Will American Agribusiness Benefit?

In February of 2022 Russia invaded Ukraine. The event triggered production and trade shifts in the crude oil industry.  Russian oil supply, 12% of which funneled into global markets, was virtually pulled off the books due to sanctions and conflict. Ports capable of loading and unloading Russian supplies were closed or congested and the shipping industry, dependent themselves on crude oil, was thrown into its own mandatory restructuring. 

As a result, trade relationships changed causing Russia to export primarily to Asia, leaving the U.S. to fill crude oil demands in Africa and the Middle East. Rerouting commodities, often by elongating shipping routes, added to demand for oil and further pressurized the industry.

Tight supplies prompted massive energy production around the world as nations vied to fill the oil gap left by geopolitical conflicts. Fast forward to 2025 and we see crude oil production in excess. At the same time, alternative fuel options are becoming increasingly available, decreasing demand on fossil fuels. We have more than we need and the price per barrel is dropping.

High priced diesel typically contributes to a stressed agriculture sector in the United States. Farmers and ranchers point to costly inputs as a primary obstacle to increasing profit margins and stabilizing farm incomes. Will an oil oversupply create the financial break American agribusiness has been waiting for?

Surplus Oil to Reduce Operational Expenses

Fuel is one of those non-negotiable inputs. When it comes to farm equipment and transporting commodities agriculture can’t do it without diesel. Whatever is going on in the energy sector ripples into farms and the micro economies they support.

If the global production trajectory holds then 2026 could see a 4 million barrel per day surplus of crude oil. Already experts suggest gas prices could fall to $2 per gallon for the average consumer by the end of 2025. It is across the board, but particularly beneficial to the transport industries and a welcome shift for those in agriculture.

Part of the price drop is due to electric vehicles impacting demand. With more fuel options available and a spike in EV sales around the globe, crude oil could see a continued downward trend. Current numbers suggest that electric vehicles will displace some 10 million barrels of crude oil per day by 2035. 

November wrapped up with fuel prices dropping rapidly and what we could say is an end to war premium prices. The world is comfortable knowing oil is in abundant supply.  Agribusinesses have been afforded a unique financial opportunity. Locking in cheap fuel prices before winter could be a game changer for farm incomes heading into the new year. It might not be harvesting season, but agricultural equipment is still milking cows, mixing feed and transporting goods; all of which rely on diesel to perform their tasks.  Lower operational costs typically equal more profit or at least help create a competitive edge.

Will Cheaper Fuel Be Enough to Boost Farm Incomes?

Despite the fact that America’s agriculture business are sighing with relief over the potential for long term fuel cost reductions, buying diesel is just one of many input expenses. Cheaper fuel could balance the scales but given the high price tags on fertilizers and seeds, the lack of laborers and shrinking markets it might not tip the scales.

For soybean farmers, cutting fuel costs doesn’t change the fact that China is currently boycotting their crops.  And, unless corn farmers can sell their crops for more than what they spent to grow them, something they are narrowly accomplishing, then fuel might still be considered an expensive input cost despite its downward trend.

This situation is not unique to the United States. Brazil also has excess crude oil and is looking for export markets. Having already overtaken the U.S. in several commodity markets, an oil surplus might only serve to further Brazil’s advance as an agricultural powerhouse. Lower fuel costs don’t mean the United States will suddenly have greater access to global markets.  In fact, it could make it even cheaper for other countries to produce commodities and keep the competition fierce.

The announcement of oversupply has been quickly followed by a reminder that these markets often work on a sliding scale. Exactly how long we can expect to see these low fuel prices depends on how global production responds to the surplus of supply. Farmers shouldn’t put their feet up quite yet. Eventually production will scale down and fuel prices will level. In the short term, securing cheap diesel now is a strategic move agribusinesses can make to widen the profit margin gap.