Word Around the Campfire: Pull the Trigger on Farm Diesel and LP
Aug 02, 2013
Word around the campfire is that now is the time to hook into most if not all of your farm diesel, LP and natural gas. Demand for all three is expected to be very high this fall and with crude oil at the top of its range, fuel prices will follow. However the factors that would inflate farm diesel pricing are the same factors that limit upside potential for natgas.
Farm Diesel --
Middle East Tension continues to inject a fear premium into crude pricing, but Brent has deferred the 'anxiety tax' to WTI. OPEC nations are producing well below capacity at present as WTI producers pump oil as fast as they can to take advantage of inflated WTI pricing. Meanwhile, better-than-expected growth in China and the E.U. suggests increased crude demand ahead from those regions. If China and the E.U. are willing buyers at these pricing levels, the WTI discount to Brent could be a thing of the past.
Many are beginning to suspect we have seen the last of WTI below $100.00/barrel. We will talk more about that another day, but I do not like the amount of time our beloved WTI and Brent are spending so near parity. If WTI wants to play on the world stage and allow OPEC to so greatly influence pricing, domestic oil production will do little to insulate U.S. fuel pricing from reverting to the volatility and upside potential we witnessed through the turn of the century.
Consensus is for farm diesel to move upward from here. There are those who suggest filling all of your farm diesel needs today. Our approach has always been to book portions along the way to remedy price volatility. Current Midwest averages stand at $3.378 -- just below the 2013 projected average of $3.40.
But if experts are correct, and you believe WTI will remain high -- even just a few weeks more -- fill all of your remaining fall and harvest farm diesel needs today.
The same holds true here -- due to increased WTI production, propane stocks are good. A mild summer thus far has allowed propane stocks to build for a few consecutive weeks, but current supplies lag last year by 6.2 million barrels. Demand is expected to be very high in the fall as we expect a wet crop. That projected demand is starting to figure into LP pricing and we have seen two consecutive weeks of timid increases suggesting LP is looking for a hole in the ceiling, and will move higher when it finds an excuse.
Consider booking more than 50% of fall LP needs today. We can play this market a little looser than farm diesel and we may see prices turn lower again before the end of summer, but warmer temperatures will demand more of propane stocks for power generation and inflate pricing if more Americans reach for the thermostat.
I'm advising a closer look at LP. Check your local pricing as prices will vary, but the overwhelming opinion is that the floor is in place for 2013 LP. If prices are within your 'go-zone', stock up today. If prices are not in your go-zone, give it the weekend and check Monday's Monitor.
We expect increases of a nickel or more. At that point, book it book it book it.
WTI has its fingers all over this market too and increases in WTI pricing have meant increased production of natgas along with crude production increases. This has moved front-month nattie well below expected levels. Of the three discussed here, natgas scares me the least. Demand will be higher this fall to service grain dryers and that will inflate pricing, but the factors that risk elevating farm diesel will limit upside action for natgas.
Prices are too attractive for WTI to slow production and the resulting glut of natgas gives us a little breathing room. Today September futures opened at $3.38 and the industry holds to a 2013 average natgas price of $3.68. Natgas is less scary, but less certain as well.
$3.38 in the face of projections of an annual average of $3.68 means the market will have to correct to the upside to make up for all the time spent below projected averages. We have been lucky here with minimal demand for power generation and air conditioning, but, just like LP, a hotter summer will push natgas prices higher. There is no reason to go crazy here if you feel like gambling. But if you are in no mood to take a chance that natgas goes lower, book a healthy portion of this today. You could do a lot worse than $3.38.
Again, we usually advise to manage the price risk by booking portions along the way. This is a good idea here, but the longer natgas spends at a low, the higher the correction will be and we have seen nattie take 20 cent hops with little or no warning.
By now, regular readers should be about 50% filled on fall natgas needs. If that is the case, throw on another 30% or more. If you are below 50% filled, get at least to that point. If prices continue to fall, you will have a chance later to book the rest at the lower rate, but there is a high amount of upside risk in the next few weeks.
Our recommendation is to have roughly 80% of fall natgas needs filled by the end of next week.
By the way, fertilizer pricing continues to bleed and we expect decreases before the end of the month. As always, keep an eye on your Monitor. We update retail pricing every Monday morning. Check there before you do anything in NPK.
Note that an earlier ALERT recommended some nitrogen purchases in select states. We stand by our advice to cover a portion of nitrogen in those areas.
Trends suggest the time to secure fall needs for LP and farm diesel is now. If you are nervous, book a portion. Everybody wants to hold out for $8.00 corn and $2.00 natgas. You can do that and may end up rubbing my nose in it. I hope it works out for you. Nothing makes me happier than growers saving money on inputs. But the safe money is on spreading the risk.
Photo credit: Steve took it / Foter / CC BY-NC-SA