Unstable input-output balance | Harvests

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Shelby Myers American Federation of Agricultural Bureaus

Like all Americans, farmers and ranchers are facing rising prices at the pump as well as on the farm. Growers faced price hikes throughout the spring as they worked to plant during one of the largest crop years in recent history. Growers have expressed concerns about the availability and delivery of diesel fuel when they need it most, especially as they have faced delayed planting in many areas. The window for planting crops this year was smaller than usual, so fuel delivery had to be on time, but it was also extremely expensive.

Gasoline prices hit a new record high, rising to over $5,006 in June, according to the US Energy Information Administration. This is an increase of $1.937 per gallon, or 63% more than the same week in June 2021. This new record gasoline price is nearly twice the average gasoline price in five years before 2020, when COVID lockdowns lowered demand for gasoline. Diesel prices rose to $5.718 per gallon in June, an increase of $2.432 per gallon or 74% from $3.286 per gallon in June 2021. The current diesel price is more than twice the price paid before 2020.

Thinking back to late February 2022 when Russia invaded Ukraine, the price of diesel jumped $1.15 a gallon in the two weeks that followed. Prior to Russian stocks, diesel prices continued to rise, but were barely $4 per gallon and were around $3.60 per gallon at the end of 2021.

So why are gasoline and diesel so much more expensive today than a few months or even a year ago?

Several factors increase costs

The US Energy Information Administration breaks down the costs of a gallon of fuel in April 2022, the most recent data available.

• 60% of the cost of regular gasoline is crude oil.

• 17% is the refining cost.

• 11% corresponds to costs associated with distribution and marketing.

• 12 percent is taxes, which vary depending on the state in which gasoline is pumped.

In April 2022, the cost of diesel, the main fuel option for farmers and ranchers, was made up of four parts.

• 49% is based on crude oil.

• 28% is refining.

• 12% correspond to costs associated with distribution and marketing.

• 11% is taxes, which vary by state.

As noted, the price of crude oil is the biggest contributing factor to the price of a gallon of gasoline. Going deeper into the crude oil market, supply and demand play an important role in determining the price of crude oil, especially because crude oil is a commodity.

Limited Crude Oil Supply

The U.S. supply of weekly crude oil stocks, similar to corn or soybean ending stocks, is at its lowest level since 2004, meaning there is less supply available. And weekly ending inventories of regular motor gasoline are 16% lower than the same first week of June 2021, falling from 258.661 million barrels a year ago to 218.184 million barrels.

US diesel inventories are 21% lower than the same first week of June 2021, falling from 137.214 million barrels to 108.984 million barrels. It is important to note that in the United States, it is normal for inventory to decrease in the spring and summer due to increased demand from road travelers.

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The United States peaked in monthly crude oil production in December 2019, producing around 400 million barrels. In March 2022, the United States produced approximately 361 million barrels for the month. The United States has only just begun steadily producing more than 300 million barrels per month since November 2017. Over the past four years, the country has only fallen below 300 million barrels in February 2018 and February 2021.

We continue to see evidence that the U.S. economy is trying to catch up with the slowdowns and disruptions in production created by COVID-19 – with additional hurdles, like Russia’s invasion of Ukraine, preventing the supply of respond to the request.

Since the United States began producing more than 300 million barrels per month domestically in November 2017, weekly U.S. crude oil imports have averaged 8.85 million barrels. During seasonal periods of extreme demand, the United States typically imports about 10 million barrels of crude oil per week. But imports declined following the COVID 2020 lockdowns, when demand declined and imports followed suit, with the United States importing only a weekly average of 7.7 million barrels. US imports in 2021 increased slightly to 8.7 million barrels per week. So far in 2022, the United States imports an average of 8.4 million barrels of crude oil per week.

Demand for crude oil increases

The United States is relatively behind in its normal domestic crude oil production, and limited imports are causing supply shortages. But demand is growing, both nationally and internationally. As noted, mid-March to the end of September is the peak demand period for gasoline and diesel, so it is normal for inventories to decline during this time. What makes it difficult this year is that the United States does not have the same amount of additional supplies, such as imports, to supplement the increased demand.

The East Coast, in particular, will continue to see fewer imports. And East Coast ports are expected to see increased exports as the United States supplements demand from European and Latin American countries that would normally source supplies from Russia.

But this dynamic creates a market force that puts American consumers at a disadvantage. Crude oil, gasoline and diesel are all considered global commodities. Short-term global market forces induce suppliers to sell their inventory at the current spot price, rather than the cheaper posted future price. This discourages suppliers from withholding any inventory that would likely flow through domestic channels, reducing US domestic supplies. It has been reported that the gap between current and future prices has been up to $1 per gallon. That would mean suppliers would lose up to $1 per gallon if they held inventory for 30 days or more.

The most recent U.S. crude oil export data shows that the United States exported nearly 103,000 barrels of crude oil, about 8% below the peak U.S. export in March 2020. year over year show that the United States exported about 24 barrels of crude oil. % more crude oil in March 2022 than in March 2021.

But in March 2021, the United States was exporting around 26% less crude than in March 2020. As the United States increased domestic production in early 2017 to the point of consistently producing over 300 million barrels per month, U.S. crude oil exports took off – nearly 7.75 times the amount the U.S. exported in December 2016.

Conclusion – difficult times for agriculture

Fuel prices have risen sharply since Russia invaded Ukraine, and inflated fuel prices continue to fuel the conversation about inflated input prices for all agricultural producers. In 2020, fuel accounted for approximately 3% of total on-farm expenses. Earlier this year, the U.S. Department of Agriculture expected fuel costs to rise more than 2% as part of projections of net farm income versus fuel costs in 2021. We expect this increase will be more significant when the USDA updates these figures in September. Since 2013, fuel has increased by 3% as an agricultural production expense.

The expectation comes from the latest cost of production data from the USDA, which estimates that the cost of fuel, lubricant and electricity combined is expected to increase by 34% in 2022 compared to 2021. This is after a slight reduction in costs of 1% from 2020 to 2021. One silver lining for farmers is the USDA estimate that fuel prices could drop about 18% in 2023 compared to 2022. But these projections are extremely early and there is significant uncertainty.

Farming is becoming more expensive and although the price of some commodities – not all – has gone up, farmers are not necessarily making more money. In fact, with the increase in expenses, many farmers and ranchers fear that they will not be able to break even, let alone make a profit. And if the market takes an unexpected turn that lowers commodity prices, farmers are unlikely to be able to generate enough income to cover inflated production costs.

Beyond the farm, diesel and gasoline are used to transport agricultural products to and from the farm. The rising cost of diesel and gasoline will inevitably increase the cost of the food consumers buy at the grocery store.

Rising fuel and other input prices – with no end in sight – are weighing heavily on farmers and herders. For diesel and gasoline, the fundamentals of crude oil supply and demand are pushing prices up at the pump. If the United States cannot increase production and import the additional quantities needed to meet increased demand, prices could continue to rise. And limited domestic refining capacity for these crude oil supplies could further strain supply availability as demand grows, which could also contribute to higher costs.

It will be important to keep an eye on domestic production to see if the United States can return to its peak production level of nearly 400 million barrels per month. To do this, two things are needed.

• Domestic crude oil companies should have regulatory flexibility.

• Refiners need a business environment that promotes certainty and increases domestic delivery capacity.

The upcoming hurricane season could also impact diesel supply, particularly if one of the hurricanes hits areas that refine diesel or contribute to offshore production. Since the United States is in an extremely supply-sensitive market, any wrong move could drive fuel prices up even further.

Shelby Myers is an economist at Market Intel at the American Farm Bureau Federation. Visit www.fb.org/market-intel for more information.

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