According to the U.S. Energy Information Administration, the average U.S. on-highway diesel price was over $6.30 per gallon for the week of September 28, up about 70% from a year earlier, after reaching a record over $6.50 per gallon the prior week. Farms, trucking and transportation companies, food processors, manufacturers and other fuel-intensive operations are seeing higher costs eating into operating budgets and margins.
“Nearly every type of business we work with is grappling with impacts stemming from these exorbitant diesel prices right now. They are asking us if we foresee any relief in sight and want to know if there are things they can be doing to offset—or alleviate—the higher costs,” says Pinion Ag advisor Keaton Dugan, CPA.
Concerns around managing these higher and more volatile diesel prices are prompting some businesses to consider fuel hedging as an option.
Here, Pinion advisors provide an overview of the diesel market, outlook, and geopolitical conditions that are shaping diesel prices, and careful considerations around fuel hedging as an option to manage diesel price fluctuations and impacts.
The Outlook for Diesel: A Political Perspective
“The current diesel-price environment is a reminder that risks originating thousands of miles away can quickly reach a farm’s balance sheet,” says Brian Kuehl, Pinion’s Director of Government and Public Affairs.
“Geopolitical disruptions, limited refining flexibility, trade policy, and seasonal demand can combine to raise costs with little warning. What makes the current situation especially challenging is that record diesel prices are hitting during harvest after producers have already been managing high input costs and tight margins.”
Those pressures can extend well beyond the fuel purchased directly by an operation. Diesel expenses are also reflected in fertilizer delivery, custom harvesting and application services, grain hauling, livestock transportation, and other services across the agricultural supply chain.
Recent discussions in Washington surrounding a potential temporary diesel export ban further illustrate how quickly policy decisions can affect energy markets and business planning. While proponents argue such a policy could provide short-term relief for domestic fuel consumers, others have raised concerns about potential market disruptions, trade implications, and unintended consequences for export-dependent industries such as agriculture.
“The diesel export debate is a reminder that agricultural businesses operate in a world where policy decisions, global conflicts, trade relationships, and energy markets are increasingly interconnected,” Kuehl says. “Producers cannot control those factors, but they can understand their exposure to them and evaluate strategies that help make their operations more resilient when volatility occurs.”
Kuehl notes that the impact may not end with this harvest season. “President Trump’s executive order deferring taxes on dyed diesel reflects the significant pressure that high fuel prices are placing on producers and the broader economy. For many producers, high diesel costs today will influence decisions they make over the coming months as they evaluate crop plans, input purchases, financing needs, and risk-management strategies for next spring.
“It would not be surprising to see continued volatility in the months ahead. Producers should prepare for a range of outcomes rather than assume today’s prices represent either a ceiling or a floor.”
Considerations for Fuel Hedging: What Is It? Who Can Benefit?
The huge move in diesel prices has rightly brought new attention to fuel hedging. Fuel hedging can be undertaken in physical and financial markets to help manage price risk. The objective of a solid hedge program is not to predict the exact top or bottom, but rather to fit the right tool to the market circumstances, business goals, risk tolerance and financing constraints.
“Diesel risk can show up in different ways. Some businesses are buying the fuel directly, while others are exposed through a fuel surcharge,” says Will Babler, Pinion Risk Management advisor. “In either case, the first thing we need to understand is the exposure and the volume. One of the biggest hurdles is often usage because hedging can require large contracts.”
A standard ULSD futures contract represents 42,000 gallons, which is why scale matters when hedging diesel with financial contracts. Larger businesses with recurring diesel or fuel-surcharge exposure may be able to match those contracts more effectively. Smaller users are not necessarily left out and may find physical purchasing strategies a better fit.
Careful considerations to discuss with an advisor:
- Physical forward contracts can be used to lock in a fixed price with suppliers.
- Futures can serve a similar role, with different advantages and tradeoffs including margin requirements that can create cashflow demands.
- Options may provide additional flexibility by establishing a maximum price or, in some structures, a range of prices (e.g. long options require an upfront premium and can protect against higher prices while retaining some ability to benefit if diesel falls).
- These financial tools are generally tied to the NY Harbor ultra-low sulfur diesel (ULSD) market. This is a good general proxy for wholesale diesel, but regional basis risk and tax differences must also be taken into account.
“Futures and options trading entails substantial risk of loss that needs to be understood before beginning a hedging program,” cautions Babler.
Don’t Wait Until the Market Forces the Decision
The impulse to be reactive should be resisted in favor of a deliberate, proactive approach.
“Businesses that tend to manage diesel risk well are the ones who are thinking about it ahead of time,” says Babler. “Rather than waiting until the house is on fire, we’d rather build positions over time and adjust how aggressive we are depending on business needs and where the market is in the longer-term price cycle.”
Changes in shipping conditions, refinery availability, reserve releases, export policy or geopolitical conflicts could move crude and diesel prices sharply in either direction. No one knows how this story will ultimately end. Managing risk in this environment requires a full understanding of the available tools and a proactive and flexible approach.
For businesses wondering whether fuel hedging could fit, the first step is to define the exposure: how much diesel is used, when it is used, whether the risk comes from direct purchases or a fuel surcharge, and how closely it can be matched to available tools.
A Pinion Risk Management advisor can help evaluate those factors, compare futures, options and physical hedging alternatives, and build an approach around the business’s volume, budget, goals and tolerance for risk.
Pinion Futures LLC — Disclosure
Pinion Futures LLC (PF), a CFTC registered Introducing Broker and NFA Member (NFA #0284447) is a fully owned subsidiary of Pinion Risk Management LLC. Information contained herein is believed to be reliable, but cannot be guaranteed as to its accuracy or completeness. Past performance is no guarantee of future results or profitability. Futures and options trading involve substantial risk of loss and is not suitable for all investors. Clients may lose more than their initial investment. Option traders should be aware that the exercise of a long option will result in a futures position. Option writers, or short option positions, entail a greater degree of risk. Traders need to fully understand these risks before trading and decide if they are a suitable trading instrument for their trading portfolio. All information, communications, publications, and reports, including this specific material, used and distributed by PF shall be construed as a solicitation for entering into a derivatives transaction. PF does not distribute research reports, employ research analysts, or maintain a research department as defined in CFTC Regulation 1.71.
