Will fuel prices alter your strategy for AG?

riptides · Apr 17, 2006

Purchases?
Upgrades?
Needs?

Sorry, but already events in the farm remodelling are underway. My dreams of resurrection of this dairy farm to a modern small hay/horse business are being questioned by the uncertain fuel market.

I have fallen a year behind on the hay equipment purchase, yet my preferred manufacture for tractors has upgraded their 50HP+ line. A positive. Now events in the oil market may make my business dreams a mute point. A negative.

Always working scared, now I am questioning my future business plans altogether. Being self sufficient would always be my starting point, but .... there is always that darn Diesel bill, an unknown, hanging over my head. How to account for that unknown risk?

-No politics please, just are others thinking this way? Or am I just a worry wart?

-Mike Z.

MikePA · Apr 17, 2006

What's your cost structure?
What percentage of your costs does fuel represent?
Figure out what a doubling (or whatever you think is reasonable) of your fuel cost would do to your overall costs.
It's really no different than any other business where some of the costs are fixed while others can fluctuate.
Another way to handle it is to set your prices based upon a certain fuel price. If the actual fuel price is higher then add a surcharge.

Robert_in_NY · Apr 17, 2006

The best thing you can do is buy fuel in bulk. We use enough fuel to warrant buying bulk but we also order extra to help save our friends a few dollars as they bring their small tanks to our place and have them filled when the truck rolls in.

The going price for ag diesel here is $2.859/gallon. We locked in a pre-buy of $1.949/gallon last week. Bought 700 gallons but the savings is well worth it. The only downside is that fuel needs to be delivered by July 31st so we try to figure our fuel usage close.

As for strategy, there is no change. If the fuel price goes up, so does the hay/straw price. Fuel only figures for around 5 cents a small square bale with my operation and when I figured that it was for the high price of fuel, not my cost at the time. I figured it high to cover myself for if I had to buy more fuel at a higher price. Of course that was two years ago and the high price was $2.369/gallon so it might go up a cent if I refigure it which I need to do.

riptides · Apr 18, 2006

MikePA ( .. cost structure.. ) Yes, I am already factoring in a 2X fuel increase.

Robert_in_NY ( ..bulk.. ) Yes, Since the farm house had a kerosene tank, the remodelling has given me the idea to clean it out and fill it with diesel. A run to my local TSC is in order this w/e for a pump.

-Mike Z.

dmccarty · Apr 18, 2006

Robert,

So you have to buy 700 gallons by July 31st to get the 1.94 price?

That means you are saving 91 cents a gallon. Do you know if you can save that much with on road fuel?

Later,
Dan

Farmwithjunk · Apr 18, 2006

(
Another way to handle it is to set your prices based upon a certain fuel price. If the actual fuel price is higher then add a surcharge. )

Quick question.... Do you now, or have you ever farmed for a living?

Do to (1) Price supports, (2) Foreign competition, it isn't nearly so simple. There is a ceiling to the market price for most all farm products. It traditionally hasn't been set according to supply and demand, nor by the producer (farmer). In SOME niche markets, "horse hay" and a few specialty items have their prices set by input cost (in addition to other factors), but in general, farm prices are dictated by the middle man, and NOT the farmer or the eventual user of these products. (BTDT for the last 31 years) Long and short of it, we don't get to pass on added fuel cost, added fertilizer cost, added machinery cost, or a host of other expenses. In a nutshell, there's why the number of farmers (in production agriculture) are dropping every year. The "hobby farm" industry, for the most part, isn't as "profit driven" as their big brothers in the production end.

The high cost/low profit potential is one of the biggest reasons why Argentina and Brazil are starting to capture much of our market. They have far less overhead. They can absorb the higher fuel cost far easier than we can.

MikePA · Apr 18, 2006

Quick question.... Do you now, or have you ever farmed for a living? 
Quick answer....I assumed Mike Z was smart enough to know he couldn't set a price higher than what his market could bear, whether that market is the middleman or the consumer.

Farmwithjunk · Apr 18, 2006

( Quick question.... Do you now, or have you ever farmed for a living? 
Quick answer....I assumed Mike Z was smart enough to know he couldn't set a price higher than what his market could bear, whether that market is the middleman or the consumer. )

You failed to answer the question in any event,

Have you ever been, or are you currently involved in production agriculture, or are you merely throwing out "pie-in-the-sky" suggestions?

I'd suggest that Mike Z is ALREADY pricing his "product" at market value. Anything less than that would be giving away his hard work.

MikePA · Apr 18, 2006

No, I am not in agriculture and what was 'pie in the sky' about what I suggested?

Farmwithjunk · Apr 18, 2006

Don't take my comments too personally. I'm a bit of a cynic when it comes to farmers controlling their own destiny. With input cost rising daily, and profit margins shrinking even faster, no wonder the American farmer is a vanishing breed. Unless you're in it on a grand scale, and practice "economy of scale", there isn't much future beyond just doing it "for the fun of it".

Bottom line is, if you have the operating capital to run a small farm, there's better things to do with that money. At least more PROFITABLE things.And it's only going to get worse with increasing fuel cost.