Soaring gas prices forcing farmers to adapt

Spiking gas prices forcing farmers to adapt
By Ching Lee
California Farm Bureau Federation,

Yuba County rice grower Paul Baggett says he is feeling the sting of rising diesel prices. Baggett farms 2,000 acres and his operation consumes about 80,000 gallons of fuel annually.

As oil prices have soared in recent weeks due to rising tensions in the Middle East and fears of major supply disruptions, California farmers are bracing for a more difficult year with higher production costs that will erode farm income.

With fuel prices climbing even before the current spike, Yolo County farmer Gary Merwin said he decided to “drastically reduce” his irrigated crops because of the cost of diesel fuel to pump water.

He had already gotten out of the tomato business in 2004 because of the cost of water pumping. This year, he is taking out a substantial portion of his alfalfa acreage—from 1,100 to 200—and planting more wheat and safflower.

He said even though alfalfa prices have been strong, once he factors in rising fuel costs, it becomes a less attractive crop to grow. He noted how practically everything used in farming alfalfa requires diesel—from the pumps and the tractor to the swather, baler and stacker.

“I’m probably not going to get the gross returns on wheat that I would on alfalfa, but my input costs are going to be much lower,” he said.

The threat of skyrocketing fuel costs also influences what crops Merced County farmer Bill Crivelli is growing this year. Whereas he used to grow almost all vegetables, including tomatoes, onions, cucumbers and melons, Crivelli said he is now growing more corn and cotton because yields are more predictable and market prices are more stable.

Yuba County rice grower Paul Baggett says newer tractors like this one do twice the work of older equipment and consume less fuel.

“We have excellent crop prices right now, but it’s very scary to try and lock them in when you don’t know how high diesel and fertilizer prices might go,” he said.

With spring planting just around the corner, Crivelli said he will be using plenty of diesel in the coming weeks to work the fields and prepare his seed bed. He recently bought enough diesel fuel to do the groundwork, but he is closely watching the situation in the Middle East.

“It’s definitely a major concern, and it’s just the beginning,” he said. “If supplies are interrupted even more, we’re concerned that our costs could get out of hand.”

Compared to gasoline, the market for diesel is even tighter, so there is greater pressure on diesel prices, said Wally Tyner, an energy economist with the Department of Agricultural Economics at Purdue University in Indiana.

That’s because the United States can import gasoline fairly cheaply from Europe, but not diesel, he explained.

So far, supply disruptions are not widespread. Libya exports about a million barrels a day and Saudi Arabia is replacing that on the market, he said. But it’s not a one-for-one replacement, he noted. Libyan oil is sweet crude that goes to European refineries, whereas Saudi oil is sour crude that will need to be refined in the U.S.

“That means a longer shipping time,” he said. “It also means redistribution globally of the product, all of which add to the cost.”

Even with oil coming from Saudi Arabia, Tyner added, if Libyan production stays down, there will be an impact.

Farmer Paul Baggett said he is already feeling the sting. As a rice grower in Yuba County, he said he doesn’t have much flexibility with cropping choices because rice ground in the Sacramento Valley is mainly suited only for growing rice. He farms about 2,000 acres and uses about 80,000 gallons of diesel a year.

“Fuel is something that’s essential to the operation, so it’s not something you could cut corners on,” he said. “Once you go down that path of planting your crop, you’re in it for the long haul. You’re committed.”

He has enough storage capacity for about 15,000 gallons of diesel, but to plant his entire acreage, he’ll need an additional 7,500 gallons. He will purchase that fuel at the going market price when he runs out, at which time prices could be much higher.

One saving grace is that the market for medium-grain rice has held strong in recent years, so California rice farmers may be in a better position to withstand surging production costs. Still, they will be hit hard, he said.

“It’s going to take away from the prices that we’re receiving now in California,” said Baggett.

Crivelli and Merwin both voiced concerns about what rising oil prices will do to fertilizer costs, since the two are often linked. Crivelli said his fertilizer dealer has already told him that prices will probably go up this spring.

But Tyner said fertilizer prices will likely remain relatively stable because of ample supplies of natural gas, which is used to make nitrogen fertilizer. He noted that recent discovery of huge, domestic shale gas reserves has dragged down natural gas prices, which have remained at about $4 per thousand cubic feet for months. A few years ago, they got as high as $14.

However, farmers may still see prices tick up slightly because of higher delivery costs, he said. Mainly, prices could increase because of more acres being planted and higher demand, he added.

“If it appears that more acres will be planted because of high commodity prices, then that would pull fertilizer prices up,” he said. “But the increase has little or nothing to do with crude oil prices.”

With the current Middle East unrest, Tyner said it is hard to predict where long-term oil prices may settle. Even before the crisis, prices had reached $85 a barrel, high by historic standards, because of growing demand from developing nations such as China, he noted.

If troubles escalate and supply disruptions spread to other oil-producing countries, that could send prices off the charts, he said. The flip side is stability returns to those regions and prices drop close to $80 a barrel.

“(Oil) is not going to be a whole lot cheaper by spring,” he said. “It certainly wouldn’t be bad advice to go ahead and buy now, but I wouldn’t lock in long term.”

(Ching Lee is an assistant editor of Ag Alert. She may be contacted at [email protected].)

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