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Trader's Corner

This week’s Trader’s Corner looks at how to use hedging to meet the needs of customers.

A big part of what we do at Cost Management Solutions is help propane retailers understand hedging tools, such as swaps and options. There are several parts to the learning process, but the two main concepts are how these tools work and how to apply them.

In understanding hedging tools, the most ground is made when a retailer has a real-world problem to resolve or an opportunity to capture that we can discuss. Ultimately, it comes down to understanding propane consumers. If we are customer-focused and want to satisfy their greatest needs, then the value of hedging tools in allowing a propane retailer to deliver what the customer wants becomes readily apparent.

When a retailer calls us to discuss hedging, we always know it is going to be a good conversation when they begin it with a statement like, “My customers need” or “My customers want.” When the focus is on delivering something specific to a specific customer or group of customers, the discussion and the decisions made in that discussion are going to be much easier to come by.

In contrast, when the conversation is centered on competitors or the market in general, answers are much harder to find. The reason for the difference is, when a retailer is focused on his customer, he generally has a very clear vision of what he is trying to accomplish. When the discussion is centered on a competitor, the conversations and desired outcome are inherently murky, fuzzy and unclear.

Mostly, the goal of the conversation has something to do with buying better than the competition. Competitors buy in the same markets and can capture the same opportunities we can, so identifying when or how we have beaten them is vague at best. Sure, if a retailer has bought propane much more cheaply than his competitor, his job is made easier, but it doesn’t necessarily guarantee he is going to be a successful retailer.

In fact, in our view, buying right is far less important than selling right. That probably is a shocker coming from a company that spends a huge amount of time and effort helping propane retailers improve the odds of buying right. But the truth is, the real money in the retail propane business is in the margins made selling to customers.

If our focus is purely on the buy side, then even when we buy right, we often just pass the savings on to the customer. The result is, our margin doesn’t really improve much, if any. The reality is whether we buy right or wrong, we tend to gravitate back to the same margin.

The problem is, this really doesn’t strengthen our position with the customer. If we buy right, we may strengthen our position against a competitor, but it may be very hard for our customers to recognize the value. The key is delivering a value proposition that the customer desires.

If all we are delivering is propane, how are we different/better than any other retailer that knocks on our customer’s door? The key to our success generally comes down to delivering something other than just the propane that our customers value.

Our customers are not created equal, and what they covet or what they consider important for their propane supplier to deliver can be quite diverse. Some customers may value a courteous and respectful delivery driver. Perhaps it is safety inspections or a pleasant voice when they call the office.

We know that many commercial accounts value having a known cost of supply. Almost all commercial operations have a budget to hit, making them a clear target for a fixed-priced program that can be coupled with swaps or pre-buys to deliver a known cost of supply to the customer and a known margin to the retailer.

Some customers value having the cost of propane spread evenly over the course of the year. For those customers, a budget program adds value. Swaps and pre-buys can be used to hedge those programs.

Some customers want a known highest price they will pay for propane, but would like to pay less if propane markets go down. For those folks, a cap program based on a call option or combination of a pre-buy and put option can add a lot of value.

The point of this discussion is to get us thinking about the opportunities we have to expand our margin by identifying the value proposition that would better cement our relationship with the customers we already have. If we are delivering the right value proposition, our opportunity to expand margins is greatly increased.

Most propane retailers we have spoken with have been able to expand margins on budget customers. The reason is the retailer is now in control of when to buy for the program. They provide the customer with a known cost, which the customer values.

At the same time, the retailer has the opportunity to improve his margin when the market gives him opportunity. It is a win-win for both parties. There are many other cost savings advantages of budget programs, such as controlling when propane goes into the customer’s tank, that can benefit the retailer.

The key is that these customers are no longer assuming the risk to higher prices. Because a retailer has removed that risk and is now managing it for the consumer, he is generally able to extract more margin. He is doing more than delivering propane, so logically he gets compensated for his efforts. He has changed the value proposition to his customer from providing propane to providing propane with known cost parameters.

Every propane consumer assumes his propane retailer will keep him in propane. If that is all we are doing, we aren’t doing much to make sure we keep that customer or expand our margins. We do that by delivering more than propane, like the peace of mind that comes with knowing the future cost of propane.

We encourage you not to just see your customers as propane consumers. If you can find something else they covet concerning propane, then you have a real opportunity to make sure they are around a very long time and to improve the value that relationship delivers to your bottom line. Just know that, on the supply side, there is a way for you to deliver just about anything your customer would find valuable concerning propane.

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
Propane continued its fall, despite gains in crude as building inventory pressured prices. We go into the week bearish, but it may be very difficult for propane prices to go much lower with the gains in crude prices.

Monday: U.S. propane prices remained weak to start the new week. West Texas Intermediate (WTI) crude managed to continue its uptrend that looked in a precarious position on Friday.

Tuesday: Propane prices continued their downtrend as overbuilt inventories continued to drive prices. WTI crude finally broke clear of all technical resistance, causing it to jump sharply higher.

Wednesday: Propane prices at both major U.S. hubs closed down 1.5 cents on good trading volume after the Energy Information Administration reported a 2.476-million-barrel build in U.S. propane inventory in its Weekly Petroleum Status Report.

Thursday: For a second day in a row, both hubs set new lows for the year with substantial falls that outpaced a retreat in crude.

Friday: Propane prices continued to soften, with trading activity pushing prices to the lowest levels of the year. Concerns over the Ukraine escalating into civil war and Libya losing gains on oil production kept crude prices above the century mark.

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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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  • Periodic Option Quotes
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  • Evening Report with Executive Summary, Trader's/Hedger's Corner, Weather maps and complete review of energy prices that are based on Propane's Btu Equivalent

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Client Services
Many retailers simply don't have time to analyze the large amounts of data to make an informed purchasing decision.

We offer:

  • Detailed market recommendations on hedge and pre-buy entry points
  • Prompt market execution of hedging strategies
  • Supply cost analysis and recommendation as to effective hedging strategies
  • Because of the volume of transactions we place annually, we receive large volume consideration when we place your hedges

Visit us online at Or e-mail

Contact us today to see if you can benefit from having the Energy Price Watchdog working for you.

Dale G. Delay 888-441-3338,
Mark Rachal 888-441-3338,

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