Traditionally, seasonal energy price lows occur in March, because the heating season's nearly over and excess inventories need to be liquidated. But now's the time to not only keep a close watch on energy prices, but also look for pricing opportunities.
An accurate price indicator is the Commodity Research Bureau (CRB) Index, a leading global indicator of industrial commodity prices. The CRB is made up of 22 commodity groups involving grains, energy, metals, etc., — anything that can be pumped, mined or produced from land. There are indications that, on a short-term trend, the index has bottomed and is rising.
Let's do some risk management on these costs and watch and analyze the charts.
One of the most important indications from the CRB is whether or not your raw material prices may rise. Your first reaction may be that grain prices would rise proportionally with oil. That's not the case, however.
Grain prices are more highly affected by the value of the dollar than oil prices. It's interesting to note that, since 1997, corn prices have dropped about the same percentage that the value of the dollar has risen. We'll analyze that in future columns.
To begin to study the energy indications, we need to look at both crude oil and heating oil prices, because these move closely with anhydrous costs and can give a price indicator, plus a hedging alternative.
Overall, oil impacts both nitrogen and fuel costs directly or indirectly. Crude oil is currently about $18.50/barrel. Below is a six-year trend of light crude monthly oil prices. As you can see, we are in the bottom half of those prices.
Watch these prices. If oil stays below $20/barrel for several months, you don't need to lock in fuel and anhydrous prices. If it stabilizes and moves above $24 (old highs in 1996 and old lows in 1999), I would aggressively lock in these costs or hedge them.
Heating oil is the next closest indicator of nitrogen and fuel prices and that chart looks very similar. Note the 60¢/gallon area that has been both a resistance and a support to the market in the past. If heating oil can close above the 60¢ areas on a monthly chart, it's a second indicator to take action.
Why is energy consumption for your operation important? The numbers bear out the details. For corn production, I estimate about 52% of your total costs of producing corn are directly or indirectly related to energy costs. Exclude land rent and the percentage goes up to 89%. It's about 86% for soybean production, excluding land rent costs. Direct costs are oil and fuel for tillage, planting, irrigation, spraying, harvesting and transportation. But indirectly, fuel costs impact chemicals, fertilizer, tires, repairs, electricity and just about every other cost.
Nitrogen and diesel fuel prices are large impact items on your income statement. As I discussed in an earlier column, changes in energy costs effect many production costs.
Moe Russell is president of Russell Consulting Group, Panora, IA. Russell previously spent 26 years with Farm Credit Services as a division president. For more risk management tips, check his Web site (www.russellconsulting.net) or call toll-free 877-333-6135.