We May Be In for another Propane Shortage This Winter

We May Be In for another Propane Shortage This Winter

by | published August 23rd, 2019

I often say that history repeats itself, and there is nothing where this is most prevalent than in the energy sector; it seems that some of the same energy concerns recur on a regular basis.

About this time last year, I wrote about the continuing problem of an adequate propane supply as rural America moved toward stocking for the winter.

Well, a similar situation is rearing its head again this year, and the normal propane cycle is once again complicated by geopolitics.

Propane is the main source of energy in rural areas, but it has been difficult this time around given the impact of Chinese tariffs on farmers compounded by horrendous floods in the Midwest.

The floods made many farmers ineligible for the grants provided by Washington to compensate for lost soybean and other exports. In order to receive this government payment, one needed to plant one’s crops by a cutoff date.

However, the flooding prevented entire regions from planting in time.

Now, on July 26 last year, I wrote a column in Oil & Energy Investor that applies with even greater urgency today.

Here’s what I mean…

When History Repeats Itself

Last year, I wrote the following:

“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.

The White House has 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%.

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…

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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.

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 U.S. 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.”

No Use Crying over Spilled Exports

In the time since I wrote the above comments, the propane marker has cratered even more, with exports from U.S. refineries to locations other than China rising to new aggregate highs while supply for domestic consumption moving down.

In addition, moves to improve propane and related liquid petroleum gas (LPG) transit in the Northeast – traditionally the region having the most pronounced distribution problems – have slowed. Not having a firm grasp on the propane demand capital investments in the network have become more problematic.

A winter colder than average will once again put a strain on the delivery system and spike spot prices for any additional consignments that farmers need to buy.

Meanwhile, on the Chinese side, anticipated surplus soybean deliveries from Russia are in trouble.

First, there may not be enough volume to satisfy the export needs. Second, the price is already rising. Third, that’s because, in addition to Moscow’s own concerns about meeting domestic demand while expanding exports, the energy costs for soybean production and processing is requiring an add-on surcharge to Beijing.

It’s too bad. If not for the tariff war, the previous relationship between U.S. farming exports and Chinese imports would have worked just fine for all involved.



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  1. LN
    August 26th, 2019 at 17:02 | #1

    it’s effecting all of us. but we can help. chipping in. have a concert where the donation goes to them. um live and throughout the states. okay maybe partly. thereby we will save the farmers, and helping keeping America helping one another in time of bad luck.

  2. B. Brazzale
    August 31st, 2019 at 09:42 | #2

    What percentage of the tariff money went to large corporation farmers? That would be an interesting subject.

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