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Trader's Corner

This week’s Trader’s Corner is going to discuss why our business model may need to change and why there is no reason it can’t.

We just completed the first of two hedging workshops we have scheduled for this year. This one was in Atlanta, ahead of the Southeast convention. Our next will be in Columbus, Ohio, ahead of the Midwest.

At the end of the seminar, one of the attendees, Javier Arango of Sungas Services in Miami, said, “Before attending this workshop, I felt like we were a boat on the ocean, out of control with the ocean current pushing us around. But now, with the tools we have learned in this workshop that allow us to manage our supply cost, I feel our boat has a sail.”

His comment struck a chord with me and immediately I knew there was a good Trader’s Corner in it to share with you. Knowing that Sungas is a very successful company, I wondered why he was so excited to equip his boat any differently than it had ever been. I imagined the boat being his business model and why he might feel it needed new equipment that expanded its capability.

To be of much use, a boat needs to be on water. I began to think how much has changed since we got into the industry. One of the primary changes has been price volatility and I thought of the body of water in which our business plan floats as price volatility.

I realized that when we began in the business, we operated on a body of water no larger than a small farmer’s pond. A simple little boat that would float was adequate for the pond. Prices tended to move very little compared with today. Even if a gust of wind blew our boat from one side of the pond to the other, it wasn’t going to be very far. No matter what, we were always near shore and not far from stepping off on firm, safe ground.

On our cozy pond, our business model (the boat) could be very simple. We could buy our propane from a reliable supplier, add our margin and make our sales to customers. In that model, we ask our customers to take on all the risk of price volatility.

Given the relatively tight price parameters identified by the banks of our pond, managing price volatility wasn’t much of a concern and asking our customers to accept it was not too much to ask.

But over the past couple of decades, our boat was caught up in a flood that caused it to leave the confines of the pond, pushing it down a mighty river into a great ocean of volatility.

Suddenly our simple boat – without oars, sails, rudder, compass or anchor – seems woefully inadequate. Our simple business model of buy, mark up and sell now subjects our customers to price extremes.

Each year that we have allowed our boat to float around without any controls has been to the detriment of our customers. Many are no longer willing to ride with us. They feel unsafe, insecure in our humble craft.

We sit in the captain’s seat of this vessel and so they watch us carefully. They expect us to guide them to safety and yet they learn we are not the captain at all. They have come to realize that, with our buy and markup business model, we are just as much of a passenger as they are on this vast ocean.

They tire of hearing us say we do not control the winds and the ocean currents so it is not our fault. All they know is that they climbed aboard when we beckoned, some many years ago, and that over the years all of the burdens of price have been theirs to bear and that burden grows heavier with each passing year.

Javier is a young marketer who looks into the eyes of his passengers and is unwilling to stand by and watch those that trust him bear all the burden of price volatility. He knows his simple boat is no long adequate for the body of water that it floats upon. He has been looking for ways to take control of the vessel and guide his customers around the storms of price volatility.

Only he has the power and tools available to modify the boat and make it more adequate as an ocean-going vessel. This week, he learned how to build a sail, a rudder, oars, and an anchor that give him the ability to manage price risk.

Yes, his responsibility is greater now because he is truly being a captain, but he is ready to take it on. He is excited and eager to learn how to apply his new tools to smooth out the ride for his passengers.

He sees he can now guide his vessel toward other propane passengers who are jumping from boats and whose passenger/captains are not willing to accept that their craft is no longer in the farmer’s pond.

Javier is excited because he can tell his current and future passengers where he will take them. When they climb aboard, he will be able to tell them with much certainty their price destination. He is sitting higher in his captain’s seat and looking optimistically toward the horizon — with its endless opportunity now that he controls the vessel.

Over the past few years, swaps, options, and paper barrels have been added to pre-buys as tools any propane marketer can use to control prices for his customers. These tools are easy to learn and master. Any retailer that is of a mind to do so can access these tools and use them proficiently to bring certainty to the world of his customers.

If you still operate under the buy-and-markup business model, quite frankly you are operating in a way that is totally unfair to your customers. And if all you do is make a couple of pre-buys each year, you may have a mast for your boat, but you have little canvas on it to carry you where you want to go. You are still subject to the winds of the market.

It is time we understand that times have changed and asking our customers to assume all the price risk on the vast ocean upon which we float is no longer fair. It is not surprising that many of them are choosing to leave as they must feel abandoned by their captain.

Using financial tools to manage price risk is not magic, it is not mysterious, it is not risk taking (just the opposite) and it is not betting. Financial tools are all part of managing price risks and providing predictable price outcomes for customers while not subjecting retailers to unnecessary risk.

Quite frankly, a propane marketer has every reason to equip his boat with all of these tools given the price environment we must now navigate.

Call Cost Management Solutions today at 888-441-3338 for more information about how Client Services can enhance your business, or drop us an email at
The threats to supply in the Ukraine kept crude well supported. Enough concern is growing about current inventory conditions to provide some price support for propane.

Monday: Propane prices started out softer, but finished little changed on the day. Early Mont Belvieu traded to a low of 106.75 cents and Conway to 105.25 cents, but both rallied off those lows. Conway propane was briskly traded, allowing it to close at 108 cents, even with last Friday.

Tuesday: Propane prices moved higher on the day without exceptionally strong volume. The price action seemed to reflect that sellers were reacting to rising crude. Propane has been trading on its own fundamentals, but with the focus on next year, perhaps crude is becoming more of an influence.

Wednesday: Propane prices moved higher on the day, despite an Energy Information Administration report that showed a larger-than-average build in U.S. propane inventory. The build of 1.016 million barrels was higher than the five-year average of 0.724 million barrels and higher than the 0.600-million-barrels average of an industry survey.

Thursday: Both hubs ended the day slightly down with West Texas Intermediate crude oil. We also saw some winter deals being placed; one was a BV swap for Dec. 14-Feb. 15 for $1.1475.

Friday: Propane prices were mixed, with Conway dropping and Mont Belvieu rising. Propane seemed to be more heavily influenced by crude.

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Cost Management Solutions LLC (CMS) is a firm dedicated to the analysis of the energy markets for the propane marketplace. Since we are not a supplier of propane, you can be assured our focus is to provide an unbiased analysis.

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Mark Rachal 888-441-3338,

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