Economic Pulse: Diesel prices driving up costs for farmers

Diesel prices are on the rise as harvest begins across the country, adding another cost for farmers during one of the most fuel-intensive times of the year.

The national average on-highway diesel price reached $6.53 per gallon on Sept. 21, up from $6.29 the week before and up more than $2.78 per gallon from the same week last year — an increase of nearly 70% year over year.

Diesel used for farming purposes is generally exempt from the 24.4-cent-per-gallon federal highway fuel tax, with state tax treatment varying by state. Even with that exemption, farm diesel prices have climbed sharply.

The average farm diesel price reached $5.45 per gallon on Sept. 4, up from $3.02 a year earlier — an increase of about 80%.

The timing of the diesel price increase is particularly challenging for agriculture.

Harvest requires long hours of equipment use, and crops must then be transported from fields to elevators, processors and ports. Those fuel costs can accumulate quickly across an operation.

Farmers have also entered this period with limited room to absorb another increase in expenses.

Commodity prices have struggled to keep pace with elevated production costs, making increases in diesel another hit to already tight margins.

Even as the grain market rallies and crop revenues are projected to improve, increased production costs continue to keep major row crops below breakeven.

Crude oil prices have increased about 14% since the beginning of September while inventories remain low.

Until crude prices ease, global fuel supplies improve or U.S. inventories rebuild, diesel is likely to remain a significant source of cost uncertainty for farmers heading through harvest and into the 2027 production year.

Farms Continue To Face Tight Margins

The U.S. Department of Agriculture released updated farm income numbers — and the outlook is still bleak.

USDA raised its 2026 net farm income forecast by $5 billion from February to $158.4 billion, and its estimate of 2025 income even more.

As a result, net farm income is now expected to fall 2.6% in nominal terms and 5.5% after inflation in 2026.

The expense outlook has deteriorated significantly. USDA raised its 2026 production expense forecast by $15.1 billion since February to $492.8 billion.

Fuel and oil expenses are now projected to jump 28.8%, fertilizer expenses are up 15.3% and livestock purchases are up 11.4% from their earlier forecast.

Direct government payments, including ad hoc and traditional farm bill program payments, are forecast to reach $47.4 billion in 2026, up nearly 70% from 2025.

Those payments provide critical support, but their size also illustrates the continued gap between market returns and the cost of producing food, fiber and fuel.

The September revisions show that 2025 farm income was stronger than previously estimated, largely because livestock receipts, particularly cattle, were better than USDA expected in February.

That adjustment matters, but it does not erase the broader financial strain facing agriculture or necessarily mean conditions improved evenly across farms and commodities.

Looking ahead, USDA still expects real farm income to decline in 2026, production expenses to rise sharply, debt to increase and returns to remain uneven across sectors.

Government payments via ad-hoc assistance and the farm safety net continue to provide an important bridge — but until market returns keep pace with production costs, many farmers and ranchers will continue to face tight margins and difficult financial decisions heading into 2027.

James Henry is the executive editor of Illinois AgriNews and Indiana AgriNews.