Diesel Fuel vs. Gasoline Price

I thought I would address this question as it comes up often and I feel there is reason for resolution to the occasional diesel engine "Buyers Remorse".

First off, take one look up and down the interstate the next time you hop on Interstate 35 or I80. Diesel engines dominate the trucking industry as well as business fleets. With the expanding trucking industry, so does the appetite for diesel.

One myth I hear quite often is "if refineries produce more diesel than gas than in return diesel should be cheaper. The reality is refineries produce more gasoline then diesel. Many refineries have to go out on the open market to buy diesel to keep a consistent supply.

One main reason diesel is priced higher than gasoline is the amount of road taxes both our State and Federal government charges per gallon. Road taxes on diesel run 46.9 cents per gallon compared to 32.3 cents per gallon for ethanol blended gasoline. Politicians charge more tax per gallon on diesel as the trucks using diesel are much heavier vehicles, which cause more wear and tear on our highways. Road use taxes fund the building and maintenance of our highway system.

I have mentioned in previous newsletter articles that demand has the most impact on price. This winter has been the longest and harshest winter that we have seen in the past five years across the globe. Thus the demand for heating oil has been higher than most winters.

Heating oil, a form of diesel fuel, is the primary heat source in most of the urban areas out east. These cities were built years ago before we had a system to deliver natural gas. Since these cities consist of miles and miles of concrete, the cost of installing natural gas piping would be prohibitive, thus the reason for using heating oil to heat those buildings.

I have included two charts that show stock levels for gasoline and diesel fuel. As you look at the diesel fuel chart you can see levels are below the 3 year average. The lower level of stocks will continue to add risk premium into the diesel pricing. Stocks of gasoline are much higher than normal. This is another reason for the very large spread between diesel and gasoline that we currently see.

I look for energy pricing to continue to be at a high level of volatility. Now that spring planting is around the corner I would recommend you start looking at buying diesel for fall. One commercial account summed it up well the other day "the entire way and timing of buying product for us has changed dramatically, we need to be on the look out for buying further in advance and taking a close look at all contracting options that may fit our unique fuel purchasing needs."

Fertilizer 2009

Since the price of nitrogen no longer tracks with natural gas as it did for the past decade, I tried to make some comparisons to commodity prices. Two years ago when nitrogen was 25 cents per pound and corn price was right around $2, nitrogen cost the producer 18 – 20 bushel per acre. That ratio has run up as high as 25 bushel and was 15-21 bushel for this past fall. Based on what we are projecting for this coming fall with 45-60 cent nitrogen and +/- $5 forward prices, it will be 14-18 bushel on the first contracts available now. That is a snapshot of what the cost based dynamics are from two years ago to today. That does not take into consideration the productive value of nitrogen. Whatever you feel your nitrogen provides in yield enhancement for corn, it currently provides more than 2.5 times the return today as it did two years ago.

The differences are similar when we look at phosphate and potash as well. Phosphate has virtually tripled in the past two years, but with the commodity price relationship that exists today, it still costs roughly 9-10 bushels on corn and 2-2.5 bushels of soybeans which is the same as what it was then. Potash is roughly 5-6 bushels of corn and 3 bushels of soybeans for 2009 and was virtually the same two years ago. While we need to be more efficient as we feel all the cost pressures chasing the run in commodities, making drastic cuts or adjustments is not the right approach as it could hamper yields and there is no guarantee it will be any more cost effective in the future.

The last thing to be considering is the ratio of nitrogen sources in your portfolio. Fall NH3 is within 5 to 6 cents or less of spring urea and within 10 to 12 cents of spring 32%. You can put on roughly 130# of 32% in the spring for the same cost as 160# of fall NH3. The spread to urea is even less. Remember that comparing fall to spring nitrogen is not apples to apples. We might struggle to get all the projected fall NH3 on the ground. Most fall contracts will expire December 31st. You will get your money back if you can’t get the product in the ground. Depending on the contract you may have to pay storage and pull it in the spring if pricing has fallen off. A good strategy might be covering 75% for fall and tie the balance up in an upgrade product such as urea or UAN for spring as a top or side dress. You should price it out. Even those of you who have always used ammonia should look at it, and those who have adjusted their operations toward the upgrades have no compelling reason at this time to consider fall anhydrous.

It has never been more important to stay in regular communication with your agronomist. There will be numerous opportunities to enhance this 2008 crop, and we need to start managing the opportunities and challenges for next year as well. With the late start, remember to keep it all in proper perspective this spring and make safety your first priority.

We also continue to see some other strange things happening around the market as we get to new record levels prices. Some of the processors going to basis only, and the Chicago Board of Trade is raising the daily limits (corn to 30 cents and beans to 70 cents) effective March 28, just in time for the big March 31 Prospective Plantings Report. By the time this newsletter is out, it will be old news. The USDA had 86 million acres of corn, less than what the trade had guessed for decreases in acres. Beans acres were at 74.8 million, naturally substantially higher than expected. But that was strictly a starting point, and now the market will attempt to buy additional acres needed for corn.

Now back to why the processors would go to basis only bids. Number one would be to reduce their risk and exposure to a volatile futures market. Another reason would be just what the funds have been hit with and that is large margin calls and a limit on available capital as everyone hits their limits at some point no matter how large and diverse. There was a company called Enron that comes to mind. Now with the increased price limits this will also create a whole new cost structure for all hedgers, elevators, and processors as we continue at these high prices. So as we see and hear more about the credit crunch, it has also caused lenders to reign in some on what type and how much risk they are willing to take on. This is the reason Heart of Iowa Coop has had to update and increase the hedge to arrive fees.

The one constant and never changing part of any marketing continues to be that you need to know what your input costs and break-even is in order to know what you need for price.

The last thing I saw that showed estimated cost of production for corn had machinery, fuel, seed, fertilizer, and drying costing $365 an acre. So at $4.75 a bushel for new crop you would need to sell between 76 and 77 bushels an acre to cover your costs. Now if you raise 200 plus bushels per acre there is a chance the price will be at $3.50, but that will be on an additional 125 bushels an acre. Then if it is dry and you only raise 125 bushels an acre, one would think the price would be substantially higher ($6 for example). You would have 50 bushel per acre to sell at that price leaving $300 an acre over expenses. The example with 200 plus an acre would show $375 an acre over expenses. That is why you need to know your input costs so you have some starting point for your marketing plan or at least some frame of reference.

Once again thank you for your patronage !!!!