Tariff News Sends Energy Prices Lower, Analyst Says Farmers Should Lock in Purchases Now

What Happened

Trade wars and tariffs sent energy prices significantly lower in the last couple of weeks. While uncertainty exists in the world marketplace, the potential to lock in longer-term energy needs presents itself. An environment of tight margins for farmers means paying attention to every opportunity. Crude oil prices recently dropped from over $71 a barrel to under $55, a change of over 20%. The current administration has promoted the idea of increased energy production, yet there is no guarantee prices will stay low. The administration has also echoed concern that prices will be on the rise, as the artificial intelligence industry ramps up the need for energy. 

Why This Is Important

Cutting costs is always important. Energy is one of the larger inputs that farmers will face in a growing season. According to a University of Maryland study in 2020, on average, fuel and electricity used for operating equipment account for 15% of U.S. agricultural production costs. Therefore, a watchful eye on energy prices and a plan to develop a risk-shifting strategy is paramount. The recent sell-off in energy prices suggests that, at a minimum, a conversation with your fuel vendor is in order. Ask lots of questions. Learn how they can facilitate contracts for you that can secure your cost and delivery.  

What Can You Do?

Beyond a conversation with your vendor, consider speaking with your market adviser, who may have different tools for you to use. A crude oil futures contract is 1,000 barrels. This equates to 42,000 gallons, which is the same size as a futures contract for New York Harbor ULSD (ultra-light sulfur diesel). Using futures may be a tool to consider, as would purchasing options to establish a price ceiling. Purchased call options give the owner the right (not the obligation) to own futures. In recent years, micro-emini, contracts one-tenth the size of a standard contract, have been introduced. Your advisor can help you navigate how to use these tools. Again, ask lots of questions before entering any position.  

Find What Works for You

Work with a professional to find the strategy or strategies that are best suited for your operation. Communication is important. Ask critical questions and garner a full comprehension of consequences and potential rewards before executing. The idea is to make good decisions for the operation rather than emotionally charged responses to market moves, which are always dynamic.

Editor’s Note: If you have any questions on this Perspective, feel free to contact Bryan Doherty at Total Farm Marketing: (800) 334-9779.

Disclaimer: The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Examples of seasonal price moves or extreme market conditions are not meant to imply that such moves or conditions are common occurrences or likely to occur. Futures prices have already factored in the seasonal aspects of supply and demand. No representation is being made that scenario planning, strategy, or discipline will guarantee success or profits. Any decisions you may make to buy, sell, or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Total Farm Marketing. Total Farm Marketing and TFM refer to Stewart-Peterson Group Inc., Stewart-Peterson Inc., and SP Risk Services LLC. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of the National Futures Association. SP Risk Services, LLC is an insurance agency and an equal opportunity provider. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with all three companies. SP Risk Services LLC and Stewart-Peterson Inc. are wholly owned by Stewart-Peterson Group Inc. unless otherwise noted, services referenced are services of Stewart-Peterson Group Inc. Presented for solicitation.

About the Author: With the wisdom of 30 years at Total Farm Marketing and a following across the Grain Belt, Bryan Doherty is deeply passionate about his clients, their success, and long-term, fruitful relationships. As a senior market advisor and vice president of brokerage solutions, Doherty lives and breathes farm marketing. He has an in-depth understanding of the tools and markets, listens, and communicates with intent and clarity to ensure clients are comfortable with the decisions.