Interest in forward fuel pricing brings Budget duty warning

Rising crude oil markets have led to early enquiries to forward-fix red diesel prices. However, suppliers and buying groups warn that the 3 March Budget could bring higher fuel duties.

The premium to fix for harvest and autumn 2021 currently averages about 2p/litre, but varies widely depending on suppliers’ opinions of how oil markets will develop.

Farm fuel prices have been on an upward trend since early November, having been lower than 42p/litre throughout October .

This gathered pace recently as oil prices rose, putting spot deliveries at between 48.5p/litre and 52.5p/litre at the time of publishing, with the range reflecting volume and location. This was just over 1% higher on the previous week’s levels and matched year-ago levels.

See also: Diversification advice and case studies

Crude oil prices slumped in April 2021 as the pandemic rapidly spread beyond China, but have recently risen above pre-Covid-19 levels, buoyed by optimism about vaccination and the prospect of economic recovery.

The pound has also strengthened recently for the same reasons, limiting the effect of rising oil prices to some extent.

“Looking at gas oil, we saw that massive drop-off back in March 2020 and, since then, a gradual recovery that jumped on the news of US stimulus and Covid-19 vaccines. The market has strengthened as things have developed there,” said Rupert Harlow, relationship manager at online input pricing and booking platform Yagro.

“Other factors we see as key to oil price movements at present are the unrest in the Middle East, with the Saudis’ intervention in Yemen… things are pretty tense and that’s never good for oil prices. Biden and the US stimulus package will inevitably drive demand and, therefore, increase prices in the US.”

Mr Harlow suggested forward-fixing up to half the required volume of red diesel, usually offered as a run of monthly deliveries that can vary in volume between months.

However, he cautioned that once the commitment had been made, the fuel deliveries must be taken as agreed, even if it is not all needed.

An alternative for those with the storage and cash in a rising market is to take upfront deliveries at spot prices.

Fram Farmers strategic partnerships manager Gordon Cummings has done forward deals in the 50p/litre region.

He said the indications from the main suppliers were for not much of an increase for harvest, with expectations of a premium to fix of about 2p/litre over spot prices.   

“You should forward-fix to suit your budget, not to try and play the market,” he said. “Fix it against your budget.”

At Oxfordshire-based farmer buying group Orion, marketing manager Adam Donaldson said interest in forward-fixing tended to occur on a rising market and was at a slightly higher and earlier level now than in previous years.

However, North Herts Farmers general manager James Williams said that, in general, the benefits of forward-fixing were outweighed by the premium to fix, unless the user was looking at least six months to a year ahead.

“Fuel prices often rise early in the year, but there can be a bit of June lull,” he said, also cautioning that a forward commitment followed by a late harvest and later-than-expected fuel use could mean the grower having to buy themselves out of a contract.

Red diesel price points 2020-21

Average prices in p/litre delivered to farm

8 January 2020

59.07

6 January 2021

47.40

19 February 2020

52.40

17 February 2021

52.43

29 April 2020

35.24 – low point of the year following mid-March oil price crash. Farm-delivered prices remained below 37p/litre for four weeks from 22 April

Source: Farmers Weekly fuel price monitor – red diesel prices collected every Wednesday morning from four farm suppliers between Scottish Borders and south-west England. Prices are for a 5,000-litre delivery the following Monday/Tuesday within 20 miles of depot, 28-day payment terms.

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