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.
Since last year at this time crude oil has risen almost 50%, and most of our commodities have followed suit. I remember a few years back; when OPEC signed their 1st production cut agreement, speculators were calling for $65-$70/barrel crude. At the time, that seemed pretty far fetched. Back then, the norm was about $45/barrel- and there really wasn’t a whole lot of volatility. Well, it may have taken two years, but today’s crude oil value is $68.50, And it seems to be pretty darn comfortable in that spot! Anyone that locked in last winter when crude was $10-$15 barrel lower, for 2018 spring/fall did pretty well (so far!).
We have also witnessed it go the opposite direction. 2013-2014, led way to all time crude oil highs, we saw crude rise up to over $100/barrel. This frightened many and we all locked in, maybe a bit early (Sept./Oct.) for the following Spring. By the time planting came around, the energy markets tanked and we saw crude oil; basically in the clearance aisle, down 50%. When this kind of stuff happens, it stings…for a long time! But, I will tell you this, although diesel prices dropped to more than $1 lower than most customers lock in, we all survived. Why? Because we budgeted for the original contract price. Did that make it sting any less, no…but again, we all survived and lived to see another crazy season.
So, let’s go back to the original questions:
Do I really need to contract? That depends, how bad will it hurt you, financially if diesel spikes up over $1+ higher than current pricing?
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! 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 a profit?
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 there is always a risk, and risky behavior comes with a higher price-tag.
Speculation of the futures markets can also wreak havoc on contract pricing- will there be supply issues in spring/fall? Will there be a bumper crop and cause higher demand for fall? Will OPEC make more production cuts this year? These types of conversations will definitely raise eyebrows and lock in pricing!
Back to the question of “Is contracting your fuel important?” Yes it is, 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 that is, if you lock in your fuel at a price you are happy with, stop shopping for a lower price. There is always going to be a lower price, but there is also going to be a higher price. 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!