Some of the effects of high fuel prices are obvious, but others are more subtle. Consider the potential impact on the farm economy. Right now, farmers are busy bringing in the harvest. That means lots of diesel fuel consumption for combines, tractors, and trucks, which are needed to get the grain from field to storage. These higher fuel costs will constrict already thin margins. Moreover, farmers may also be squeezed on the revenue side, as the effects of fuel costs on other transportation sources -- including the rail cars that transport grain to river terminals for export or to domestic users and processors -- may also be depressing prices.
Grain prices have declined significantly from summer levels, which included concerns about drought in parts of the corn belt. This meant an expectation of lower supplies at harvest, and stronger price levels. However, recent crop estimates indicate that the drought effects are not as significant as previously anticipated. With estimated supplies growing, prices have fallen. However, in addition to positive supplies, there is the matter of transporting grain to export markets. Katrina created temporary disruptions, but there was also the matter of rail transportation. Reports of rail car shortages have been common, and this deserves some additional inquiry. A report in the Omaha World Herald last week (September 22) indicated that rail cars would be costing about $1800 more per car than in previous years. Considering that each car holds about 200,000 pounds loaded, this translates into about 40 cents per bushel for corn (56 pounds/bu). Someone will pay for that. Farmers are likely candidates.
Cash corn prices in the Omaha/Council Bluffs markets are now below $1.50 per bushel. By comparison, the average for the 2003 market year (the most recent reported in the Iowa Agricultural Statistics, 2004) for Iowa farmers was $2.40. The Iowa Agricultural Statistics book for 2004 also reports that the cost of producing a bushel of corn (assuming planted after soybeans and yields of 150 bushels) was 2.57. Thus, at $1.50, this is not working out too well, even if one could produce a higher yield to spread out some of those fixed costs. (I think this may well be happening in my neighborhood, where some 200 bushel corn is expected.)
Government price supports (LDPs) now approach 50 cents per bushel on corn. These function much like put options for farmers, who can sell and receive a payment now, or take a payment and store grain with the hope of selling at higher cash prices in the future. Given that grain has been piling up at some elevators already, storing looks like a good option if you have the facilities to do it.
Basis (the difference between the spot price and the futures price) is also now at very high levels of over 50 cents per bushel on corn. In part, this may reflect seasonal supply pressures of the harvest season. In part, this may also reflect increased transportation cost estimates due to higher fuel prices. By comparison, basis for the first week of October against the December contract has ranged from a low of 15 cents to a high of 55 cents (during the period 1994-2001), with an average at 39 cents. Thus, we are at the high end of the range. (Basis data can be found here: http://www.extension.iastate.edu/agdm/crops/pdf/a2-41.pdf) Soybean basis is also 55 cents under the November contract, which is at the high end of this historical range as well.
Transportation costs will impact all of us in some ways, but these effects on grain prices, as well as on the costs of bringing them in from the field, may be a double-whammy operating on farmers.