This Niche Energy Imbalance Could Devastate American Farmers
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This Niche Energy Imbalance Could Devastate American Farmers

by | published July 26th, 2018
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While the tariffs have dominated headlines for the better part of the last five months, we haven’t really seen their economic consequences here on U.S. soil.

Until now.

As politicians wrestle with Donald Trump’s version of “farm aid,” the tariff impact on America’s deep red heartland now has a direct impact on the energy sector.

On Tuesday, the White House advanced a $12 billion aid package for farmers impacted by Chinese counter tariffs against American soybean, pork, and other agricultural products. This indicates a huge reversal of fortune for the workers that Trump claimed he would protect on the campaign trail.

The furor was instantaneous, with criticism uncharacteristically coming from both sides of the aisle. The problem stems from a huge cut in U.S. exports after farmers have already planted and harvested with the expected major foreign sales now suspect.

As you can imagine, their economic prospects have gone from bad to worse.

But the consequences of the tariffs go much deeper than the farm soil.

In fact, at this rate, the tariffs could harm one of the world’s most overlooked – yet crucial – energy products…

The Art of the Raw Deal

The tit-for-tat initiated when Trump placed tariffs on imported Chinese solar panels, steel, and aluminum, which forced China to respond with measure directed at Trump’s agrarian political base.

Soybean prices have since plummeted to 10-year lows, leaving wide areas of rural America facing farm collapse.

In response, Trump’s aid to beleaguered farmers deals with some of the immediate problem, but does nothing about the potential for a spiraling trade war that could decimate middle America.

On the other side, China remains a primary global importer of soybeans, used among other things for essential animal feed.

But Beijing has access to ample alternative supplies from Argentina, Brazil, India, and even Russia. In fact, Russians are witnessing a significant rise in soybean prices for the first time in years thanks to the transition in Chinese buying patterns.

Meanwhile, back in the U.S., the farm belt is facing a quadruple whammy.

In addition to the plunging commodity prices and export cuts, other tariffs raising the cost of steel and aluminum will add to the expense of replacing farm equipment.

Preliminary reads put the addition to the price tag of a tractor at about 8%; harvesters and high-end cultivators at 10%.

PROFIT OPPORTUNITY

For centuries, farmers have been growing corn, peanuts, potatoes, and dozens of other crops to make a living and support their families.

But now, there’s a new crop to make money from: solar panels.

From 2013 to 2016, solar panels were installed on about 7,000 acres of North Carolina farmland. This has added a gigawatt of power-generating capacity. Georgia has followed suit, adding more than 200 MW of capacity across its lush fields and forests.

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The fourth, however, to receive a price hike is not only the most pervasive. It is also directly connected to the energy sector.

I’m talking about propane.

The uncertainty surrounding crop prices and farm prospects has certainly had a negative impact on the propane market.

You may think weekend barbecues when the subject of propane arises. But the gas is a main factor in crop drying, for a range of uses in pumping, generation, refrigeration, and thermal agriculture (protecting crops from damaging cold).

Besides its utility in maintaining crops, the biggest connection between propane and farm life can be found at home. Well over 50% of rural Americans use propane to heat their houses and other structures.

And that’s what makes the aftermath of the agricultural tariff hit so tricky…

The Imbalanced Propane Market Moving Forward

Facing collapsing commodity prices, farmers have found themselves quickly in a classic “rock and a hard place” scenario.

They depend on the proceeds of sales to pay for this season and prepare for the next. This year, though, nobody has a firm grip on where matters are heading.

A handout in the form of a subsidy from Washington is not what anybody in this part of the country had in mind.

In such an environment, it has become difficult to estimate how much propane is going to be needed. Much of the amount required for the end of the harvest season is already in the system. But it is the likely demand (and, more importantly, prices) that remains a factor moving into the fourth quarter of 2018.

Normally, rural areas are locking in propane consignments by this time in the year. The trick has always been to estimate what is required to avoid having to acquire additional volume in the colder months when prices are always much higher. In addition, propane will be essential in the next growing season and that should be on hand when the sowing starts.

This year, prices have been drifting lower than average, prompting many end users to delay the usual moves.

However, recently, propane has begun to spike. Without having a clear idea what the market for their product is going to be down the road, entire farming communities have seen some unusual posturing.

Several state agencies are now warning farmers not to wait as prices advance. A run is expected, merely exacerbating the situation. Some regions like New England, often the usual suspect, may experience spot shortages with others forced to weather pipeline and storage problems.

But the difficulties hardly stop there. They are rapidly moving back in the supply chain to midstream, and even upstream.

Propane is a byproduct of both natural gas processing and crude oil refining. More propane is produced via gas processing, where it emerges after the removal of butane, ethane, and other components from raw natural gas. Some of these procedures are also necessary to remove condensation elements from pipeline flow.

Unfortunately, having no clear idea what the product distribution should be – because the propane cut is unknown – means there are likely to be significant imbalances in market products resulting.

Even more disturbing is the even further upstream impact resulting from a “fuzzy” propane demand expectation. The longer this lasts, the more difficult it will be for operating companies to determine how much gas extraction makes sense.

This begins with US engendering a foreign response that adversely impacts U.S. farmers. But it is morphing into a much broader concern.

Hopefully the bad news doesn’t get much worse, but in this energy and political climate, it’s anyone’s guess.

Sincerely,


Kent

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  1. July 26th, 2018 at 19:56 | #1

    The volatility will shake itself out because of China’s parallel tariffs on US-made petrochemicals. Much of the global supply of acetaldehyde, glacial acetic acid, derivatives such as cellulose acetate for the absorbent in disposable diapers and cigarette filters, and solvents used for metal painting and solar panel manufacture, is made at 3 plants on the US Gulf coast by catalytic oxidation of butane. Idling a furnace at any one of those plants while awaiting a resolution of the tariff dispute, would enable propane distributors to blend a percentage of butane into the propane sold for farm use, because the surplus butane not providing China with chemicals, is inconvenient to store and would have to end up in the fuel market.

    The market volatility we are witnessing at the moment, is not from a lack of propane and butane,. Rather, what needs to be worked out is the geographic distribution of fuel purchasing. Extremely cold places like Minnesota and the Dakotas require nearly-pure propane in January and February, because deep subzero temperatures reduce the boiling vapor pressure of butane, below the minimum pressure needed for gas-fired burners to remain lit. In interior Alaska where it gets too cold for pure propane to work, many Alaskans mount electric heaters on outdoor propane tanks. If these Alaskan tank heaters come into common use in the Lower 48, we could see a move to increase the percentage of butane that’s put in propane fuel.

    With all of these unknowns in play, price volatility will undoubtedly increase. What is not happening as yet, is a clear knockout punch coming from Beijing. In the end, China can’t develop China Sea oil reserves fast enough to abandon imports from Saudi Arabia and live exclusively on Iranian imports. An overall crude price spike that puts the Saudi Aramco IPO on firm footing is likely. And better relations between Tehran and Riyadh, requires bilateral agreement to contain terrorism, which was the issue that split the US from China and the EU over the Iranian nuclear agreement. Tehran is already showing signs that domestic economic issues may be taken more seriously than ideology-driven war fighting, and may grudgingly tolerate the existence of Israel and of the Saudi monarchy, in return for some symbolic victory or other that can justify a cut in military spending. The Iranian regime didn’t survive by stupidity. And it can make the entire problem disappear quickly once it chooses to do so.

  2. Neil Temple
    July 27th, 2018 at 09:08 | #2

    Is possible to rebuild our steel and aluminum industry’s buy the ore from third world countries perhaps Africa and trade our propane for it?

  3. Neil Temple
    July 27th, 2018 at 09:17 | #3

    There is unlimited options that could create unlimited opportunities for all sectors in America if only we think globally… We would then make economic opportunities for other nations as well as Americans in the long run the dividends that would bring are unfathomable

  4. Neil Temple
    July 27th, 2018 at 10:41 | #4

    And another factor would be a solution for American farmers their crops could be a very valuable part of the barter. Now we all know that in this day and age the barter system isn’t possible however with the emmanent crash of the US dollar as well as other world currency’s getting started with the bartering system could really jumpstart the US in a system that I think world wide will very likely replace most monetary systems . It would begin to help the US gain the experience that will be needed to do this effectively. The 13 billion the president want to give the farmers would be a terffic jump start in setting up a program that could begin the bartering that could bring back the industry’s that we now rely on other country’s for. It would certainly create more jobs and most important integrate the world economy to bring better economic efficiency’s and value to all countries.

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