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High fuel prices squeezing farms and ranches

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Price of crude oil is largest contributing factor.

Rising fuel prices are putting growing pressure on farmers and ranchers as they grapple with increased costs of growing food and fiber. USDA estimates show that the cost of fuel, lube and electricity is expected to increase 34% in 2022 compared to 2021. American Farm Bureau Federation economists analyze the factors contributing to rising fuel prices in its latest “Market Intel” report.

The war in Ukraine has reduced availability of global crude oil and U.S. domestic production is down while demand is increasing in the United States and abroad. Diesel prices rose to $5.718 per gallon in June, up $2.432 per gallon, or 74%, compared to $3.286 per gallon in June 2021. The current high price of diesel is more than two times the price paid before 2020.

AFBF relayed that the U.S. Energy Information Administration breaks down the costs within a gallon of fuel. As of April 2022, which is the most recent data available, 60% of the cost of regular gasoline is crude oil, 17% is the cost to refine, 11% is costs associated with distribution and marketing, and 12% is taxes, which vary based on the state in which the gasoline is being pumped.

The cost of diesel, which AFBF said is the primary fuel option for farmers and ranchers, was also made up of four parts – 49% is based on crude oil, 28% is refining, 12% is costs associated with distribution and marketing and 11% is taxes, which varies by state.

The price of crude oil is the largest contributing factor, and supply and demand play a significant role in setting the price of crude oil, especially since crude oil is a commodity, AFBF explained.

Further, the report pointed out that the U.S. supply of weekly crude oil stock is at its lowest point since 2004. Weekly ending stocks of regular motor gasoline and U.S. diesel inventories are down 16% and 21%, respectively, compared to the same first week in June last year. Still, AFBF said it is important to note that in the U.S., inventories normally decline in the spring and summer months due to increased demand from road travelers.

How does this impact agriculture operations? Earlier this year, USDA expected fuel costs to increase more than 2% as part of net farm income projections compared to the cost of fuel in 2021, and AFBF expects the increase will be larger when USDA updates those numbers in September. Since 2013, fuel has increased as a farm production expenditure cumulatively by 3%.

“While some farmers are seeing increases in commodity prices, their gains are being eaten up by higher expenses,” said AFBF President Zippy Duvall. “Many farmers and ranchers are concerned they won’t be able to break even, much less make a profit. It’s not just on-farm costs taking a toll. High diesel and gasoline prices, among other increased costs, all affect the food supply chain, starting at the farm and continuing to the grocery store, which means all families are ultimately paying more to put food on their tables.”

Prices could potentially begin to decline, but the U.S. must increase domestic production and expand refining capacity. Farmers and ranchers will also be watching the weather as hurricane season ramps up. Severe weather could impact production if refineries or offshore sites are hit by storms.

Read the "Market Intel" report here.

TAGS: Business
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