Fueling Up Fears
As a contract grower and shipper, Steve Theobald isn’t as worried about what it will cost him to deliver his product in a few months as he is about the effect increasing fuel prices are having on everything else associated with his business.
“The indirect effect is even more difficult to predict,” said Theobald, of R & G Potato Company in American Falls, Idaho. “Everything we buy is freighted.”
R & G, a supplier to the potato chip industry, puts together its contracts months in advance, Theobald said, typically accounting for the variable nature of fuel when constructing those contracts. In a year such as this, those contingencies are likely to be used, meaning the cost of everything else now becomes much more important.
“There is enough risk in the margins that you can’t give up anything else as you go through it,” Theobald said. “You have to watch your other costs. You have to pay attention every day. It’s more important today that you have cost containment and get the best deal you can.”
With a barrel of crude oil selling for more than $100 for roughly six straight weeks, fuel prices were hovering around 2008’s historic highs in early May. The average price for a gallon of regular unleaded was at $3.98 nationwide with diesel at $4.17, according to AAA’s Daily Fuel Gauge website on May 5.
Average means just that. In some areas, such as California, Alaska and the Midwest, fuel prices were well over $4 a gallon.
Among the factors driving the increasing fuel prices, said Avery A. Ash, a manager for regulatory affairs with AAA in Washington D.C., is unrest in the Middle East.
“It’s adding uncertainty to the crude oil supply,” he said. In addition, investors and speculators, hedging their respective bets on continued instability, also are driving up fuel prices through their investments.
On May 5, some relief in crude oil prices finally seemed at hand.
“We have seen crude pull back about 12 percent this week,” Ash said of the price per barrel. “(May 5), was the first day oil closed below $100 a barrel. It was the largest single-day drop since 2008.”
Of course, he’s not speculating fuel will now drop the way it eventually did in the latter half of 2008. He said seasonal trends would predict a decline in fuel prices right now with a predictable rise during the more significant summer driving months of July and August.
“Those are with the caveat, as we have seen this year, that you can talk about seasonal trends all you want, but there are many geopolitical drivers out there,” Ash said.
Those forces are what kept fuel prices rising early in 2011, a time of year when they would typically remain flat, or even decline, Ash said.
Theobald, whose operation handles about 4,500 acres in Idaho, another 4,000 acres in Mew Mexico and about 1,500 in Arizona, is focusing on trying to get the best prices he can for those peripheral needs, understanding there is little he can do about the price of a gallon of gas when harvest comes.
His operation, he said, isn’t large enough to do any hedging on fuel prices.
But Dale Lathim, executive director of the Potato Growers of Washington, located in Kennewick, said many of the growers he works with do hedge those fuel purchases, buying up a significant supply during times of the year when sales are slower and prices are typically lower.
He said most in that position are able to purchase much of the fuel they will need for the season with some supplemental purchases being made at harvest.
Lathim’s concern, much like Theobald’s, is for the cost of everything else.
“Our impact will not be so much directly related to fuel we use, it will be the fuel surcharge and the impact on all the other things we buy,” Lathim said. “For example, when you buy parts, you will pay fuel surcharges for those. Those will add up to more than the increased fuel prices on our direct use.”
At this point, increased fuel prices aren’t having a direct effect on many potato growers, Lathim said. But that doesn’t mean they aren’t keeping an eye on it.
“Any increase is of interest,” he said. “I wouldn’t say we were alarmed yet, but we are watching.”