Tuesday, November 15, 2005
Chainsaw or scalpel?
Although you are tempted to start your chain saw and begin trimming operational costs, good management would be better served if trimmed with a surgical scalpel. The Farmgate has recently suggested new approaches to calculating your nitrogen needs, but what about fuel costs? They will be your other headache this winter. Let’s take a look at fuel requirements, machinery costs, and ways of saving dollars per acre on your fuel bill.1) Your first job is to identify the horsepower of the equipment in your machine shed along with sizes of tillage equipment, if you don’t already know. Having that inventory at hand will make your job much easier in benefiting from the information that follows.
2) With the help of the University of Illinois Farmdoc website, examine your fuel requirements for each operation you have during the year. Since the tables are based on $1.50 costs for diesel fuel, you will need to adjust for your current fuel costs. If your cost of delivered fuel is $2.50 per gallon, then increase the per acre fuel costs by 66%.
3) A recently revised calculation, of fuel demand for fall field operations, has been released by U of I ag economists Gary Schnitkey and Dale Lattz, who say, “The question arises as to how much machinery costs per acre have increased due to the higher fuel costs. This is especially important to those farmers involved in custom farming arrangements. The increase in machinery costs per acre due to the higher fuel prices depends on a number of factors, including the size of equipment, efficiency and type of machinery operation.” An easy to interpret table is posted on the FarmDoc website.
4) If you have a choice of power equipment, using different fuels, Colorado State Extension ag engineers H.W. Downs and R.W. Hansen compared output horsepower from diesel, gasoline and LP gas. Their research, which generally favors diesel, can be found in the National Ag Risk Management Library. Their charts, featuring a wide variety of field operations, provides fuel demands in gallons per acre and gallons per hour.
5) For farmers offering custom services to landowners, ag economist Bill Edwards at Iowa State suggests: “Custom operators should record their actual fuel consumption and purchase prices, so they can calculate a fair charge to their customers. Some operators may quote a base rate plus actual fuel costs to be calculated after crops have been harvested. In other cases, persons hiring the work done may provide fuel from their own supplies. Costs for hauling grain to storage or market have also increased. Distances and fuel consumption rates vary widely, but haulers can estimate their own costs by recording fuel purchases and distances driven.”
5) Ag economist Raymond Massey at the University of Missouri says, “The U.S. Energy Information Administration (EIA) projects an average retail diesel price of $2.58/gallon in 2006. This compares to an expected average of $2.45/gallon in 2005. Their analysis indicates that the October 2005 average was the highest real diesel price on record. However, they project the price going down from the October high and stabilizing between $2.50 and $2.60 for most of 2006.
The EIA notes that the real price of gasoline has not yet reached the 1981 real price high. They estimate that gasoline in 2006 will average $2.45/gallon in the U.S., up from the 2005 average of $2.34/gallon but less than the fall 2005 price of $2.68. Though they do not forecast prices by region, their data do indicate that the Midwest region of the U.S. is normally about 10.4 cents/gallon lower than the whole U.S."
Massey's comments are contained in a more extensive analysis of higher farm operating expenses in 2006.
6) Kevin Dhuyvetter, ag economist at Kansas State looked at monthly forecasted prices for crude oil markets on the new York Mercantile Exchange, and developed a chart for diesel prices in 2006, compared to their 2005 prices. As you can see, diesel prices early in 2006 will be considerably higher than 2005, but will become closer in line to 2005, because of the spike in prices resulting from the hurricanes. Fall harvest prices of diesel fuel in 2006 are expected to be well below what was seen in 2005.
Jan-06 27.4%
Feb-06 26.1%
Mar-06 9.6%
Apr-06 3.2%
May-06 9.7%
Jun-06 3.8%
Jul-06 -1.0%
Aug-06 -6.8%
Sep-06 -18.8%
Oct-06 -31.4%
Summary:
Whether you are farming only for yourself or proving custom services for other landowners, fuel will be one of your 2006 inputs that will require additional management, since its costs have increased in volatility. Carefully look at your equipment requirements, their fuel consumption, and sharpen your pencil to better estimate your fuel costs in 2006. That is a much more practical method of management, compared to the chainsaw method of trying to "cut back by 25%."
Posted by Stu Ellis on 11/15 at 11:59 AM | Permalink