Fuel prices will probably increase over the next seven months, so custom forage harvesters may want to lock in prices now, says Curt Evans.
Evans, sales and marketing manager with Halron Oil, a division of SemFuel LP in Green Bay, WI, lists several reasons.
“The demand for fuel by contractors, spring planting, fall harvest and the summer driving season, along with new specifications for ultra-low-sulfur diesel, the threat of more hurricanes and geo-political events, all lead us to believe there will be higher prices this spring, summer and fall,” he says.
Road construction and spring planting, which increase fuel demand, are now in full force. But custom harvesters who didn't lock in prices in March — the best time historically to do so — should still consider it, Evans adds. Most fuel used by agriculture is consumed during harvest.
An EPA mandate that U.S. refineries reduce diesel fuel's sulfur content from 500 parts per million to only 15 ppm starts this year. As refineries make adjustments, the cost of making this new fuel could drive fuel prices up. “It's going to be an expensive process,” he says, and consumers will help pay for it.
Hurricanes might impact prices again, too. The core of the hurricane season — August, September and October — is when fuel prices rise the highest. “If we have more hurricanes hitting those oil platforms, you'll see fuel over $3/gallon,” Evans predicts.
“There are other geo-political issues that are driving prices up: the continuing conflict in Iraq, concern about Iran and insurgent activity in Nigeria. Another event that recently spiked prices was an al-Qaeda attack on the Abqaiq oil complex, described as the world's most important refinery, in Saudi Arabia.”
Although the terrorists didn't breach the refinery's security, their actions and continued threats to attack other energy facilities influenced the markets.
All of this indicates that custom harvesters should consider locking in fuel prices as soon as they can, he says. Refineries determine these fixed rates based on average monthly prices over the period specified.
A harvester who locked in an April through November price likely got the best price for that period. But he's also probably paying a higher price than the going rate at the start of the period.
“Sometimes there's a reluctance by customers to lock into higher prices than they are paying today,” says Evans. Some will wait and hope for lower prices, then find prices from the refineries have actually increased.
“Customers should go in with the philosophy that they are not making this decision to save money,” he adds. “They are making it to control fuel costs and limit the risk to this very large segment of their operating expenses.
“Let's say I lock into $2.50/gallon and fuel prices stay at $2.40. I would have done better by just paying the market price. If I used 10,000 gallons, at a dime a gallon I lost $1,000. But if I don't lock in and the price goes up to $2.85, that's 35¢ on 10,000 gallons. Now I'm out $3,500.”
Custom operators can also look into ceiling price agreements, where they buy options to cap their fuel prices. But the cost of those options has increased over the years, making ceiling price agreements less attractive, Evans says.