Propane goes global
Bryan Brazee, left, and his brother Steve have cut propane deliveries to their farm in half during the drying season with an increase in their on-farm storage and help from their local Certified Energy Specialist Lisa Effert.
Propane buyers are no strangers to the ebbs and flows of market shifts and dips. But while seasonal swings have long been a driving force in purchase decisions, propane supply is no longer seasonally dependent.
“There’s a hope that supply availability will loosen up and we’ll again see the seasonal price shifts we’re used to,” says Ben Lyden, director of propane commodity risk for CHS. “But we’re not emerging from the COVID-19 pandemic to business as usual. The market has changed.”
At 2.4 million barrels per day, domestic propane production has rebounded from a mid-2020 dip to near-record highs. But U.S. inventory is at a five-year low. Why? More propane than ever is being exported to customers in other countries.
“The U.S. is producing enough propane,” says Lyden. “Production is growing, but more than 50% of that propane is being pulled overseas. Even though CHS does not export propane overseas, growing demand from global customers is creating tight supply and shaping a new normal for everyone in the industry.”
Two key factors have accelerated how much propane is leaving the U.S.
First, recent investments in U.S. propane infrastructure, including new pipelines and export terminals, have added capacity to move more product. “Local product isn’t staying local. The ability to move as much propane volume as we can today just didn’t exist four years ago,” says Lyden.
Additional pipelines from North Dakota’s Bakken oil and gas fields to the Conway underground storage facility in Kansas and on to the Mont Belvieu export facilities in Texas have made it easier to move more propane to the Gulf Coast and into the export market.
Current U.S. infrastructure has the capacity to export up to 75% of the nation’s domestic propane production — roughly 1.8 million barrels a day. In 2021, exports averaged 52% of the nation’s production.
“The U.S. produces 2.4 million barrels of propane per day,” says Lyden. “If exports get closer to 2 million barrels, that doesn’t leave much for domestic buyers who need propane to fuel their operations and heat their homes. There’s not much of a cushion for a demand surge of any kind.”
Second, increased plastic use has triggered exponential growth in propane demand. At the start of the pandemic, as online shopping skyrocketed, the need for plastic packaging grew as well. As a result, demand spiked from petrochemical producers who use resin from natural gas products like propane to make plastic packaging. And there’s still more to come, says Lyden, since additional Chinese petrochemical plants are expected to open over the next two years.
“We’ve seen increased international appetite for propane matched with an ability to move much larger volumes abroad,” says Lyden. “It’s a perfect storm.”
Propane Export Destinations, 2021
Navigating the New Normal of Propane Prices
This change means U.S. farmers are in direct competition with international markets for the propane they need.
“If a major demand event were to happen today halfway across the world, U.S. farmers would feel it in propane price and supply availability tomorrow,” says Lyden. “The same goes for day-to-day market dynamics. While farmers are working to secure supply in advance of peak seasonal demand, global markets are buying 24/7 and influencing price and supply in the process.”
With domestic propane customers more vulnerable to external market factors, Lyden advises a reset in expectations.
“We are used to seeing prices for propane drop in the summers, and seasonal customers are accustomed to having access to last-minute supply to get them through their tightest spots. But if we don’t see an even larger increase in production, propane suppliers are going to have a problem sourcing physical supply during high-demand periods,” he says.
Recent warmer winter weather may have created a false sense of security for seasonal customers.
“We saw a relatively mild winter this year, so American inventory was higher than expected,” says Lyden. “With more typical cold-weather demand, our supplies could have reached historically low levels. The tight supply shaping our new normal could mean we are one weather event away from being short of physical product.”
Plan for the Unpredictable
While it’s impossible to predict the full effect of the complex factors driving the propane market today, Lyden recommends working with cooperative propane experts to plan ahead and strategize storage and contract options for protection from volatile supply swings.
Using fixed price contracts can help manage risk because it doesn’t leave customers open to market spikes in price at times when supply is tight, he says. But additional storage is also a critical asset.
“Having more on-farm storage is one of the best ways to reduce risk during periods when inventory is extremely tight and supply is tough to find,” Lyden says. “Additional storage can also help lock in low prices at optimal times to buy.”
Steve Brazee, who grows corn and soybeans with his brother and son on his family’s 1,600-acre farm in Neenah, Wis., opted to increase propane storage when he upgraded his grain-drying system. He knew having more propane on hand would deliver multiple returns on investment.
“During the drying season, we were getting propane deliveries every day before upgrading our storage,” Brazee says. “Now I don’t have to stop what I’m doing to go check the propane tank all the time. I know I have more storage to pull from and I’m not hanging on the next delivery. I’ve cut propane deliveries in half.”
Increased on-farm storage has also opened up new cost-saving opportunities for Brazee. With more flexibility between deliveries, he’s been able to fill up when propane prices drop. He works with Lisa Effert, a certified energy specialist with Country Visions Cooperative based in Brillion, Wis., to secure lower pricing.
“It’s been great to have Lisa as a partner to help get us the best bang for our buck,” says Brazee. “We can make the most of our storage and avoid some of the fluctuations in the market today. It’s one less stressor for me and frees me up to tackle other work on the farm.”
Investing for long-term ROI
Investing in additional propane storage is a significant investment. To help manage costs, financing is available through the CHS Storage for Pennies program.
The program includes a lease-to-own option on bulk fuel storage and equipment, including propane tanks. Operations can lease tanks and begin receiving bulk propane deliveries right away, then pay for the equipment over time with payments included in the price of propane purchased from CHS.
Working with CHS, cooperative energy experts can help with equipment selection and sourcing equipment, then line up installation with reliable vendors.
Check out the full Spring 2022 issue of C magazine with this article and more.