Crude oil prices are down 50 percent from a year ago and are hovering near $45 per barrel. Consequently, retail gasoline prices are currently averaging $2.04 per gallon compared to $3.30 per gallon a year ago. Retail diesel prices are averaging $2.87 nationwide compared to $3.90 a year ago.
Energy usage in red meat and poultry production can be divided between the following stages of the supply chain: production, processing, packaging, freight, wholesale distribution to retail and food service markets (including refrigeration), and final at home or away from home consumption. Studies indicate that the largest share of energy use is in the production sector.
The impact of sharply lower diesel prices will reduce costs of production both directly in freight cost to haul livestock and both directly and indirectly in the production of feed. Will lower freight and feed costs be passed through the chain – it’s not likely. However, lowering the cost to livestock production will not transfer immediately through the supply chain. Livestock prices are driven by supply and demand in the short term, not changes in costs of production.
Lower diesel and natural gas costs will be realized in processing, freight, and distribution and this is assumed to be an immediate cost savings which would likely be seen as lower operating costs. Will those cost savings be passed on ‐ it’s not likely.
Consumers have realized increased seen their discretionary income increase as they spend fewer dollars for gasoline at the pump. They can either spend or save these dollars. While one likely scenario is to spend more for food either at home or in restaurants, it still remains to be seen how those increased discretionary dollars will be spent assuming they are spent rather than saved or used to pay debt.
While lower oil prices suggest immediate benefits to the supply chain, much of that benefit is not quantifiable. In addition, much of the benefit to declining energy prices is seen over a longer term trend rather than in the short term. Consequently, it likely remains to be seen just how much the industry will benefit from this 50 percent drop in oil prices, particularly when it is unclear how long these prices remain at current levels. There is a relatively high probability that they will begin increasing by mid‐year.