ATLANTA — Greg Ibendahl thought he made a good decision when he bought a diesel-powered car last spring.

“When I bought the car around Memorial Day, the price differential between diesel and gas was about 40 cents a gallon, so it was looking like a pretty good deal at that point,” said Ibendahl, an agricultural economist at Mississippi State University.

“But it’s cost me $2 a gallon the last couple of fill-ups,” he said. “So my diesel purchase decision is not looking as good as it was. Fortunately, I still get about 50 miles per gallon on some tanks.”

Speaking at the 2004 Southern Region Agricultural Outlook Conference in Atlanta, Ibendahl used a personal example to convey the sense of unease many farmers may be feeling as they watched diesel fuel prices climb steadily for most of the first nine months of this year.

“After fuel prices rose 10 to 15 percent in 2003, we thought we might see prices trend down a little bit in 2004,” he said. “We thought maybe 2003 would be our high year. But that hasn’t been the case. Instead, prices for diesel fuel have gone up practically the whole year.”

Although gasoline prices haven’t risen as fast, with crude oil prices hitting $50 per barrel, Ibendahl expects gas prices to go up this fall. “That’s counter to what normally happens,” he noted. “Usually, they peak around Labor Day and start to go down, hitting a low point about January. On the other hand, I think diesel prices will go down this fall.”

Ibendahl and other analysts expect diesel and gasoline prices to move lower in 2005, but “if you look at the overall average for 2005, I think it’s still going to be above the average for 2004.”

Although production cuts by members of the Oil and Petroleum Exporting Countries have been blamed for the initial run-up in fuel prices, that doesn’t appear to be the case now, he noted.

“Right now OPEC nations are producing more oil than any other time since we began keeping track of their quotas back in the 1980s,” he said. “We’re also producing as much as we can in the United States based on the capacity in our oil reserves.

“The problem — or the opportunity if you want to look at it that way — is a five-letter word called China. Their economy is so strong that they’re using a lot more fuel than they have in the past. They’ve increased industrial output. They’ve discovered cars over there and are driving more.”

At the same time, the world capacity for producing oil “is probably lower than it has been for a long time, which means we are vulnerable to shocks to the economy if anything such as a terrorism strike happens,” he said. “That’s why we could see more big spikes in gasoline prices.”

In general, U.S. oil refineries operate at more than 90 percent capacity. But, in some cases recently, they’ve been operating in the upper 90s, making the system more vulnerable to problems. Two years ago, a fire at a refinery in the Midwest caused an unusually big jump in summertime oil prices.

Typically, refineries have to be shut down for maintenance at various times of the years, he noted. “When they do, that puts more pressure on the whole refinery system, and we tend to see spikes in fuel prices.”

Natural gas prices are expected to follow a similar pattern, he said, because many companies use natural gas and petroleum interchangeably to meet energy needs. Natural gas costs could drop in the fall months before rebounding as the winter heating season begins in the northern United States.

Analysts are predicting the price could go from a third quarter 2004 average of $5.43 per 1,000 cubic feet to $5.78 in the fourth quarter to $4.98 in the first quarter of 2005 and $5.44 in the second quarter.

Those prices are expected to have an impact on fertilizer prices because natural gas is used in the production of nitrogen fertilizers.

“Surprisingly, nitrogen fertilizer prices haven’t quite gone up as much as would be indicated by the increase in natural gas prices,” he noted. “Some analysts say nitrogen fertilizer prices will go up only 4 to 5 percent this year.

“But that may be too optimistic. It’s possible that anhydrous ammonia prices could go up about 10 percent in 2004 and another 4 percent to 5 percent in 2005 given the current prices outlook.”

For crop inputs in 2004 and 2005, Ibendahl projects.

• Fertilizer: Up 10 percent in 2004; up 4 percent in 2005.

• Seed: Up 3 percent in 2004; up 6 percent in 2005.

• Chemicals: No change in 2004; up 1 percent in 2005.

• Repairs: Up 2 percent in 2004; up 2 percent in 2005.

• Feed: Up 11 percent in 2004; down 8 percent in 2005 due to higher grain prices in the first half of 2004 and the lower prices that followed.

• Machinery: Up 5 percent in 2004; up 8 percent in 2005, primarily because of increases in steel prices.

“I don’t see how the manufacturers can help but pass those along in 2005,” said Ibendahl. “The bigger companies like GM and Ford and John Deere haven’t been affected as much because of their negotiating power, but the smaller guys may get hurt.

“It all goes back to what’s happening in China. Scrap metal prices are soaring because of the demand for steel in China. It’s been estimated that 70 percent of the tall cranes used on construction sites are now located in China.”

• Cash rent: Unchanged in 2004; up 2 percent in 2005.

• Wages: Unchanged in 2004; up 4 percent in 2005.

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