A Few Thoughts on Propane Price Risk

Posted on 03/09/2017 10:25 AM

On the last day of June we began to focus on propane for harvest and winter. I looked back over our Midwestern price survey to find out exactly when the price lows of the year have been placed over the last few years. As expected, the best time to buy propane has been in July, and while we expect this year to be no different, I also noticed the market has a tendency to dip once again in September. That September dip appears to be related to weather and at the risk of hopping on the weather market band wagon, we must consider the forecasts for a generally dry end to summer.

LP"A dry end to the growing season will limit demand for harvest propane on the basis of lower moisture contents in grains. The suggestion is that if the forecast for late-season dryness is realized, harvest related demand will sink, and LP prices will dip slightly. In years when that has been the case, however, the September low has not been below the price lows posted in July. That does not mean September prices cannot be below July's, and counting on a September swoon in propane pricing is at best a gamble that could quickly get out of hand.

Your confidence in the dry late-season forecast and your appetite for LP risk should determine whether you go ahead and pull the trigger on 100% of harvest and winter home heating needs in July, or book half in July and wait for the possible dip ahead of harvest to arrive before filling the remaining half. As I said above, any possible September swoon is not likely to fall below July's price low, and I would contend farmers are better off filling needs at the midsummer low, and moving on.

The winter price spike of 2013-14 still looms large on our chart and the market gave us very short notice there was a supply problem. We were tipped off by a Pro Farmer member that something was up, and the news of the removal of the Cochin Pipeline through the northern states was confirmed by a little digging through news reports. We offered a number of warnings just ahead of the spike which firmed prices from $2.05 regionally, to an average above $4.00 per gallon within two weeks. We expect no such price increases this year, but we didn't in 2013-14 until we were well past the July low.

With that season in mind, for the sake of personal security, we advise rural residents book 100% of home heating and confinement operation needs at the July low. If you must gamble on weather related demand softness pressuring pre-harvest prices, gamble on LP for grain drying operations. It is also worth noting that forecasters also suspect the La Nina weather pattern that will bring late-season hot and dry weather will also usher in a cool winter with the potential for lots of snow. That could make deliveries difficult during the dead of winter, and support higher propane prices. Get out in front of the risk and get your home heating needs covered first.

Having said that, we will wait for propane to prove its summer low before pulling the trigger, but we are picking pennies at this point and we believe from here, the downside will be limited across much of the Midwest.

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