High fuel, energy prices push up farm input costs

As a grain farmer and owner of an ag trucking business, Terry Davis is feeling the pressure of volatile fuel prices from both sides.

“(Fuel prices) moved so fast that they have put everything in a negative margin,” Davis told FarmWeek. A year ago, the Warren- Henderson Farm Bureau member said he paid $3.50 per gallon for diesel, and in recent months that figure rose closer to $5.

“We aren’t able to absorb the cost, so the choice had to be made to either shut down the operation or to ask the customers to accept higher freight costs on the trucking side,” he said, noting most of his customers have been willing to renegotiate contracts.

Energy prices are also tightening farm margins, which is being felt by grain and livestock producers like Mercer County Farm Bureau member Chad Bell.

“The electricity at my pig barn has more than doubled since I built the barn in 2017, approaching a three-times rate,” Bell said. “I used to get by for $400 during months with low usage, but now I barely dip below $1,000.”

Diesel

On-highway diesel fuel prices in the Midwest averaged $5.19 per gallon July 27, up $1.40 a gallon from the same time a year ago, according to the U.S. Energy Information Administration (EIA). The price increased rapidly at the start of the Iran conflict in February.

“I’d be expecting higher fuel prices and per-acre fuel costs than we’ve experienced on average in the last five to 10 years, but probably not as high as what we saw in 2022,” Nick Paulson, an ag economics professor at the University of Illinois, told FarmWeek.

Fuel-buying strategies

Many farmers have delayed securing fuel for the busy fall season, holding out for price relief. Others are buying cautiously.

“I have locked in some diesel fuel needs but not all,” Bell said. “The price has been so volatile that I’m not willing to take a big position. My fuel supplier has been nudging me when prices have dipped to keep biting off some needs.”

Tim Abel, GROWMARK director for customer risk marketing, encourages farmers not to wait until harvest is underway to address fuel needs, as fall demand often coincides with tighter logistics and increased competition for supply.

“Having at least a portion of your fuel secured before peak demand begins reduces both price and supply risk,” Abel said. “Set reasonable price targets that you’re willing to commit gallons to. If it hits, it gets executed. Consider filling your tanks on market pull-backs, especially if this may be only one-third of your fall needs. If this is true, you still have two more fills for fall that could improve your average price of fuel.”

Oil market outlook

Signals of a potential end to the war present optimism for increased oil production by the end of the year, which should provide some price relief.

Following the June 18 memorandum of understanding between the U.S. and Iran to open the Strait of Hormuz, EIA raised expectations for global oil production. EIA predicts most crude oil production to return to “near pre-conflict averages” by the end of 2026.

“We expect global oil inventories will fall by 2.2 million barrels per day (b/d) in the third quarter of 2026 compared with more than 7 million b/d in our June forecast and 5 million b/d in the second quarter of 2026. Next year, we expect that rising oil production will result in the market shifting back to the pre-conflict state of oversupply,” EIA noted in its latest short-term outlook.

The Brent crude oil spot price averaged $85 per barrel in June, down $22 from May and $32 from its recent April 2026 peak. In mid-July, the price shifted back to triple digits at $102 per barrel and cycled back down to $78 the last week of the month.

EIA expects Brent crude oil to average $65 per barrel in 2027 as ongoing oil inventory accumulation over the next year should put downward pressure on prices.

Electricity

Electricity is the biggest energy concern for Bell, who uses it to run ventilation fans and heating systems in his hog barn and drying fans in his grain bins.

“I could always delay my harvest slightly and let Mother Nature do the grain drying, but that brings other risks with crops staying in the field longer,” Bell said.

He is researching using solar power for his hog barn.

“That’s where I can make the biggest difference since that barn needs power 24/7,” Bell said. “I’ve been reluctant to invest in solar because of reliability and poor service.”

EIA expects wholesale electricity prices will be lower this summer compared to last summer, primarily because of lower costs of natural gas delivered to power plants. But heatwaves during the summer could still cause price spikes. Nationally, wholesale prices are forecast to average about $45 per megawatt-hour.

Propane

While propane prices are more moderate in comparison to other inputs, it could add to the balance sheet this fall if a large amount of corn and soybeans need to be dried post-harvest.

“On the price side, propane doesn’t look extremely concerning, although in the tight margin environment that we’re in, everything adds up and everything is under pressure to try to keep costs low,” Paulson said.

EIA expects U.S. natural gas consumption in the electric power sector will set a record next year, driven largely by rising overall electricity demand, the expansion of the natural gas generating fleet and relatively low natural gas prices.

Headwinds

Energy prices heavily influence the markets of other agriculture inputs, like fertilizer, so volatility in the energy market will factor into other categories on farmers’ balance sheets.

Paulson expects 2026 to be the fourth consecutive year of negative returns for the average grain farm in Illinois.

“For other inputs, you’re looking at some pretty sizable numbers on the cost side, and corn and soybean prices are just not high enough to really pencil out much of a positive return at this point,” Paulson said.

Abel has several concerns about fuel and energy in the near term, including wild cards like hurricane season.

“A major late-summer or early-fall storm that significantly reduces production capacity out of the Gulf Coast region could accentuate the already volatile price environment,” Abel said.

With tight global oil supplies, other countries are having to rely on the U.S. for backup, so the market has very little cushion for unexpected disruptions. Farmer procrastination to lock in purchases could also force supply needs all at the same time.

“U.S. stocks are still historically low,” Abel said. “Any supply surprises will just add to the tight global situation.”

With high input costs across the board, Tonya Crow, executive director of energy marketing and business development for GROWMARK, said farmers should stay on top of equipment maintenance to help manage fuel and other costs. The use of Dieselex Gold will improve fuel efficiency and keep injectors clean while premium engine oils, such as Suprex Gold ESP, reduce friction and protect engines under severe operating conditions, she noted.

“Farmers can maximize the value of every gallon of fuel and every hour of equipment operation through proactive maintenance,” Crow said. “In today’s tight-margin environment, improvements in operating efficiency and reduced downtime have a significant impact on profitability.”

Rhiannon Branch, FarmWeekNow

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Rhiannon Branch is the commodities editor for FarmWeekNow.

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