Fuel prices were a hot topic during the last part of 2005. Prices of unleaded gasoline and diesel fuel reached unheard-of levels following hurricanes that devastated the heart of America's Gulf Coast refinery region. In fact, for the last several years the trend toward volatility in energy prices has left consumers wondering how high prices can go. For background, we can look at some government statistics to see where we have been.

According to the government's Energy Information Administration, the average monthly retail price per gallon of diesel fuel fluctuated $1.17 and unleaded gas fluctuated $1.07 during 2005, a very different story than 1995, when the retail price of diesel fuel only fluctuated five cents per gallon and unleaded gas 12 cents per gallon. In 1995, the highest monthly average retail price for a gallon of diesel fuel was $1.11 and the high for unleaded gas was $1.19 per gallon, a far cry from prices that climbed higher than $3 during 2005.

Ten years ago, there was no need for price protection, but the challenges that faced us in 2005 will continue into 2006. Given the current tight balance of supply and demand, unexpected supply disruptions, like this last hurricane season, can create a recipe for extreme price volatility and the need for price protection. A good time to look at forward contracting would be when prices are on the down side of the volatility roller coaster.

Forward fuel contracting gives consumers the assurance of knowing what their fuel costs will be for a certain period of time. This is a purchasing option that offers peace of mind by allowing producers to lock in fuel costs and reduce market risk. Forward fuel contracting is a good tool for producers who operate on a budget because it allows them to know their fuel costs in advance. It is also a good purchasing option for producers who believe fuel prices will trend up, allowing them to lock in a price ahead of time.

Forward fuel contacting is not a guarantee of the lowest fuel price but protection against higher prices. The contract price is based on the futures market. The futures market is based on what traders believe will happen in the market. Since no one knows the future, there is no guarantee.

Two types of forward fuel contracts typically are offered: fixed price and maximum price. A fixed-price contract means the price is fixed for a specific number of gallons for a specific period of time. This type of agreement is especially good for those who feel confident that prices are likely to be higher during that specified period of time. The benefits of a fixed price contract are:

The maximum-price contract gives producers protection from increasing prices and, for an extra fee, assurance of a lower price if the market declines. In other words, the producer's price will be the lower of the contract price or the market price for a specific number of gallons for a specific period of time. The extra fee, or premium, is simply an insurance premium. Benefits of the maximum price contract are:

Forward fuel contracting provides a tool for producers to control their fuel costs, which in today's volatile price environment may offer significant savings. Paul Wilson, Shelbyville, Mo., was one of many farmers who protected fuel input costs in 2005. According to Wilson, "Forward fuel contracting gives you an opportunity to protect yourself from rising fuel costs for a minimal fee. It really worked well this year." 

If you are interested in price protection for your fuel needs, contact your local fuel supplier to discuss details. Most suppliers now offer these options.

David Perkins is manager of special projects for MFA Oil Company