High diesel prices likely to remain a major risk for farmers

The long-term impact of significantly higher diesel prices will remain a dark cloud over the agricultural sector for some time, despite the drop in the oil price after the two-week ceasefire between the United States and Iran was announced

By Francois Williams, senior journalist at African Farming and Landbouweekblad

With planting season already starting in some winter grain regions and harvest time approaching in the summer grain areas, farmers are having to cope with diesel prices that, due to delays in the international oil and fuel supply chain, could remain above record levels for quite some time.

Although the Strait of Hormuz is expected to remain open for at least two weeks, allowing South Africa’s fuel orders to continue in theory, it will still take about two to three weeks for tankers from refineries in the Middle East and India to reach Durban.

Also read: Fuel crisis: Farmers give expert tips to cut fuel costs

Apart from possible shortages caused by bottlenecks and delays, South African consumers remain exposed to international fuel prices and the rand-US dollar exchange rate.

Currently, there is still an average under-recovery of about R12.50 per litre on diesel for the period from 27 March to 7 April. This means that if diesel users had to pay the full current market price now, they would still have had to pay an additional R12.50 per litre. The wholesale price of diesel could, in theory, rise to above R37 per litre.

Diesel wholesale prices increased by R7 per litre last week, although the increase should have been about R10 per litre if government had not reduced the fuel tax by R3 per litre. This relief applies only for the month of April. If the R3 reduction falls away in May, diesel could increase by a further R3 per litre on top of the usual expected price adjustment.

fuel diesel — Photos for illustrative purposes: City Press / Gallo Images and Gallo Images

The latest figures from the Central Energy Fund show that the daily under-recovery on 7 April had already dropped below the average of R12.50 recorded since 27 March. It stood at about R8.60 per litre – still high, but less severe than before. This indicates that lower international oil and fuel prices, following news of the ceasefire and expectations of a possible end to the attacks on Iran, are already starting to ease price pressures slightly.

Also read: Fuel crisis threatens South Africa’s citrus export season

Next Price Adjustment

South Africa’s next fuel price adjustment will take effect on 6 May.

Brent crude oil futures fell by more than 15% to below $95 per barrel on Wednesday, 8 April, after US President Donald Trump postponed his threat to attack Iran’s infrastructure by two weeks. This is the first time since early March that the oil price has been at this level. Over the past 12 months, Brent crude has mostly traded between $60 and $70 per barrel.

One positive factor for local consumers is the strengthening of the rand against the US dollar since news of the ceasefire broke. On Wednesday, the rand strengthened from about R16.90 to below R16.50 against the dollar. The currency was last at these levels in the first week of March.