10/10/06 Ag Optimistic but Cautious

Plummeting oil prices are giving agriculture reason for optimism - but at the same time - caution. The good news is diesel and natural gas prices - key for agriculture - are down sharply from year ago levels - with crude oil plunging below 60-dollars a barrel Tuesday to a seven-month low. American Farm Bureau Senior Economist Terry Francl says that's certainly good news for farmers. FRANCL: Diesel prices are down about 60 cents a gallon from when their peak was late in the summer and certainly again that helps as we go into the harvest if farmers have not already contracted. I know some farmers paid some very high prices a month or two ago as they were getting ready for the gravest season, trucking tank loads of diesel fuel several hundred miles. Meantime - natural gas prices are running at about 35 or 40-precent of the level a year ago after Hurricanes Katrina and Rita. And Francl says that means more good news for America's farmers and ranchers. FRANCL: So that means substantially lower cost of production for nitrogen fertilizers and that's being reflected in prices this fall. We're seeing nitrogen fertilizer prices 50, 75, 100 dollars a ton less depending on the product than they were a year ago. Francl says the one question is short-term investment in ethanol plants - as margins are squeezed. FRANCL: It might delay or have some of those people that were considering building down the road a year or two a little bit. But certainly it's still a very positive, profitable business given these current prices. But with wholesale ethanol prices running around 1.75 a gallon and plants paying about 2.50 a bushel for corn - Francl says ethanol's still making a 40 to 50-cent profit today. He says crude would have to drop even further before ethanol would no longer be profitable. FRANCL: I think you probably have to see crude oil get down into the 40 dollar a barrel or less range before you'd start being in a position where ethanol would be at the break even level. Meantime - Francl says OPEC is in a quandary right now. Major OPEC producers like Saudi Arabia don't want prices so high they encourage ethanol production - or so low they hurt profits. Unfortunately for OPEC - Francl says ethanol is now a viable and established industry in the U.S. That's today's Line On Agriculture. I'm Greg Martin on the Northwest Ag Information Network.