2006 Diesel

[TOM4CWB]

WD9;

UFA has under .70/l fuel we can lock in for the first 8 months of 2006 being the delivery period. Sign up till Dec 9/05

Is this a good deal?

I understand the hedge was put on at about $60/barrel US.

Now guys... how do we turn this into a put... so if the market goes down... we get an option cheque... and if it goes up (which it will this winter some time) our fuel cost is locked in!

Got to be some way to do this... on N2 Fert too... what am I missing here?

[TOM4CWB]

Dateline 1987:

Fuel is 3 cents per litre... how could it ever be less?

2005... is 85 cents, will it get more?

Is this not a foolish time to hedge without risk management?

[wedino]

Flying J posted cash price for road diesel is .809 less gst = .756. Farm fuel in Ab should equate to .666. Re: UFA price, do you have to take a predetermined amount?

My supplier at Weyburn quoted .749 gst farm diesel this AM.

[URL="http://www.flyingj.com/fuel/diesel_CF.cfm"][/URL]

[wedino]

Should read .749 plus gst, sorry.

[TOM4CWB]

Wedino;

Must pre buy with fixed volume.

Must pay for it.

Must pay a .03/L if don't take delivery plus whatever the price of Diesel has gone up or down.

IE. if diesel went down .02/L then buyer pays UFA .05/L...

if up .07/L UFA pays buyer .04/L and so on.

[dfarms11]

correction Tom, if the price goes down say 10cents, then you don't buy the fuel and all you lose is your 3 cent buyout. Very cheap hedge if you ask me. The plus is if you don't take delivery and the price goes up UFA pays you the difference.

[TOM4CWB]

dfarms 11,

There seems to be some clarification needed... my UFA fuel dealer told me if it went down 10 cents/L I owed 13 cents/L. THis in fact would be a short hedge, your assumption would be a put.

Now, which is it?

[TOM4CWB]

dfarms11;

I checked with Rob the writer of the Spring Forward Program.

The Crude Oil price using Oklahoma NYMEX futures from Jan 1 to Oct 31st 2006 is averaged... and an average Crude Oil price is reconsiled with $60.50/barrelUSD. The conversion is 159L/barrel yeild of Diesel... and this converted back to CDN$ and a final cost in Cents/L to determine the cost of undelivered Diesel... plus 3 cents/L for admin.

If the average is over $60/b, credit, under $60/b the diesel buyer owes the UFA hedge the difference.

Therefore this UFA program is certainly a hedge and not a put.

Hope this helps!

[dfarms11]

It sounds like you went to the horses mouth and got clarification, so I will have to discuss this further with my dealer as they told me the ONLY money I would be out would me the 3cents/L. Thanks for bringing this to my attn.

[TOM4CWB]

dfarms11;

There is an element of risk avoidance... that this contract does in fact cover... that is the risk of "crack" between the cost of the oil, and the nozzle on the fuel tank going into our machines.

For Instance;

The differential is close to an all time high on the cost of diesel relative to the price of crude.

$60US @ 159L/b is equal to 71.5 cents/L before GST/AB tax concession.

It is possible that in fact a $60USb of oil could produce diesel @ 51 cents/L.

In this case the 3 cents/L would be the only loss if we did not take delivery of this diesel... and in effect we could buy the cheaper diesel @ 54 cents/L.

Now in March/April 06 Edm. ESSO (aprox. 1 month) and Petrocan (Approx. 2 months) are to go down to switch over to low sulpher diesel production specs... which will keep supply tight well into the summer in all likelyhood.

Hope this helps!

[TOM4CWB]

dfarms11;

Risk Strategy:

Buy a June or July 06 NYMEX Put @ $60 strike... First week of May is historically the low in the fuel market... look at taking delivery of fuel and cashing in Put if well in the money (below $60/b).

[crusher]

Tom,

Thanks for the effort on explaining the program, I think I understand. Ended up buying about 25% of my needs, but might add more tomorrow.

Question - when do you sleep?

[agstar77]

If you are a stock investor buy oil and gas trusts and the major oil companies. This will painlessly hedge your diesel price and might even let you farm on the side.

[dfarms11]

hey, well I talked to my UFA outlet again, and he guarenteed me what he says is right! The only loss to me total would be 3 cents /L. So I went with what he said.

[TOM4CWB]

dfarms11;

Does your UFA contract not have part 6. Account Reconciliation: A, B, and C... of which C states the ..."3 cents per litre for any shortfall in volume."?