January 11, 2022
Ben Lyden, director of commodity risk for CHS Propane, discusses the market factors impacting propane supplies and how year-round planning can help maintain a reliable supply.
Farmers and ranchers understand the value of planning for their seasonal propane supply, but market dynamics are making it essential for them to plan for propane needs year-round, says Ben Lyden, director of commodity risk for CHS Propane. Factors at play include competition from other global markets for U.S. propane, the rising cost of this commodity and its decreasing availability domestically.
“In June 2021, propane was around 90 cents a gallon,” says Lyden. “By late October, that price had increased to $1.50 per gallon without any cold weather demand or any kind of crop-drying event that increased demand over that time period.”
Although cost is a major factor driving the need for year-round propane planning, Lyden believes the primary reason is global competition from markets that are not seasonal like traditional U.S. ag markets. In particular, increased petrochemical demand from Asia has led to a rise in U.S. propane exports.
“We’ve seen very low propane prices over the past several years in the U.S., which has led to investment in both infrastructure and export capacity,” says Lyden. “Rather than have landlocked gallons in some of our customers’ local areas, a number of propane producers have decided to build pipeline infrastructure and export capacity to move those barrels to other markets. Up to 70 or 80 percent of our production today can be exported overseas. Canada has also increased its access to international markets by building out export capacities and terminals on their West Coast. They’re now seeing those barrels being moved into Asia and away from their traditional U.S. destinations.”
In Asia, petrochemical producers have seen propane demand ramp up over the last several years to satisfy the need for plastic and packaging, which has been driven by a notable rise in consumer online shopping.
“These producers are purchasing propane in large volumes that we would traditionally use for home heat or commercial applications, then converting it into feedstock for producing plastic resin,” says Lyden. “In addition, a natural gas shortage in Europe is causing people to look for alternative energy sources, which spilled over into propane markets and caused prices to increase.”
Low domestic inventories, cold weather woes
Over the last six months, propane production has ramped back up after the initial impact of the COVID-19 pandemic and is close to record levels in the U.S., says Lyden. However, even with that production increase, the U.S. is still playing catch up.
“We’re seeing a shortage in the number of barrels available to make it through our winter period, which has created volatility,” Lyden notes. “Physical inventories in the United States are at a five-year low. That’s where the concern over availability and supply comes from.”
Of course, cold weather is a critical factor. “People are evaluating how they’ll make it through winter with enough propane to meet their needs,” says Lyden. “That remains the big question at the moment, which is why it’s important that folks are looking at their propane needs month to month rather than just planning once a year.”
Tools from CHS
To help anticipate propane volume swings month to month, Lyden recommends using supply planning tools from CHS, which can be found at local cooperatives. These tools enable more consistent planning and help ensure that sudden changes in availability don’t negatively impact businesses.
“At CHS, we pride ourselves on making sure we can meet customer demands and have product available,” says Lyden. “Any insights we can help producers gain through our supply planning tools makes it a lot easier to plan. Whether it’s a crop-drying event or winter heating demand changes, I recommend that people take advantage of the resources available from CHS and plan ahead to navigate this new normal.”