Energy costs will impact your potential profit more than any other cost in the next 10 years.
The rain and cold weather has caused delays in planting, drowned out wet spots and uneven corn. This may mean wet corn in the fall and big drying needs. That would be unusual in comparison to the last several years, but could happen. If that is the case, propane costs could really take a bite out of your profit picture this year.
On a larger scale, energy costs will impact potential profit more than any other cost in the next 10 years. This is a world wide problem and will get bigger. Within the next decade, we won't be able to increase fossil fuel production enough to keep up with a growing world economy and the resulting demand for energy. We will talk about that in later Riskwise columns, but for now lets look at the rest of this year.
For corn production, I estimate about 52% of your total costs of producing corn are directly or indirectly related to energy costs. Exclude land rent and the percentage goes up to 89%. For soybean production, excluding land rent costs, it's about 86%. The direct costs are oil and fuel for tillage, planting, irrigating, spraying, harvesting and transportation. But indirectly, fuel costs impact chemicals, fertilizer, tires, repairs, electricity and just about every other cost.
For your operation, you may soon have opportunities to book propane at costs that would surprise you. Look at the propane price chart above.
You can get updated daily, weekly or monthly charts and daily price quotes at www.futuresource.com. Just go to the site and look up PN (the Stock Exchange symbol for propane) and follow it yourself.
We've used this Web site for some time and find it easy to use. It has all the information we often need to help clients make decisions.
Long-term charts such as this monthly chart take much of the emotion out of price movements and you can see longer-term trends. Propane costs are already below the highs of late 1996 and far below the wholesale pipeline costs of nearly 90¢ late last fall.
Could they go lower? Yes. The chart will give you an indication of the future trend. Note the horizontal line I have drawn on some old highs and old lows from previous months. Markets tend to react to old highs and old lows. In July propane broke through these old highs.
It may go lower, but our recommendation is to do phase-in buying, since we don't know what prices will do. It could go lower, but good risk management dictates that you take advantage of this opportunity. If it continues lower, just keep phase-in buying.
We use this process of analyzing old highs and old lows to give us decision points. We then make phase-in buying and selling decisions based on chart analysis. If it goes lower, wait for another key point to buy more. If it stops at a resistance area and starts going up, then you can move more quickly in getting all your needs met.
Our clients booked half of their diesel fuel using this approach for spring, saving about 20-25¢/gallon. They'll book the other half for the year when the opportunity is present.
Moe Russell is president of Russell Consulting Group, Panora, IA. Russell previously spent 26 years with Farm Credit Services as a division president. For more risk management tips, check his Web site (www.russellconsulting.net) or call toll-free 877-333-6135.