Do I Really Need to Contract Fuel?

Do I really need to contract? When is the right time to contract?  How do I know if I’m getting a good price?  Why is the price of the contract higher than today’s price?

Over the years, there has been a lot of discussion and even a slight bit of controversy over the subject of fuel contracting on the farm.  Let me tell you this, there are no right or wrong answers to these questions.  I honestly don’t know if these are even the questions you want to be asking yourself when thinking about contracting. 

This time last year crude oil was hanging out around $60/barrel, which was about the average for 2019, and the beginning of 2020.  Until Covid hit the US, and along with it came the potential for an economic disaster that could top the Great Depression.  On April 20, 2020 the crude market made history; closing the day at -$36.98.  For 1-day crude oil was worth less than nothing! What a day, filled with fear and uncertainty. Since this day the markets have seen a slow steady recovery, very slow.  Non the less, we are currently hanging out around $45/barrel.  With no sign of complete economic recovery in the near future, the market has bounced a bit in the past few months; but seems to really like that $45/barrel marker. 

Though the energy markets seem very content under $50/barrel right now, we have to ask ourselves, what does the next 9 -12 months actually have in store for us?  Will the US continue to struggle financially?  Will Covid continue to rule the energy markets?  Will the new administration bring in new changes that will ultimately affect the markets?  The unknown can be quite scary. 

So, let’s go back to the original questions:

Do I really need to contract? 

That depends, how will you be affected by a price spike that could bring diesel fuel up over $1+/gallon higher than the current price?

Does contracting give you piece of mind?  Do you like to gamble?  When is the right time to contract? 

There is no right or wrong time to contract.  Historically, pricing is at it’s best between December & March…but history doesn’t always repeat itself!  If 2020 taught us anything, it taught us that!  Leaning on your energy sales consultant is the best idea. 

How do I know if I’m getting a good price?  What is a good price? 

The question you really need to ask yourself is; does this price work with my annual budget? In other words, can I spend this much for fuel and still make the necessary profit for my business.

Why is the price of the contract higher than today’s price? 

Contract prices can sometimes be higher than the current rack price (not always) because we are buying “futures”.  With “futures” purchase there is always a risk, and risky behavior comes with a higher price-tag!  Speculations of the futures markets can also wreak havoc on contract pricing-will there be supply issues in spring or fall?  Will there be a bumper crop and cause for higher demand for fall?  Will the prospect of a new administration cutting US drilling cause prices to skyrocket?  These types of conversations will definitely raise eyebrows and lock in pricing!

Back to the original question of “is contracting your fuel important?”

The answer is = YES, it is important, but it is not the best option for everyone.  Only you can make that decision if contracting is right for you. 

One statement I make to my customers: DON’T LOOK BACK!  What I mean by this, if you lock in your fuel at a price that you are comfortable with, stop shopping.  There is no reason to waste precious time looking for the cheaper price, there is always going to be a cheaper price, but there is always going to be a higher price too.  For your own piece of mind, lock it in and forget about it.  DON’T LOOK BACK, you might trip over something in front of you!

Written by Kim Leisner, Certified Energy Specialist

© 2021 CHS Inc.