The farming fuel factor

The Detail

Although at EP3, we generally discuss the markets for the products which farmers produce, it is equally important to examine the cost of our inputs.

As we approach the cusp of harvest, one of those significant costs will be fuel. In this short analysis, we will take a look into the driver of price, and where prices currently are.

The biggest driver of fuel pricing is crude oil. This makes sense as diesel is derived from crude. Crude oil futures and Australian diesel pricing has a correlation of 0.91, with 1 being perfect and 0 being no correlation.

This means that if crude oil prices rise, our prices should follow (and vice versa). Due to the high correlation between the two, it would be possible to use crude oil futures as a hedge against fuel usage,. There are institutions which offer this service. The reality, however, is that most have very high minimal levels.

Although I have been consciously trying to avoid discussing COVID-19 in articles, it is hard to ignore the impact of this pandemic. As the economy slows down, the demand for energy has declined, from factories to cars and planes. This resulted in a decline in crude oil pricing levels, at one point with the futures expiring at a negative level.

The market has recovered but remains at the lowest in recent years. The same pattern is shown in the average Australian diesel price. The diesel price which we use is based at the terminal, not the price received at local sites. This, however, should give a fair representation of pricing trends.

The current average price for diesel in Australia is 105¢/litre, whilst the average for September 2019 was 138¢/litre. A considerable saving.

The price of fuel is likely to remain depressed until such time that the world gets moving again.

Whilst we have discussed the average Australian price, below is a percentile table showing diesel pricing around Australia.