Ag News

Mecardo Analysis - Fuel for thought

  • By: "Prime" Ag News
  • Aug 07, 2018

By Andrew Whitelaw | Source: Mecardo, AIP

The grain market is well supported at present due to concerns both locally and globally. Any grain we produce this year is destined to be sold at above average prices. At Mecardo, we think it is equally important to examine input prices and so in this update, we will examine fuel pricing.

Fuel is one of the biggest single costs for a cropping operation, provided we get a crop to harvest. It is therefore important to ensure that we are taking advantage of opportunities to capture as much value as possible.

Most of our fuel is imported from Singapore. We would therefore expect our fuel price to have a strong relationship with the price in Singapore. In Figure 1, the Australian and Singapore petrol price is displayed. This chart shows that as the one price rises, the other follows (and vice versa). There is an extremely high degree of correlation between the two (0.98, with 1 being a perfect correlation and 0 being no correlation).

2018-08-07 Grain Fig 1

You might think that it’s a bit irrelevant discussing the petrol price, as we typically use diesel on-farm. Petrol and diesel are however both a derivative of crude oil and they also share a strong relationship with one another (Figure 2). The average (all states) since the beginning of the decade for petrol and diesel is very close, at 126¢/L and 127¢/L.

2018-08-07 Grain Fig 2

We do however have a basis between the Singapore price and the Australian price. The average basis has been 60.9¢/L. In the past two months, the basis level has increased to an average of 65¢/L (Figure 3).

2018-08-07 Grain Fig 3

Key points
   * Singapore petrol and Australian petrol have a high degree of correlation.
   * Australian petrol and diesel have a high degree of correlation.
   * There are opportunities to use derivatives to hedge your future fuel requirements.

What does this mean?
Clearly our fuel pricing has a strong relationship with pricing in Singapore and a very high degree of correlation.

It is possible to take out fuel swaps on Singapore petrol. These provide an opportunity to hedge your fuel requirements into the future whilst having minimal impact on cash flow.