Fall Propane Demand Outlook

Weather, Exports May Affect US Propane Market

Russ Quinn
By  Russ Quinn , DTN Staff Reporter
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Analysts have some concerns about the supply-and-demand situation for propane this fall if the crop-drying season is seen as above average. (DTN/The Progressive Farmer file photo by Dan Miller)

OMAHA (DTN) -- With more U.S. propane supplies heading to export markets and lower domestic stocks compared to last year, a stronger-than-normal crop-drying season could put extreme pressure on the propane market, causing prices to rise in the coming months, experts say.

There appears for now to be enough propane supplies to handle crop-drying demand this fall, according to DTN Oil Reporter Alton Wallace. However, he said two factors could completely change this relatively balanced situation. A sharp increase in demand for propane, either domestically or worldwide, as well as a cold winter, could cause prices to climb considerably, he said.

"Propane prices are vulnerable to factors like a strong crop-drying season and a colder-than-normal winter," he said.

DELAYED CORN CROP?

A strong crop-drying season could be setting up as the corn crop is behind its normal growing pace, at least in some locations.

Mark Nowak, a corn and soybean farmer and ag consultant based in Wells, Minnesota, said most of the corn planted in south-central Minnesota needs about 2,500 growing degree days units (GDUs) to black layer, or full maturity, for corn plants.

As of Aug. 23, Nowak's local GDU count was 1,856. Looking at his local forecast for the next 15 days, he projects only about another 218. If September is normal, that would add another 373 by Oct. 1.

"That then would total 2,447," Nowak told DTN. "So we are going to push that first frost date (Oct. 2) pretty close to get the crop mature."

Nowak said while the weather could turn warm and speed up plant growth and not much crop drying will be necessary, he thinks this year is very similar to 2009. That year the driest corn he ran into his dryer was 28%, and the propane delivery truck came every 18 hours. Propane supplies got scarce and dealers went on allocations, causing some -- if not most -- farmers to shut down harvest for a day or two, waiting for deliveries, he said.

Fearing a rise in propane prices this year, Nowak priced a "liberal" amount of propane for his farming operation. In his consulting business, Nowak Ag Consulting, he told his customers to get propane booked and get the grain dryers ready for a long fall run, "then hope I'm wrong," Nowak joked.

FALL WEATHER OUTLOOK

DTN Senior Ag Meteorologist Bryce Anderson said the general outlook is for normal to above-normal temperatures in the Midwest in September and then above-normal temperatures in October and November. The precipitation outlook is generally near normal for the fall months, he said.

"Certainly not a cool, wet trend for this fall," Anderson said.

Looking at USDA Crop Progress information, corn maturity doesn't appear to be a major issue this growing season, though crop progress is running slightly behind normal in some states, he said.

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The nationwide denting rating as of Aug. 13 was 16%, compared to the five-year average of 20%. Iowa corn was 8% dented, 10 points behind its 18% average, while Minnesota was at 2% versus the five-year average of 10%, he said.

In contrast, during the delayed crop in 2008, the mid-August corn denting rate was only 9% nationally versus the average at the time of 26%, Anderson said. Specifically, Minnesota was at 0% dented versus the average of 11%, while Iowa was only at 3% dented compared to a five-year average at the time of 17%.

"So there may be some propane usage for drying that's needed, but it does not appear to be extensive," he said.

SOME CONCERNS ABOUT SUPPLY

While fall weather may be generally cooperative, the U.S. propane market may not be so agreeable to farmers.

Wallace said petroleum analysts have "some concerns" about the supply-and-demand situation for propane this fall if the drying season is above average.

Farmers used 3 million barrels of propane to dry crops in 2014, which is the most recent year of data, Wallace said. He estimated propane for crop drying averaged from 2.5 million to 3 million barrels in 2015 and 2016. In other recent years, this number was been significantly higher. In 2009, 9 million barrels of propane were used to dry crops. Seven million barrels were used in 2013, when propane supplies were tight and prices skyrocketed that year.

According to the U.S. Energy Information Administration (EIA), U.S. propane production is at 1.85 million barrels per day in its most recent report on Aug. 18. This number is up from about 1.7 million barrels per day seen in August 2016.

Prices are currently around 75 cents per gallon, compared to 45 cents per gallon last year at the same time, Wallace said. Prices could climb as demand increases, he said.

"It's easy to conceive of spot propane prices reaching the mid-90s (cents) this winter if there's normal demand from crop drying and winter temperatures are average or colder," Wallace said. "Spot propane prices reached the mid-90s (cents) per gallon in February of 2016, and hit $1.74 gallon in February 2016."

Another event that could affect propane prices in the short term -- and possibly in the longer term -- is Hurricane Harvey, which was forecast to hit the Texas coast over the weekend. As of Friday, forecasters were predicting the hurricane could dump 18-35 inches of rain on the Houston area.

"At the high end of this range, there would definitely be effects on the storage facilities that contain most of the propane in this country, the fractionators that separate propane and the other natural gas liquids from natural gas, and possibly on the export terminals on the Houston Ship Channel that send propane overseas," Wallace said.

"One export terminal not located on the Houston Ship Channel, the Phillips 66 facility in Freeport, is particularly vulnerable to the storm and might need time for repairs, which will likely slow exports a little bit for a while. In the six to seven days of rough seas that are expected, movements of vessels going to Houston and leaving with propane will be limited, too," he said.

The price for Gulf Coast propane was up a little more than 2 cents a gallon to 78 cents per gallon on Friday, ahead of the storm.

The U.S. has propane stocks of 72.2 million barrels in its most recent report. For the same period in 2016, stock were 96.1 million barrels. Days of propane supply have also dropped in the last year. This year the U.S. has a supply of 62.7 days, while in 2016 the number was 99.9 days.

Wallace said the nation's stock of propane is lower because of increasing exports, with Asian countries and India being major customers. Export levels are currently around 750,000 barrels per day but were as high as 1.3 million barrels per day earlier this year, he said.

"Roughly half of the propane supply now goes to exports, which has been an increasing number in the last three to four years," Wallace said.

In addition to exports, many different industries use propane year-round, whereas crop drying is a relatively short period of activity. Propane is used in petrochemical plants in the Gulf Coast region, as well as a raw material in places like China, Wallace said.

DTN POLL: MOST NOT BOOKING PROPANE

Despite the possibility of a late-maturing crop in some parts of the country, many farmers surveyed by DTN aren't planning to book propane ahead of harvest.

An unscientific poll question posted on DTN websites on Aug. 18 asked: "As spring-planted crops progress, some farmers will be thinking about their propane needs for crop drying and heating. What is your plan for propane this late summer/fall?" As of Aug. 25, 50% of poll respondents responded with, "Not going to book propane at all."

The next popular response was "Will book propane in August" at 40%. "Will book propane in September" had 10% of the vote, while "Will book propane in October" had 0%.

Some areas may not have an especially strong crop drying season this fall. Levi Taylor, a farmer from near Ypsilanti, North Dakota, said he is planning for a normal crop-drying season in his region of east-central North Dakota.

Spring crops were planted in a timely fashion, and drier conditions in the area for most of the growing season have pushed local crops along on schedule. While his crops will probably yield close to average, the severe drought affecting the Northern Plains is only about 40 to 50 miles west of his location, and yields drop considerably in those areas, he said.

"There might be some variability in crop progress around here, but I don't think we will see a lot of wet crops to dry," Taylor said. "We did our usual summer fill of our propane tanks recently."

Russ Quinn can be reached at russ.quinn@dtn.com

Follow Russ Quinn on Twitter @RussQuinnDTN

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Russ Quinn