Diesel prices drop, but how long will it last?

Issue Date: November 5, 2008

By Ching Lee
Assistant Editor

December and January are typically the two most favorable months to purchase diesel fuel, and the recent drop in price has made the situation better for farmers.

After hitting record highs this summer, diesel fuel prices are finally dropping. As they welcome the reduced fuel prices, many California farmers and ranchers say they wish the lower prices would have come sooner, during the height of harvest when fuel use is at its highest. And analysts say they expect fuel prices to head up again by spring.

Many farmers have already harvested their crops or are winding down. However, those who are currently working the ground for their winter plantings are benefiting from the fuel savings.

They are also seeing lower transportation costs for hauling their commodities from the farm to the processor, said Fresno County farmer Keith Nilmeier, who grows tree fruit and winegrapes and runs a trucking business.

"The immediate effect of the reduction in fuel prices has helped farmers through our harvest," he said.

After the wild market fluctuations and skyrocketing fuel costs of the last several years, many farmers are now keeping a close watch on the price, wondering how low it will get and how long the current downswing will last.

Suzanne Garfield, spokeswoman for the California Energy Commission, said the substantial decline in fuel prices is in large part due to the tanking U.S. economy. With mortgages toppling, people losing their homes and unemployment rising, consumers have less disposable income and therefore are driving less and spending less, she said.

"Price always reflects what the demand is, and what we're seeing is that U.S. demand for gasoline on a whole has dropped considerably," she said.

That drop has led to a huge reduction in crude oil prices, which reached a high of $144 a barrel in early July but dipped as low as $60 a barrel last week. Since early May, the price of gasoline has fallen about $1.50 a gallon while diesel has gone down about $2 a gallon.

Garfield said her guess is that the price of crude will probably continue its downward trend for a little while, hit a plateau, and then start to climb again in the spring. But this time, it won't reach the over-inflated prices that consumers have seen in the past year.

"I think what will happen is that the crude oil prices will reflect more reasonably the demand that's going on in the world," Garfield said.

In recent years, demand for diesel fuel has exceeded the demand for gasoline, which has caused the price of diesel to be higher than gasoline. That's because gasoline is used mostly to fuel passenger vehicles, while diesel has a wide variety of uses: in trucks to transport goods, in agriculture to run tractors and other farm equipment, and in some railcars and generators.

Garfield said California's gasoline consumption is still higher than diesel due to the sheer number of cars on the road--25 million--but the demand for diesel is growing at more than 3 percent a year compared to just 1 percent for gasoline.

Traditionally, demand for diesel is usually not as high during winter months, when farmers with storage capacity like to stock up at lower prices for use in the spring when they plant their crops, which is also when the fuel prices begin to increase.

But in recent years, prices fluctuated so erratically throughout the year that farmers have not been able to predict when they should buy, said Tony Amato, manager of Dawson Oil Co. in Sutter County.

"December and January are typically the two most favorable months to purchase," he said. "Over the last few years, there is no normal anymore."

He said so far, his farmer-customers are mainly watching the market closely to see when fuel prices will hit rock bottom before they call in a big order. But he has had some takers who are stockpiling, mostly rice growers.

"I've got some who are buying to get them started for next year; they'll sit on it all winter long," he said.

David Miller, a walnut grower in Stanislaus County, said he tries to buy when prices are low, but with the recent rise in fuel thefts, he's reluctant to keep too much in storage.

"Yes, you've got the savings for the fuel price, but if somebody rips off 300 gallons, you've lost the savings you had by having your tanks full," he said.

Farmers who don't have storage, like Charley Mathews Jr., a rice grower in Yuba County, say they will buy as they need it. Unfortunately, he was only able to take advantage of the recent low prices just as he was finishing his harvest, he said.

"For me, fuel is not as important as the fertilizer costs. Those are really higher," said Mathews. "But the fuel price gets built into so many different things, like freight and cropdusters all have fuel surcharges. So at least we can relax a little bit from that."

Nilmeier said his Fresno County trucking operation has already been able to pass along some fuel savings to his customers. He's cut his surcharges back about 10 percent.

Because of his dual farming and trucking businesses, Nilmeier uses large quantities of diesel and buys it in truck-and-trailer loads, which are typically 7,800 to 8,000 gallons per load. Therefore, he has been watching prices daily in hopes of buying at low-enough prices so that he can fill half of his 45,000-gallon storage.

"I like to always store my fuel so that I can take advantage of the market fluctuations as they go up and down," he said. "Diesel is one of our major costs, so we try to keep a very close handle on it."

Bill Crivelli, a Merced County farmer who grows cotton and fresh tomatoes, said despite the lower fuel prices, he's still planning to cut his fuel usage by reducing tillage in the field and employing other efficient farming methods. He said he's not counting on the downward trend in fuel prices to last.

"Everyone in the area is doing less passes through the field so they don't have to burn any more diesel unnecessarily," he said. "With fertilizer escalating, if we can work this ground a little more economically now, it'll put us in better position for next year."

Other farmers such as Bill Koster, who grows walnuts and row and field crops in San Joaquin County, say they're watching fuel prices closely but have other pressing concerns. With the state's water shortage, he said he's limiting his groundwork this fall because he doesn't know how much water he will have to farm next year.

"I'm not going to burn up fuel if I don't know what I'm going to plant," he said. "If I don't have any water to plant, I'm not going to farm. Right now I'm just keeping my trees alive."

Despite the savings farmers may see in lower fuel prices, Allan Freese, a wheat grower in Solano County, said commodity prices are also coming down along with the economy, so farmers will earn less income for what they produce. With farmers' already-narrow profit margins, the fuel savings will likely not reflect too much on their bottom line, he said.

"If fuel prices don't go down and the commodity prices go down, we'd really be in trouble," he said.

(Ching Lee is a reporter for Ag Alert. She may be contacted at clee@cfbf.com.)

Permission for use is granted, however, credit must be made to the California Farm Bureau Federation when reprinting this item. Top