Regan Brown
Farmers and ranchers are facing higher prices at the pump, with fuel costs on farms rising. In 2020, fuel accounted for about 3% of total on-farm expenditures, and this figure is expected to increase. The primary fuel used by farmers and ranchers is diesel, the price of which is determined by four main factors: crude oil, refining, distribution and marketing, and taxes. The price of crude oil is the largest contributing factor in the price of a gallon of gas, and with supply and demand pushing prices up at the pump, the rising price of fuel is a significant concern for farmers.
| Characteristics | Values |
|---|---|
| Date | April 2022 |
| Primary fuel used by farmers and ranchers | Diesel |
| Percentage of cost of regular gasoline that is crude oil | 60% |
| Percentage of cost of diesel that is crude oil | 49% |
| Cost of gasoline in June | $5.006 |
| Increase in cost of gasoline compared to June 2021 | $1.937 per gallon |
| Percentage increase in cost of gasoline compared to June 2021 | 63% |
| Percentage increase in cost of fuel, lube and electricity combined in 2022 compared to 2021 | 34% |
| Percentage decrease in cost of fuel in 2020 compared to 2013 | 1% |
| Percentage increase in fuel as a farm production expenditure since 2013 | 3% |
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What You'll Learn
Fuel costs for farmers are rising
The U.S. Energy Information Administration reported that gasoline prices rose above $5.006 in June, a 63% increase compared to the same month in 2021. This is affecting farmers, who are facing higher prices at the pump and on their farms. The availability and delivery of diesel fuel are also concerns for growers, especially with delayed planting in many areas and a smaller window for crop planting this year.
Fuel costs are a significant expense for farmers, representing about 3% of total on-farm expenditures in 2020. These costs are expected to increase further, with the USDA projecting a 34% rise in the cost of fuel, lube, and electricity in 2022 compared to 2021. While there is hope for a decrease in fuel prices in 2023, the uncertainty remains, and farming is becoming more costly.
To address the rising fuel costs, the U.S. needs to increase production or import supplemental quantities to meet the rising demand. Additionally, the domestic refining capacity for crude oil supplies needs to improve to avoid further straining supply availability. These measures could help alleviate the impact of rising fuel costs on farmers and ensure a more stable supply of fuel.
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Crude oil supply and demand impact prices
The price of crude oil is influenced by a multitude of factors, but the most significant factor is the balance between supply and demand. The law of supply and demand dictates that when demand for a good is high and supply is limited, prices increase. Conversely, when supply is abundant and demand is low, prices decrease.
In the case of crude oil, demand is relatively unresponsive to price changes due to the global economy's dependence on oil. Oil is not only used for fuel but also in the production of plastics, chemicals, clothing, and other goods. Thus, even when oil prices are high, demand does not decrease significantly as it is an essential input for many industries.
On the supply side, oil production capacity is relatively fixed in the short run. It takes years to develop new supply sources or increase production, so supply is also relatively unresponsive to price changes in the short term. As a result, oil price swings tend to be dramatic and can impact the global economy.
Geopolitical events can also impact the supply and demand of crude oil, thereby affecting prices. For example, the Russia-Ukraine conflict led to fears of supply disruptions in Russia due to sanctions and potential Russian retaliation, causing oil prices to surge. Additionally, technological developments, such as advancements in shale fracking, can increase supply and impact prices.
Overall, the complex interplay between supply and demand is the primary driver of crude oil prices, with various external factors also influencing the market.
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Diesel fuel availability and delivery are a concern
The Russian invasion of Ukraine has also played a role in the availability and price of diesel fuel. With Russia being one of the world's major oil suppliers, international sanctions have prevented Russian oil from reaching many countries, affecting the global supply. Additionally, accidents, fires, terrorist strikes, natural disasters, and disruptions at refineries can all impact the supply chain and delivery of diesel fuel, making it difficult to predict and plan for these events.
The diesel market is facing a perfect storm of dwindling reserves, increased demand, and surging prices. For example, the drought on the Mississippi River has led to higher fuel demand as more product is pushed to rail and truck transportation. A potential rail strike could further exacerbate the situation, leading to even higher prices. The U.S. government has been urged to intervene to increase the supply and address the concerns about diesel fuel availability and delivery.
While there are concerns about diesel's stability and viability due to sustainability and environmental impact, it remains integral to various industries, including transportation and agriculture. The shift towards renewable diesel and other biofuels is gaining momentum, but diesel fuel continues to be in high demand, and its availability significantly impacts economic sectors and the broader economy. The supply of diesel fuel is expected to keep pace with demand for 2024, but worsening geopolitical tensions, refinery disruptions, and other issues could change this forecast.
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Fuel is a significant farm production expenditure
Fuel is a significant expense for farmers and ranchers, and rising fuel costs can have a substantial impact on their operations. In 2020, fuel accounted for approximately 3% of total on-farm expenditures, and this figure has been increasing. According to the USDA, fuel costs were projected to increase by more than 2% in 2022 compared to 2021, and the cost of fuel, lube, and electricity combined was estimated to rise by 34% during that period.
The price of fuel is influenced by various factors, with the cost of crude oil being the most significant contributor. As of April 2022, 60% of the cost of regular gasoline was attributed to crude oil, while for diesel fuel, the primary fuel option for farmers, it accounted for 49% of the cost. Other factors impacting fuel prices include refining costs, distribution and marketing expenses, and taxes, which vary by state.
The rising fuel costs have had a noticeable impact on agricultural activities. Growers have faced challenges with the availability and timely delivery of diesel fuel, especially during critical planting seasons. The window for planting crops is often time-sensitive, and delayed planting in many areas due to fuel delivery issues has added to the concerns of farmers.
Additionally, the increase in fuel prices has not been accompanied by a corresponding rise in commodity prices. As a result, farmers are facing higher production costs without necessarily making more money from their yields. This situation underscores the significant financial burden that rising fuel prices place on the agricultural sector.
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Gasoline prices hit a record high in June 2022
In June 2022, gasoline prices in the United States soared to unprecedented levels, surpassing the $5 mark and profoundly impacting Americans' summer plans and budgets. This unprecedented surge in gasoline prices contributed to a four-decade high inflation rate of 9.1% in June 2022. The Labor Department reported that inflation had risen by 1.3% between May and June, with energy costs accounting for nearly half of the monthly increase.
The record-high gasoline prices had tangible effects on individuals' travel decisions. For instance, Sariah Masterson from Provo, who had initially planned a five-hour road trip with her family, was forced to cancel those plans due to the exorbitant gasoline prices. Instead, she chose to camp in her backyard, stating that the money she saved on gasoline was used to purchase extra cots for her family's camping experience.
Another individual impacted by the soaring gasoline prices was Bethany Chambliss, a hospital registrar commuting 28 miles from her home in Frankfort to her job in Lexington, Kentucky. Chambliss noted that while she could manage the $3.50 per gallon price, the surge to almost $5 per gallon wiped out her raise entirely. She considered relocating closer to her workplace but found the rents in Lexington unaffordable. Chambliss expressed concern about the potential increase in her rent and the possibility of persistently high gasoline and food prices, acknowledging that her budget was already stretched thin.
The high gasoline prices also influenced the travel behaviour of individuals over the age of 18. Data from September 2022 revealed that as gasoline prices climbed towards $4.00, a larger number of people in this age group reported reducing the number of trips they took. In contrast, when gasoline prices dropped to approximately $3.50 in December 2022, fewer individuals reported skipping trips, and a greater proportion indicated no change in their travel behaviour. Income levels also played a role, with over 50% of people from households earning less than $50,000 reporting that they had skipped trips due to the high cost of gasoline.
While gasoline prices have since declined from their record highs in June 2022, they remain a significant factor in the overall inflation rate. As of May 2023, the price of motor gasoline has dropped by 27% from its peak in June 2022, selling at $5.03 per gallon. Despite this decrease, the price is still 10% higher than it was in December 2022, and consumers continue to face elevated fuel costs compared to the previous year.
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Frequently asked questions
The cost of farm fuel varies and is influenced by the price of crude oil, refining, distribution, marketing, and taxes. In April 2022, diesel fuel, used by most farmers, was composed of 49% crude oil, 28% refining costs, 12% distribution and marketing costs, and 11% taxes.
The price of crude oil is the largest factor influencing the cost of farm fuel. Other factors include supply and demand, domestic refining capacity, and production levels.
Rising fuel costs have significantly impacted farmers and ranchers, affecting their expenditures and income. In 2020, fuel represented about 3% of total on-farm expenditures, and costs are expected to continue increasing.
While there is uncertainty, the USDA estimates that fuel prices may decrease by about 18% in 2023 compared to 2022. However, this projection is early, and actual price movements will depend on various economic factors.
