Ethanol plant beyond field of green photosbyjim/ThinkstockPhotos

Energy/Ethanol Outlook: Harvest fuel costs stay expensive

Rising crude oil prices take diesel and propane higher.

Growers needing fuel to harvest and dry big crops this year face higher costs, and fuel bills likely won’t get any cheaper in 2019.

In fact, the only cheap fuel these days is the one farmers produce: ethanol. Prices for the biofuel remain near the lowest level since the corn-into-energy boom began more than a decade ago. While that’s pressured margins at ethanol plants, forcing some to close recently, production picked up last week and stocks declined. That suggests corn usage so far in the new 2018 marketing year is on track to meet or beat USDA’s forecast for a modest increase. 

Weak ethanol prices are at least encouraging blending, because gasoline is priced at a 60% premium as the summer driving season ends. While the slowdown to gasoline demand sometimes affects crude oil usage, that wasn’t the case last week. Crude oil stocks declined due to lower imports and increased exports, sending futures above $71 a barrel, with charts setting up a challenge of the summer highs above $75. 

U.S. crude is in demand right now as countries shun exports from Iran ahead of the restart to sanctions in November. That lifted the Brent international benchmark to nearly a $10 premium over West Texas Intermediate, making U.S. supplies look like a bargain.

U.S. crude stocks normally drop into the end of summer, but his year they’re at the lowest level since 2015. The number of days’ supply is the lowest since 2014.

Diesel supplies are headed in the other direction, reaching the highest level since Hurricane Harvey disrupted the market last September. But prices followed crude oil, staying near their highest levels since the typically strong spring planting season.

Midwest refineries continue to run near capacity, and stocks in the region are actually building as combines begin rolling. That has weekly supplies of ultra-low sulfur diesel at an all-time high.

Yet ULSD prices likely won’t get much cheaper until the crop is tucked away, barring a broader market trigger like a sharp downturn in the stock market. In the meantime, propane costs are still rising seasonally ahead of the heating season. Propane typically follows crude oil for direction, too.

Growers got a few chances to buy propane this spring at cheaper levels around 20% less than current costs. Diesel never offered many bargains this summer, typically a good time to book harvest needs. In July I recommended using a dip in the energy market to complete propane purchases and step up diesel coverage to two-thirds of harvest needs. 

While the energy market is known for market disruptions, average prices likely won’t get any cheaper in 2019. Average farmgate diesel could run around $2.50 a gallon, with costs maybe a quarter a gallon cheaper if crude oil prices swoon. Patience, and a little bit of luck, will be needed to get a shot at locking in planting needs.

 

 

Download a complete version of the outlook with extensive charts and analysis using the Download button at the end of this report. 

Senior Editor Bryce Knorr first joined Farm Futures Magazine in 1987. In addition to analyzing and writing about the commodity markets, he is a former futures introducing broker and is a registered Commodity Trading Adviser. He conducts Farm Futures exclusive surveys on acreage, production and management issues and is one of the analysts regularly contracted by business wire services before major USDA crop reports. Besides the Morning Call on www.FarmFutures.com he writes weekly reviews for corn, soybeans, and wheat that include selling price targets, charts and seasonal trends. His other weekly reviews on basis, energy, fertilizer and financial markets and feature price forecasts for key crop inputs. A journalist with 38 years of experience, he received the Master Writers Award from the American Agricultural Editors Association.

 

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