Hedging diesel and focusing much more strongly on equipment running costs offer farmers the most effective mechanisms to manage the impact of increasing fuel prices on production costs.
Given the perfect storm currently raging amongst the traditional drivers of South Africa’s fuel price, the question can be asked: “What can farmers do to manage today’s increased production costs and heightened price risk?”
Marthinus Loock, AgriBusiness Senior Manager at Standard Bank, lists two tools that are available for farmers.
Firstly, diesel hedge and option contracts traded on SAFEX provide farmers a mechanism to purchase forward contracts on diesel at fixed prices in South African rands (ZAR). This allows farmers to purchase three months’ diesel supply at a fixed price ahead of planting or harvesting, for example. This can help farmers manage the impact of price spikes on production costs. The broader agricultural value chain, including beneficiators, transporters and distributors, can also, hedge diesel. As such, hedging diesel provides a mechanism to bring fuel price stability and cost-predictability to the entire agricultural value chain. This has the potential to significantly reduce the carry-through effect of increased fuel prices on food inflation.
Secondly, farmers can use new technologies and up-to-date equipment to reduce running costs. Farmers generally replace their mechanised equipment, especially tractors, every five years or so. New equipment, and especially the technologies to manage and monitor the equipment that new models increasingly come with, provide farmers an opportunity to increase the efficiency of equipment while also reducing running costs. Instead of merely looking at capital costs when purchasing new equipment, “farmers should work closely with tractor manufacturers to develop comprehensive mechanisation plans that can increase performance and production while reducing fuel consumption and other running costs,” says Loock.
Source: adapted from a Standard Bank press release, 29 April 2019.
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