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Pulse on propane

May 30, 2018

The grain-drying and home-heating season of 2013-2014 lives in infamy for those who follow the propane industry. The wet fall caused growers to use large amounts of propane to dry corn and was followed by the "polar vortex" - cold weather that tapped propane inventories as homeowners struggled to heat their homes. By spring 2014, U.S. propane reserves were drastically low. 

The tight supply situation for domestic propane has become the norm, despite record U.S. propane production, which reached nearly 2 million barrels a day in December 2017. Instead, the change in propane markets and supply is being caused by increasing U.S. propane exports. 

 

Since 2010, the U.S. has increased propane exports and now exports more than half of domestic propane production. By the end of 2018, export capacity is expected to reach 82 percent of projected production.

 

Demand drives up price

The practice of exporting propane is growing, says Drew Combs, vice president of CHS Propane. "In 2013, we exported 300,000 barrels per day. Now we export a million barrels per day," he says. "That's more than half the propane produced in the U.S."

Roughly 35 percent of these exports go to Asian countries, mainly for petrochemical uses, including making plastic and products like shrink wrap," he says. "Propane is now a global commodity and we predict exports will grow over time."

Ultimately, this market change drives up the price farmers pay for propane to dry corn and heat homes, shops and livestock facilities. U.S. consumers who bought propane for home heating in winter 2017 saw costs increase by more than 17 percent over the previous year. 

"With this new marketplace, our infrastructure needs to change, both at the farm and with marketers, which includes co-ops and private owners," says Combs. 

 United Farmers Cooperative 

"When my propane tank runs low or I have a question, I know Doug is just one text away," says farmer Deron Johnson, right, of Doug Lund, energy sales and marketing manager at United Farmers Cooperative, left. "He's a trusted partner who helps me run my business."

 

​Changing the model

​"We don't have access to as much propane inventory, so prices are only going up and we can't afford to run out," says Doug Lund, energy sales and marketing manager at United Farmers Cooperative (UFC) in Winthrop, Minn. "We're constantly watching the market to make sure our customers have the propane they need to dry their crops and heat their homes."

Lund knows about reacting quickly to supply challenges. During the 2013-2014 season, he says, "Everybody fought to find supply and keep up with demand." After that experience, he began working with customers to right-size their farm and residential propane tanks. Now, he says, 80 percent of his 5,000 propane customers have correctly sized tanks for their operations.

Part of the equation was right-sizing UFC's own facility to accommodate customer demand, Lund says. "We had to evaluate our transportation routes and determine storage options so UFC could be efficient for our customers."

All this uncertainty in an already volatile industry also means co-ops need diversity in supply. "Making sure our propane is coming from multiple supply points helps ensure we'll have propane for our customers. If one terminal doesn't have supply, we need to be ready to move to a different terminal," says Lund. "We always need to be ready with Plan B."

Lund is working with customers again this year to evaluate their propane equipment and storage needs and help them prepare for price volatility. 

"Our customers are always asking why the price is increasing and it is because of the market," he says. "The best thing people can do is increase their tank size so they can buy propane when it's at a good price and have enough to carry them through peak demand."

For many, the main barrier to adding propane storage is understanding the return on investment," says Lund. "A new tank is expensive, but when we do the math for our customers to show what they'll save in price per gallon and how a larger tank can take the worry out of their propane supply, it becomes a no-barrier." 

What you can do?

The combination of pricing opportunities and reduced hassle helped Deron Johnson make the switch to a larger on-farm propane tank. 

Before 2016, the owner of Johnson Farms near Hector, Minn., was drying corn from his 1,500 acres with six 1,000-gallon tanks. During peak demand, the tanks were being filled every other day. 

"I thought it was too expensive to make the jump to a larger tank," says Johnson, "but propane shortage was a constant worry and it seemed I was paying more per gallon with every delivery." 

In spring 2016, Lund worked with Johnson to upgrade to an 18,000-gallon tank through the CHS Propane Storage for Pennies program, which allows farmers to lease equipment, then pay for it over time. "The savings were instant," says Johnson. "I was buying propane at almost half the price per gallon I was paying before." With additional storage, he plans for two propane deliveries per year and is able to buy when prices are lowest. "Before upgrading my tank, I had no way to take advantage of better prices."

Johnson says eliminating concerns over propane supply has helped him focus on more important things. "I never have to worry about shutting off the combine and, with a larger tank, my dryer runs much better."

He also doesn't worry about running out of propane, regardless of what's happening in propane markets, since he relies on Lund to keep an eye on them. 

"I watch the tank gauge and when it gets to 30 percent, I call Doug to talk about what's going on in the market and about prices," says Johnson. "It's nice knowing I have someone I can trust keeping an eye on the propane industry so I can focus on my business.

How can other farmers determine whether increasing their propane storage is the right move? "Know your costs and how much propane you use," says Johnson, "then call your co-op."

 

​Storage for Pennies

Deron Johnson upgraded his on-farm propane storage to an 18,000-gallon tank with the CHS Propane Storage for Pennies program, available through CHS Energy Equipment. Through the program, suppliers lease tanks to producers, who can begin receiving bulk propane deliveries right away.

"It's an investment up front, but being able to take advantage of better prices and taking uncertainty out of propane supply has made it worth it for me," says Johnson, Hector, Minn.

Farmers interested in bulk propane storage should contact their local CHS-affiliated cooperative and ask about right-sizing their tanks through Storage for Pennies.

 

 Check out the full C Magazine with this article and more. 

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