500 gallons of avgas at $5.27 per gallon, costing close to $24,000.

"We use about a truckload a week here, so about 8,000 gallons a week during the busy season. Throughout the year we use about eight to nine truckloads," Richter said.

Aviators started noticing a large spike in the price of aviation fuel at the end of 2010. On Dec. 30, Richter bought a load for $2.99 a gallon.

"When fuel is low in the offseason, I try to buy several loads just to hedge," Richter said. "It is a capital outlay and now you are paying interest on that money, on that fuel that is stored in those tanks."

Hedging, a way to manage risk with the use of options and futures contracts, could work well for a large fuel customer that has very predictable volume that they would like to purchase, Strickland said.

Growers who use Richter's services pay on average $10 per application per acre; the cost is higher for seed since they plant close to two sacks per acre. This per-acre cost does not include Richter's fuel surcharge, which is based on the average price of fuel per acre.

"Growers should know that we're trying to fairly pass on the extensions that are dealt to us. We're just trying to make it equitable," Richter said.

Rice farmer Daryl Schaad of Maxwell, who also grows almonds, said farmers are always trying to find ways to cut their input costs, but must balance production costs with the benefits from increased yields.

"Maybe some farmers would opt to get their own ground rig instead of an aerial application. But I don't see that happening because with that, you have a big outlay initially and then maybe a small savings after you've got your equipment paid off," Schaad said. "I've always relied on a traditional aerial application."

Though rice prices have been favorable recently, Schaad noted that markets change quite a bit.

"For right now, farmers are able to absorb those expenses, but rice markets fluctuate pretty dramatically and the fuel prices just keep going up and when they do go down, they only drop a little bit," Schaad said.

Richter said farmers and aerial applicators alike must rely on good business sense to survive tough times and to conserve during better times.

"In agriculture, you deal with lows and highs—cycles—and you don't tend to overextend for fear that you are going to hit another low. It is about maintaining steady growth," he said.

(Christine Souza is an assistant editor of Ag Alert. She may be contacted at csouza@cfbf.com.)

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




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