The farm belt's next energy pain point is about to arrive
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Illustration: Lazaro Gamio/Axios
Diesel prices are soaring just as the energy-thirsty peak of harvest season looms for many of the country's largest crops.
Why it matters: It's a double whammy for farmers, with the Iran war also causing much higher fertilizer costs that hit months ago.
- "At the end of the day, unfortunately, the high prices have hit both in the spring during planting, and then they're going to hit again in the fall during harvest," said Jed Bower, an Ohio corn and soybean farmer.
Zoom out: The diesel market is tight and expensive for two main reasons: the throttled Strait of Hormuz, and the Ukrainian attacks on Russian refineries that have prompted Moscow to reduce exports.
- Fuel is a major input cost for farmers, who use diesel for combines, preparing fields, transporting crops to storage, irrigation and more.
- And farmers typically can't pass those costs along to crop buyers.
"[For] farmers, there's an old saying in agriculture: they buy retail and sell wholesale," said John Newton, VP of public policy and economic analysis at the American Farm Bureau Federation.
What's next: Peak harvesting starts next month for corn and soybeans — the country's two largest farm commodities — and several other crops, though specifics vary by location and product.
- "Harvest is the single operation that uses the most fuel and runs from now through November for most of the country," said Drew Kientzy, a University of Missouri agricultural analyst.
Zoom in: Fuel costs vary, but they're around 3%-5% of production expenses for corn, soybean and wheat, per the Farm Bureau, and higher for some other major crops.
- Diesel is the bulk of farms' total fuel costs.
- It's an important and now rising expense, though typically smaller than costs like labor and other services, seeds, and fertilizer, per Newton and Agriculture Department data.
- Most Midwestern farms use around 3-5 gallons of fuel per acre of soybeans and 5-8 gallons per acre of corn, Kientzy said via email.
Mid-August diesel prices are at their highest levels in the last decade, per AAA data.
- While 2022 had the all-time highest average recorded ($5.82 on June 19), prices are higher this year heading into harvest time for some key crops.
- Farmers pay less than what you're seeing above, because off-road diesel isn't subject to the same taxes. But these off-road prices move in tandem with costs for diesel used on highways.
Context: Farmers have tools for managing price risks, like pre-paying with bulk suppliers.
- Newton notes that Agriculture Department insurance programs can help protect against changes in major input costs, including fuel and fertilizer.
- But most farms lack the size and storage space to directly hedge prices through futures markets, where contract sizes are much larger than what individual farms typically need, Kientzy notes.
State of play: Bower, who holds the rotating presidency of the National Corn Growers Association, farms around 1,100 acres.
- He expects to pay an extra $20,000 to $25,000 in diesel costs this year compared to where prices were in January.
- And this comes as other costs have climbed, too, in the low margin business.
The bottom line: "The way our input prices have been, there's no way I can make a profit this year, and all this is going to do is bury me further," he said.
