Farm Margins Are Being Set by a Diesel Market Producers Rarely Hedge

Cattle feeders, grain handlers and processors hedge the markets they sell into as a matter of routine, yet the fuel and freight costs running underneath those operations usually sit outside the hedge book entirely. Diesel functions as an input cost across the whole commercial agriculture supply chain, from field work and grain drying through trucking, rail and ocean freight, and it moves on refinery outages and conflict risk rather than on crop fundamentals. Strikes on Russian refineries, disruption around the Strait of Hormuz and rerouted shipping through the Panama Canal have tightened global distillate supply and lifted freight economics at the same time. For an operation that has locked in crop or livestock revenue, the result is a cost line compounding against margin with nothing behind it.

In this episode of In the Round, recorded in Kansas City, Missouri, Philip Smith, StoneX Group Chief Executive is joined by Brent Grecian, President and CEO of StoneX Supply & Trading, who runs the physical trading and supply chain business, alongside Adam Stout, Commodity Risk Manager, and Alex Hodes, StoneX Director of Energy Market Strategy to examine how current market conditions are impacting clients.

Key Themes from the Discussion

• Cattle markets sit at the tail end of a long contractionary cycle as border closures and tariff policy tighten supply.
• Grain producers hedge crop price risk routinely but leave diesel and freight exposure unmanaged.
• Bunker fuel costs and Panama Canal rerouting are repricing physical grain shipments booked months forward.

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Livestock and Grain Operations Carry Unhedged Fuel Costs

Energy exposure runs through the commercial agriculture supply chain regardless of whether an operation feeds cattle, stores grain or processes protein, and it rarely appears in a risk position built around crop and livestock prices. Stout frames it as an industry-wide condition rather than a sector quirk, since "our client base across the commercial ag industry, they on some level have energy exposure. And so when you do get into times like these, it does bring it back to the forefront". Cattle operations absorb it through feed transport and processing, grain operations through field work, drying and truck freight, and both watch it compound against seed, fertilizer and labor costs already rising. The gap is one of habit rather than sophistication, because the same producers manage crop price risk with considerable discipline. Hodes locates the disconnect precisely, "If you go to a farmer, they are pretty well versed in hedging because they've been doing that in grain for a long time. However, they really haven't even thought about energy."

Freight Costs Reprice Physical Grain Trades Booked Forward

"Having a war breakout and having the economics dramatically impacted by the bunker fuel costs that we're paying and our ability to move through the Panama Canal" Grecian is describing a grain shipment into Colombia contracted months ahead of delivery, where the economics were rewritten after the trade was struck. Physical agricultural flows carry fuel exposure through vessel bunkers, fuel surcharges and rail and truck rates, so a conflict thousands of miles from the elevator lands directly in the delivered cost of soybeans, fertilizer and iron ore alike. Rerouting through the Panama Canal has shifted timing, cost and available capacity across those flows simultaneously, evidenced by freight rates moving higher as crude takes precedence out of the Strait of Hormuz. Getting product to the buyer on schedule has consequently become as material to the margin as the price agreed for it. In Smith's view, that is now a core part of the service, "it's providing that service of logistics, providing that service of delivery, helping our customers get what they need on time to wherever it has to be".

Volatility Turns Energy into a Managed Agricultural Exposure

Fixed price contracts and swaps allow agricultural businesses to lock in a portion of their fuel costs the same way they lock in crop or livestock revenue, and StoneX executes these across diesel, natural gas and refined products. The correction Hodes puts to clients who equate the two is blunt, "This is what hedging is. It's risk management, not gambling. We're not here to win. We're here to mitigate your volatility.". Producers already comfortable with grain futures tend to extend that discipline to energy quickly once the exposure has been identified, whereas industries with no hedging tradition require the concept rebuilt from the ground up. Calm markets are what allow the exposure to go unnoticed in the first place, and StoneX clients globally are hedging more energy now than they were two years ago. According to Smith, the pattern is consistent, "energy is not always recognized as a risk exposure because periods of stability or periods of lack of volatility can just put people into a comfort zone".

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--- Expert: Philip Smith, StoneX Group Chief Executive

--- Expert: Brent Grecian, CEO, StoneX Supply & Trading

--- Expert: Alex Hodes, StoneX Director of Energy Market Strategy

--- Expert: Adam Stout, StoneX Commodity Risk Management Manager

--- Written by Gus Farrow, Senior Manager, StoneX TV