Pros & Cons of Cheap Oil for Grain Prices for Nebraska Farmers
Remember when crude oil was around $150 a barrel, around 8 years ago? Most people do, especially if you had to fill up a tank of fuel in your car or tractor.
enjoy a complex relationship with the price of oil, and now, with oil prices vastly lower—under $30 a barrel earlier this week—farmers are examining how low prices at the pump will affect their farming operations.
Most obviously, lower fuel costs mean lower fuel input costs for farmers, many of whom contract their diesel prices in December and January. Most farmers can expect lower chemical costs in petroleum-based fertilizers, pesticides, and herbicides as a result of low oil prices, as well, though these effects may take longer to materialize.
Unfortunately, and against common assumptions, cheap oil ultimately means cheaper commodities, as well as lower prices for farmland. Corn is the most directly affected agricultural commodity when oil prices fall. Ag economist Andrew Wood agrees that, over all, cheap oil is not favorable for those in the agricultural sector when it comes to commodity prices.
“The correlation between oil and agriculture commodity prices (the two broadly rise and fall in tandem based on a multitude of factors, including energy consumption in farming and the use of feedstocks for biofuels) means that production cost savings are likely to be offset by reduced sales revenues, leaving the average producer facing greater challenges in raising finance and unable to lift its margins in a low-cost climate.”
Cheaper oil also means that ethanol is less attractive at the pump. In many areas, people are noticing that the price per gallon of E-85 is the same as—and sometimes even slightly higher—than its regular unleaded counterparts. This leads to a general scaling back on ethanol producers, leading to less demand for corn. Gasoline and ethanol are competing energy sources, so when gas prices fall, ethanol prices drop to remain competitive, say farm economists. That squeezes income at ethanol plants, reducing how much the facility pays for a bushel of corn.
Fuel blenders have been able to add 10% ethanol to gasoline as a relatively inexpensive source of octane. Now that advantage is disappearing, leading to tighter margins for the ethanol industry, and affecting corn prices along the way.
On the other hand, cheap oil and falling land prices may be an opportunity for farmers, especially young farmers looking to increase their acres. Experts and experienced farmers know, too, that the markets are cyclical, and that patience will serve them well in the long run, when the price of crude makes a comeback in the future.
In the meantime, ag producers should continue to keep an eye on their margins, and look to taking advantage of lower input costs and diesel as a result of low oil prices in the coming year. Placing and emphasis on increasing productivity and efficiency each growing season is integral.
Are you concerned about how continued low oil prices will affect your farming operation? Feel free to contact an experienced UFARM representative. We are glad to help you find ways to maximize your profit.
Sources consulted:
Caldwell, Jeff. “Pros and Cons of Sliding Oil Prices for Farmers.” Agriculture.com. Meredith AgriMedia. 03 Dec. 2014. Web. 28 Jan. 2016.
Doering, Christopher. “Falling Fuel Prices a Mixed Blessing for Farmers.” The Des Moines Register. Des Moines Register. 14 Dec. 2014. Web. 28 Jan. 2016.
Wood, Andrew. “Low Oil Prices—What do they mean for Agriculture?” Norton Rose Fulbright.com. Norton Rose Fulbright. Mar. 2015. Web. 28 Jan. 2016.
