The cost of at least one farm input is tumbling due in part to the global economic impact of COVID-19, says an industry executive.
Don Smith, vice-president of petroleum and innovation with United Farmers of Alberta (UFA), said diesel fuel costs are at about 2016 levels.
“You’re looking at, at least a 20 to 30 cent decrease since the beginning of the year,” he said.
The main reason for the rapid decline in diesel fuel prices is the crude oil price war that has broken out between Russia and Saudi Arabia.
Russia recently ended a three-year pact with the Organization of Petroleum Exporting Countries (OPEC) that was designed to manage global oil supplies.
Oil prices tumbled after Russia refused to accept Saudi Arabia’s proposal to cut production of the commodity.
Smith said there isn’t a one-to-one relationship between crude oil prices and diesel fuel prices but the two commodities are closely related.
The other factor behind the decline in diesel prices is COVID-19, which has caused a slowdown in economic activity around the world, reducing the demand for diesel.
As of late last week, diesel was retailing in Alberta for about 70 cents per litre after subtracting the farm fuel exemption and the federal carbon tax exemption.
“That’s down significantly from where it was,” said Smith.
He estimates that fuel comprises about five to 10 percent of total variable costs on an average farm.
That jives with information contained in Saskatchewan Agriculture’s Crop Planning Guide.
The guide estimates that a wheat farmer in the province’s dark brown soil zone will spend an average of $15.40 per acre on fuel in 2020. That represents seven percent of total variable expenses.
A canola farmer will spend an estimated $16.31 per acre, or 4.8 percent of their total variable costs.
The fuel expense pales in comparison to seed, pesticide and fertilizer costs but it is still significant.
Smith said many retailers, including UFA, offer fixed price diesel contracts but he cautioned farmers against trying to pick the bottom of the market by buying all their fuel at what they think is the low point.
“You’re gambling with your money and quite honestly, you’d probably have much better odds of going to Vegas than trying to predict world oil markets,” he said.
The fixed price contract is a tool that should be used to lock in the price of a crop input at the same time as fixing some of the revenue side as well. “That’s the smart way of doing it,” he said.
More important than locking in the price is securing a supply of the highest quality fuel available because that will have a bigger impact on their bottom line, said Smith.
He said it is difficult to tell how long the low-priced fuel environment will be around due to the ever-changing dynamics of COVID-19 and the volatility of the relationship between Russia and OPEC.