In the Know: How to prepare for crop drying season

July 31, 2014 By and    

In the Know is a monthly partnership between LP Gas magazine and Propane Resources. Our focus this month is on preparing for crop drying season, addressed by supply and risk management experts Marty Lerum and Pat Thornton.

Q. How can propane marketers better prepare for high-demand crop drying seasons, such as the one that kick-started the industry’s supply issues last fall?

A. Before the winter of 2013-14, retail propane marketers and their agriculture customers were complacent for a few winters about supply planning for potential crop drying needs.

Although crop drying demand is one of the toughest segments of the market to plan for, warm winters and falling prices have lulled many marketers into a false sense of security. Planning for crop drying was not all that necessary, marketers thought.

Last fall, the high level of product needed and the inability of propane infrastructure to deliver caught most retailers and their agriculture customers off guard. Even before the severe cold hit, allocation problems plagued many terminals in the Midwest.

The first step to a better plan is to recognize the need for a better plan. Last winter certainly helped with the recognition process, but problems have developed in a variety of areas.

For example, limited gallons came from Canada through the Cochin Pipeline; the Todhunter, Ohio, terminal no longer has 3 million barrels of storage due to a leak; propane competes with other products for shipping on pipelines in the Midwest; and propane now moves south to the Gulf Coast, bypassing the Midwest.

Billions of dollars have been and continue to be invested into natural gas liquids infrastructure to accommodate petrochemicals and propane export demands – and those demands are on the Gulf Coast, not in the Midwest. Plus, despite record propane production levels, demand surpassed production and propane sat in Mont Belvieu, Texas, unable to be moved to high-demand areas.

Agriculture accounts can also be good partners in a winter like the one the industry just experienced for one key purpose: additional storage. Propane marketers can become partners in an 18,000- or 30,000-gallon tank. The agriculture account helps pay for the tank that they use during the fall crop drying season, and the propane marketer has use of the tank for winter residential demand. This type of agreement can be a win-win for the propane marketer, as well as the agriculture account.

If more delivery capacity is still needed even after storage is added at the crop drying customer or at the retail marketer’s storage plant, marketers will need additional ways to free up delivery capacity. Allocation is a solution.

Propane marketers have marketing programs that allow them to fill their customers’ tanks during the summer months, earning more supply allocation for the winter. When propane marketers sell a pre-buy or put a customer on a payment plan or have a summer-fill program, they gain the ability to fill those tanks during the summer allocation period.

The days of thinking a propane tank can sit empty until Oct. 15 and that a load will be available to fill it are disappearing. Know your historic use patterns for agriculture demand and know what your allocation is likely to be in order to deliver to those demands.

When a propane marketer’s supply allocation runs out, there is a 99.9 percent chance it will cost a lot more to buy that next load of propane. Propane marketers usually negotiate a fixed price with a crop drying account. If they don’t negotiate a fixed-delivery volume that matches their supply allocation, it would be wise to negotiate a price for spot loads over the supply allocation from their supply points.

Because crop drying gas is often sold at a much slimmer margin than residential gallons, using propane purchased for residential demand will put higher margin sales at risk early in the season. For that reason, retailers should communicate with their agriculture accounts the importance of filling their tanks earlier in the summer to help increase the availability during the crop drying season.

Crop drying demand is unpredictable and price protection is an important component. Flexibility is important with a heavy demand year coming, on average, once every five years.

The use of hedging tools that allow quick liquidation of propane positions at Mont Belvieu or Conway, Kan., can help agriculture accounts lock in volume and price protection.

Marty Lerum and Pat Thornton are supply and risk management experts for Propane Resources. Contact Marty at 913-262-0628 or marty@propaneresources.com. Contact Pat at 913-262-0628 or pat@propaneresources.com.

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