Refrigerated Truckers Work Around High Diesel Prices
The following is part of our series wading through the economic jargon, Crunching Numbers.
Diesel fuel, the lifeblood of California’s nearly $40 billion agriculture industry, is fully 10 percent more expensive than it was one year ago, threatening to cut into what had been shaping up to be a successful autumn for its farmers and the truckers who move their goods around the state.
The high price of crude oil, which makes up most of the cost of diesel, is primarily responsible for this large year-over-year increase. Political instability in the Middle East and the threat to Gulf Coast refineries posed by the U.S. hurricane season, as well as a recovering retail economy, have caused the oil market to surge over the summer months. California diesel averaged $4.477 per gallon as of September 10, down slightly from $4.493 the previous week, but a full 41 cents per gallon higher than the same time last year, according to the U.S. Energy Information Administration.
High diesel prices squeeze almost all businesses that deal in physical products, but their effect is magnified on the refrigerated trucking industry. California farmers rely on refrigerated trailer trucks, or “reefers,” to get their perishable goods such as meat, cheese and fruit to market in a necessarily timely fashion. These reefers require diesel to power their cooling systems and drive the truck, making their operating costs especially sensitive to changes in fuel prices. Farmers and refrigerated haulers have a mutually dependent relationship; farmers need haulers to be available within a small window of time or they risk spoilage, and haulers need a supply of refrigerated cargo to be able to charge a premium to transport. The current high cost of diesel adds another obstacle to this business relationship, as neither side wants to absorb this significant added expense in what is already a relatively low margin business.
April Low of Minuteman Transport in City of Industry, which specializes in refrigerated trucking, said her company has been able to pass much of the effect of the rise in diesel prices to its customers, but at the cost of not raising its own prices. “The [shipping] rate’s stayed the same,” she said. “What we’ve done is raise the fuel surcharge.”
Recent events have brought about new challenges for the refrigerated trucking industry. The rise in oil prices has a compound effect on reefers, and the drought affecting much of the country has already and will continue to depress crop yields, meaning fewer available loads in these areas to haul. California has mostly been spared the worst of the weather and its agricultural production has not suffered from it, but its diesel prices are the highest in the country, largely due to the state’s tax burden.
Even with the higher cost to its customers, Minuteman’s business has been steady lately, with the company hauling volumes of refrigerated goods that are comparable to the totals from last year at this time. Low points to the company’s ties to agriculture as the main reason for its stability.
“We do a lot—a lot of food,” Low said. “And people have to eat.”
Minuteman’s most transported cargo is cheese, which needs to be kept cold and is relatively energy-intensive to haul. Despite the additional surcharges the company has had to pass on to its cheese-producing clients, they have not reduced their shipments, and she sees no signs of a looming slowdown.
Part of this could be due to the drought, which is likely to affect feed prices for dairy farmers across the country and increase the price of milk, according to the USDA. California cheese makers might find themselves in an advantageous economic position and push more product to market.
Low acknowledged that some dry goods haulers have had less success dealing with the summer surge in diesel prices. While reefers use more fuel than regular trailer trucks, refrigerated trucking companies serve a specialized clientele and can negotiate pricing much more effectively than standard companies. This has helped Minuteman maintain its level of business in the face of high fuel costs, and Low feels confident that even if the pain at the pump worsens, California farmers will have enough food with high urgency of movement to keep its reefers on the road.
Read more from Neon Tommy's Crunching Numbers series here.
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