Don’t expect diesel, fertilizer, and chemicals to match oil’s steep decline

Experts say it’s a mixed bag when it comes to input costs

Falling oil prices are bad news for energy producers, but that should be good news for farmers and other big users of fuel and energy-intensive products.

“We’re paying 30 or 40 cents a litre less for gas today than we were three or four months ago,” said Michael Burt, director of industrial economic trends with the Conference Board of Canada.

“Fuel costs will definitely be lower this year, and that should be a benefit financially for farmers.”

There is some serious money on the table — Alberta producers spent an estimated $676 million on fuel, mostly diesel, in 2013.

But compared to gasoline, which has dropped dramatically, so far diesel prices are just “softening,” said Jennifer Stoby, ag inputs market analyst with Alberta Agriculture and Rural Development.

“Unfortunately diesel is not dropping as quickly as gasoline is,” said Stoby. “I don’t think we’re going to see a huge drop like we did with gasoline in the last few months.”

And why is that?

The problem is twofold, said Michael Ervin, president of MJ Ervin and Associates, a Calgary-based expert in the refining and marketing end of the oil business.

On the supply side, big gasoline inventories pushed down gas prices very quickly while on the demand side, diesel is closely linked with furnace oil, a popular heating fuel in parts of Canada and the eastern and midwestern U.S.

“In the wintertime, there are higher furnace oil sales in parts of North America where furnace oil is a fairly significant heating product,” said Ervin. “That creates a bit of seasonality, which tends to create a heightened markup of diesel relative to the crude oil price in the winter.”

There is also a large amount of North American diesel being exported to South America and other global markets.

“Come springtime when furnace oil demand is reduced, I expect to see a further drop in diesel prices, assuming that the crude price stays low,” said Ervin.

Fertilizer prices

The drop in fuel prices also makes it cheaper to produce fertilizer, seed, and chemicals — but, again, it will take time for those lower costs to trickle down to the farm level, said Remi Schmaltz, CEO of Decisive Farming.

“In the short term, from now till spring, the drop in oil is not really going to offset or help those three commodities,” said Schmaltz. “Until we get into next year, that’s when we’ll probably start to see some real correction around oil affecting these other inputs.

“Right now, supply and demand for fertilizer, seed, and chemicals is really going to dictate it, versus the cost of production.”

And like the furnace oil market, the oil price plunge came at the wrong time of year in terms of having a big and immediate impact, he said.

“A lot of this fertilizer has already moved,” said Schmaltz. “Even if there was some adjustment in the cost of production in the short term, it’s really a delayed effect for it to work itself through the system because all of this other stuff has been produced at a higher number.”

Stoby agrees.

“Fertilizer probably won’t be directly impacted by the drop in crude oil prices,” she said.

As a result, producers shouldn’t expect fertilizer prices to come down between now and spring, said Schmaltz.

“We have now started to see in the short term a lot more growers realizing, as we get closer to spring, the logistics really start to tighten up on fertilizer, and they’re starting to make purchasing decisions if they haven’t already,” he said. “Historically, now ’til spring, prices don’t get better.”

Falling loonie

The drop in the Canadian dollar is also a big factor, and that’s definitely a negative for input prices.

“When you look at fertilizer in particular, it’s not a positive because our prices are based on U.S. numbers typically,” said Schmaltz.

Alberta producers spent a total of $1.246 billion on fertilizer and lime in 2013 — and that number will continue to climb.

“Even if you weren’t dealing with the supply-and-demand logistics that we are (facing) today, that bigger spread between the stronger U.S. dollar and the weaker Canadian dollar means that we need to pay more for fertilizer,” he said. “That’s going against us for sure.”

But it’s also a two-way street and the drop in the Canadian dollar is making crop commodities more “cost competitive,” said Burt.

“If you’re selling your products outside of Canada and you’re getting U.S. dollar of X per bushel, you’re getting more Canadian dollars for every bushel that you sell, so there’s a benefit there,” he said.

That’s good for grain exports, said Schmaltz.

“From the Canadian dollar perspective, that makes our grain exports cheaper,” he said. “We’re a more attractive market to buy from.”

But whether the bump in grain prices will offset the higher costs of fertilizer and equipment remains to be seen. That’s why producers need to know their margins, said Schmaltz.

“When we’re dealing with the volatility in commodity markets like we’re experiencing these days, you really have to have your finger on the pulse of where your margins are down to a field crop level,” he said.

Producers need to have a plan in place to protect themselves from rising costs and dropping prices.

“You can’t be shooting from the hip here,” said Schmaltz. “The last four years have been a gift. Pretty much no matter what you did, you were profitable when you sold. This is a very different game.”

About the author

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Reporter

Alexis Kienlen lives in Edmonton and has been writing for Alberta Farmer since 2008. Originally from Saskatoon, Alexis is also the author of two collections of poetry, a biography, and a novel called "Mad Cow."

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