The agricultural sector, from Canada and the United States, to Russia, Brazil and Europe, is seeing profits harmed by the rise in diesel prices. The global oil benchmark, Brent crude, touched US$80 a barrel for the first time since late 2014 in mid-May.
In the U.S., fuel accounts for about five per cent of farmers’ overall costs, and is hurting margins at a time when farm income is already half that of 2013. Massive harvests have depressed prices of staples such as corn, wheat and soybeans.
Why it matters: The increase is making it even harder for many farmers worldwide to turn a profit in the estimated US$2.4-trillion agriculture industry, and could cast a cloud over future investments.
In the United States, farmers are expected to spend an estimated US$15.25 billion on fuel and oil in 2018, an eight per cent increase from 2017, U.S. Department of Agriculture data showed.
The price of ultra-low-sulphur diesel used for farming equipment and transporting crops was the highest since 2014 in May. Heating oil futures, the proxy for ultra-low-sulphur diesel, traded at US$2.29 a gallon recently.
Ron Heck, who grows soybeans in Perry, Iowa, expected fuel costs to rise by US$1,000 to $2,000 this spring.
“You feel the pain right away,” Heck said.
In Russia, fuel prices for farmers are up 50 per cent compared with a year ago, Arkady Zlochevsky, the head of Russia’s Grain Union, a non-governmental farm lobby, told Reuters. Farmers will need to spend more ahead of harvesting, which starts soon in Russia, he said.
U.S. farms are also factoring in potential losses of income due to a 25 per cent tax China announced on major American imports following the U.S. government’s decision to slap duties on steel and aluminum.
“We’re seeing financial stress occurring in agriculture that we probably haven’t seen for a decade or so,” said Scott Brown, director of strategic partnerships at the University of Missouri’s College of Agriculture, Food and Natural Resources. “If diesel prices continue to go higher, it continues to put more pressure on.”
Net farm income is forecast to fall to US$59.5 billion in 2018, an 8.3 per cent decline from 2017, according to the USDA. It has fallen by 55 per cent since 2013.
In Holly Grove, Arkansas, Tim Gannon paid about US$17,000 in February to fill a 7,500-gallon tank with diesel used to run equipment and irrigation. The price increase means it may cost up to 25 per cent more, or an extra US$4,000, to refill it in coming weeks, he said.
“That’s a fairly significant amount of income to lose,” he said. Gannon has been taking steps to cut his diesel costs by reducing the number of times he tills.
In Brazil, farmers are also taking steps to deal with higher costs, as diesel prices have climbed 43 per cent since July 2017. Eder Ferreira Bueno, a farmer in grain state Mato Grosso, said increased fuel costs meant he had “no other option but to spend less to treat the soil.”
Other farmers might hire fewer workers or delay investment plans, he added.
In neighbouring Argentina, the top shipper of soybean meal and oil, farmers are having to deal with a weakening currency at the same time fuel costs are rising.
“Where the impact is felt greatest is in trucking costs. We are already at a disadvantage when compared to our competitors on freight costs within Argentina,” said David Hughes, a farmer in Buenos Aires province and president of Argentine wheat industry chamber Argentrigo.
In Europe, French grain producers say rising oil costs may have a knock-on effect on fertilizers and crop protection products.
“It comes at a time when things are already difficult for farmers economically,” said Philippe Pinta, head of grain growers’ group AGPB in Paris.
Wamego, Kansas, farmer Glenn Brunkow said he may lock in diesel prices in advance for the first time ever next year, to avoid the pain of future increases.
“You just kind of all of a sudden realize, ‘Wow, it’s pretty high,’ “ he said.