This has been a year to remember. There were crop production concerns most of the year, record crop yields, and above average oil and propane prices that seriously impacted your ability to get the crop out and dried.
Oil prices affect some industries more than others, but the airline industry and production agriculture feel the effects more than most.
David Kohl, trends editor and professor emeritus at Virginia Tech, indicates that the vast majority of non-land costs on the farm are directly or indirectly tied to oil and gas costs. The obvious costs are fuel and electricity for crop production, irrigation and harvest.
The less obvious impact is how oil costs affect the price of fertilizer, tires, plastics, steel, lumber, concrete, chemicals and a variety of other things you need to do business on the farm.
The question? How do we take some of the risk out of these rising costs?
Light crude topped at $55.65/barrel and as I write this it's closed at $49.30/barrel. I would hesitate to lock in fuel costs at these prices. More significant than trying to guess when is the best time, or if you should lock in fuel costs, might be to look at futures prices.
The NYMEX crude oil futures show December 2004 at $49.30/ barrel, December 2005 at $44.60/ barrel and December 2006 at $42.00/barrel.
Incidentally, the December 2010 futures price is $38.25.
These prices can change at any time, but this indicates that the market thinks oil prices are more likely to drop than rise. Notice the opposite is the case for December corn futures in 2004, 2005 and 2006.
Propane futures prices peaked at 97.70¢/gal. and are now at 89¢/gal., so they have backed off as well.
Our strategy now is to operate hand-to-mouth. But as you know, that has its risks.
Of concern is that overall in the U.S. and the rest of the industrialized world supplies remain below normal, (see chart at right) largely because nearly 500,000 barrels per day of production were lost during the September hurricanes in the Gulf of Mexico.
Industry officials estimate that resumption of normal operations could take 45-90 days. Below normal oil inventories across the industrialized countries have contributed to concerns about the adequacy of supply to meet rapidly expanding global oil demand.
A very valuable Web site I refer to is www.eia.doe.gov. Monitoring this site can be helpful because it provides inventories, short- and long-term forecasts and data on most all energy sources, including electricity and coal.
However, watching futures prices may not be the prudent thing to do. If your operation uses a lot of energy, investing in additional storage may be wise.
Each of us has a different ability to bear financial risk. Even with higher prices you may be more comfortable to buy supplies ahead, especially if your overall cost structure is still profitable.
Look At Wind Energy
Another profit opportunity I'm becoming increasingly aware of is wind energy.
In most places in the Midwest, and especially the High Plains, there is an abundance of wind. It's free and never ending.
The technology in wind turbines has greatly improved the last several years. In several analyses I've done recently, it shows a 6-7 year payback, plus an internal rate of return of more than 20%. After the tower and generator are paid for the cash really adds up and, depending on the quality of the generator and maintenance, the useful life can be 20-30 years.
With increasing oil prices and decreasing dollar values, the rate of return will become more dramatic. A dropping dollar makes our imports more expensive and much of our energy is imported.
I've done research on wind energy this year since we're looking at adding it to one of our hog farms. My conclusion is that it's more feasible if you can generate three-phase power.
Call me if you are in interested in wind energy. I've found a wide variance in quality and dependability of turbines as well as credibility of vendors.
Moe Russell is president of Russell Consulting Group, Panora, IA. Russell provides risk management advice to clients in 20 states. For more risk management tips, check his Web site (www.russellconsultinggroup.net) or call toll-free 877-333-6135.