Market Morsel: fill her up.

Market insights | 12th February 2021 | By Andrew Whitelaw

Market Morsel

This morning, we released an article on the fertiliser market (see here). Examining the input market is as important as the price of the produce we sell. Another significant cost on-farm is diesel.

As we approach seeding, one of the significant costs will be fuel. In this short analysis, we will look into the driver of price, and where prices are currently.

The biggest driver of fuel pricing is crude oil. This makes sense as diesel is derived from crude. Crude oil futures and Australian diesel pricing has a correlation of 0.91, with 1 being perfect and 0 being no correlation.

This means that if crude oil prices rise, our prices should follow (and vice versa). Due to the high correlation between the two, it would be possible to use crude oil futures as a hedge against fuel usage. There are institutions which offer this service. The reality, however, is that most have very high minimal levels.

The crude oil market collapsed during 2020, as large tracts of economies shut down. The crude oil market has from lows of US$19 per barrel, in recent weeks crude has been grinding higher to settle above US$60 per barrel.

Whilst diesel prices in Australia have increased in recent months in line with moves overseas; the reality is that prices are remaining at low levels compared to most of the past decade.

The decile table below displays where current prices sit compared to the timeframe 2010 to present.

A decile measures how often, historically, prices have fallen below (or below) a particular pricing point. It gives a brief snapshot of whether a market has more upside or downside and how large this may be.

For example, if a price is at its 45th decile, 45% of the time prices have been below that value and 55% of prices higher. Similarly, a 99% percentile means that 99% of the time, prices have been lower and higher just 1% of the time.

The interesting point from this data is that most states are in line between 20-30th decile, except NT & TAS, which are paying considerably more than the other states.

Tags

  • Fuel
  • Inputs