Sep 17, 2014
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February 2014 Archive for Inputs Insights

RSS By: Davis Michaelsen, Pro Farmer

Inputs Monitor Editor Davis Michaelsen adds his perspective into the happenings of the inputs markets.

Watch Farm Diesel and Burn Your Corn

Feb 21, 2014

 

This week marked our last stop on the Pro Farmer annual Profit Briefing trail at the Par-A-Dice in Peoria, Illinois. A snow storm rolled in the early morning hours of that Monday and had Chip and I not decided to leave the night before, we might have missed it altogether.

Attendance was definitely impacted by slick roads, but those who did brave the elements were anxious to hear what we had to say, and even more anxious to share with us the things on their minds. Propane was a concern and we talked it all out, but something else I talked about had a few growers looking for a chance to pull me aside quietly... farm diesel risk.Picture6

We have written about this a little, but the idea is that at midwinter, your Inputs Monitor has advised to fill up to 50% of projected spring needs, hoping for a chance to fill remaining needs at an annual price break in the spring. However that price break may not be there this year.

Today natural gas rose above $6.00 in the front-month contract. The East Coast answers much of its home heat and power generation demand with natural gas however, in times of high natgas pricing -- like now -- the infrastructure is set up to switch to heating oil, and they intend to this year.

Lagging distillate stocks has also had an influence on WTI crude pricing as demand for refined products -- like heating oil and farm diesel -- skyrockets. Today, we note the March heating oil contract opening at its daily high of $3.18. That number has been steadily climbing due in part to distillate and refined fuels demand.

disstuss

Growers wanted to know if it was time to book some farm diesel. My advice was this, if you are out, fill up to 50% to catch up with our present position. The low for this winter has come and gone, but prices could be much higher by spring, and we may miss that spring low altogether. The impacts of a winter wrought with fuel shortages and price spikes on farm diesel pricing is uncharted territory, and we advise to cover yourself at present prices, especially if you are out.

Another thought that came up comes a little out of left field, but I have to address this. This sounded a little ridiculous from the journalist's perspective but I've been thinking sarcastically that at these prices, its gotta be cheaper to burn your corn than your propane. Knowing full well that the prospect of low crop returns is nothing to joke about, the idea has bubbled to the surface of several conversations with all kinds of folks and as I was talking about propane in Peroia, a grower shouted out "Burn your corn!"

natgas

Corn burners were en vogue a few years ago and business dried up somewhere around 2008, I've been told. If propane is at a regional average of $3.79 per gallon and I have been holding up a plant with a corn burner I bought in 2003, is $4.50 corn cheaper to burn for home heat than LP?

The simple answer lies in the Btu's. One bushel of corn lasts the average corn burner about one full day and yields 200,000 Btu. That's heat for a part of your home -- depending on the size of your stove -- all day priced at $4.50. 200,000 Btu's of propane currently runs in the neighborhood of $8.25.

By the numbers, corn is currently much cheaper to use for home heat, if you have the gear. Now I'm not one of those 'preppers' you hear about railing against 'the grid', but this is becoming an economic concern and if corn prices stay low and propane prices stay elevated into the coming winter, let's just say corn is giving us some food for thought.

Thanks to all who attended Pro Farmer's Profit Briefing in Peoria and elsewhere. We get some of our greatest ideas from conversations at these deals, and this year has been no exception. We look forward to seeing you at another Pro Farmer event in the future.


Propane Exports Under Fire

Feb 14, 2014

I wrote critically about the impacts of rising propane exports in my Friday blog a few weeks ago and took some heat for it. It is true that export policy has the power to make or break an industry. Echoes of the Jimmy Carter Administration's policies and the disastrous effects of grain export embargoes on America's agricultural sector rippled through discussions here at the Monitor.

A colleague of mine reminded me, "This is still America and we have to be careful when we say to a company they can or cannot make money in this or that way." The fracking boom gave American energy prospects a shot of adrenaline but the seemingly endless supplies of crude oil and natural gas limited returns for producers.

As drought minimized agricultural propane use for grain drying in 2011 and '12, natural gas liquids (NGL) producers were stuck sitting on a wealth of possibilities, with very limited upside price potential. When NGL producers found customers on the global market, they were anxious to finally move some product and turn a decent profit on the shale -- and rightly so.

Bad timing --

But the shift to exports was timed poorly. Two or even three years earlier would have hit it just right. This year, however, marked a springtime shift from the chapped crocodile soils of drought, to saturated soils and ponding in fields across much of the Cornbelt. Strong summer winds created stand issues in corn; early snows forced harvest to put the pedal to the metal; winter was on its way and the early October cattle kills in South Dakota now look like a grim warning from mother nature.

According to a Reuters article, "Data from the Energy Information Administration showed that coming into the winter, propane exports rose to 410,000 barrels per day (bpd) in November, the highest since the agency began collecting data four decades ago. That figure eclipsed the 408,000 bpd exported the previous month, which in itself was a big jump from the 270,000 bpd that had been exported on average in the previous months of 2013. And some analysts say that this high export level had been more or less maintained throughout December and January. Energy consultants RBN Energy, citing fellow consultants IHS Waterborne Energy, said exports barely dipped below the 400,000 bpd mark in the past two months and, according to their chart, have stayed above the 375,000 bpd mark."

Current national inventories are roughly half of what they were at the same time last year. Agricultural demand was pegged at harvest four times above a 'typical' year. But exports have ballooned at the same time from 5% of the national supply in 2008 to 20% of the national supply in 2013.

Help is on the way --

This month, supplies positioned in Cushing, Oklahoma were sent back northward to Conway, Kansas for domestic distribution. Just this week, the Federal Energy Regulatory Commission (FERC) took historic steps to prioritize 21 million gallons of propane pipeline shipments to the Midwest. The U.S. Department of Health and Human Services has also released $450 million for low income home heat assistance to combat the price spike, but these are band-aid solutions.

Our takeaway from this depends on our position. Propane sellers have hit the demand motherlode -- strong domestic demand parallel with strong export demand. We can call this year a mulligan or blame unpredictable weather for price spikes and local shortages. It is true, that until that October snowstorm, we really had no clue how severe this winter would be. They did not expect ice in Atlanta and Dallas, but they got it anyway.

Perspective --

From the end user perspective, the importance of contracting LP at seasonal low prices is refreshed. This not only locks in your price at a demand low, but it also helps your supplier pencil in projected needs for the season ahead. I wrote in a white paper recently that on the farm, there are worse ideas than considering alternative home heat solutions like wood burning stoves and fireplaces.

Chip read my piece and asked, "Are you seriously saying to these guys to go out and chop wood?" In homes that have fireplaces or wood burners, the answer is absolutely yes -- maybe get the neighbor kid to do it. It is dangerous to be so tied to the grid that we cannot heat our homes and farms without the support of propane deliveries or electricity. A backup plan is never a bad idea, especially if next winter is as cold as this one. I grew up with a kerosene heater glowing in the living room through the winter, and I know it gave our family a small measure of independence and security through some cold nights.

To discourage propane exports would hamstring the industry when global marketings are starting to gain momentum. It is time for American natural gas to put its money where its mouth is, however. A wealth of shale reserves does us no good if it cannot answer domestic demand for winter heat. From what we have all been told, there is enough shale gas to fuel us to the moon and back. Now that natgas and other NGLs have gained some price strength, the incentive is there for LP producers to refill U.S. inventories.

We do not have to embargo the export of propane, and we should not. We can all learn from this winter's propane problems and with any luck, as much attention will be paid to storage levels and agricultural demand as to export demand in the future. There are many exporting nations who send out product only after domestic needs have been filled generously. The United States must adopt a similar policy that makes domestic demand a priority over export shipments.


 

Advice in Charts and the Near-term Fuels and Fertilizer Outlook

Feb 07, 2014

This week we look back at fertilizer and fuels in charts with an eye toward our advice. We have indicated our purchases on each chart with green arrows. We have done well so far this year and if you have followed our advice, you are 80% filled on UAN, urea and phosphate for the upcoming crop year. We are also 60% covered on anhydrous and 30% covered on potash.

Market trends suggest the downside is pretty much exhausted and while we wouldn't be surprised to see a few downside gasps here and there, industry experts, supply/demand features, Chinese purchases and even Dec corn futures lead us to believe spring prices across the board will be above that of today's.

Below we chart our positions over the past few months, chronicle our decision making process and look ahead to spring. Keep an eye on your Inputs Monitor and watch in the next few weeks for opportunities to wrap-up bookings for spring/summer.Picture7

Potash prices are on our radar and last week's P&K Today suggested go-time may not be far off for spring potash. The Chinese have signed a contract for the first half of 2014 for potash from Uralkali at $305.00 and Canpotex has also reported it has struck a deal for the same time period, noting that the price was consistent with current levels. Despite the lack of specificity on the Canpotex K price, Chinese tenders with the two main global suppliers suggest the floor is in place for potash.

Potash demand may be low, and prices have been on a slide since late July. But this week, the regional average price ticked 11 cents higher and we believe this to be the chart hook we have been waiting for. I will likely pull the trigger on spring potash next week if the uptrend is confirmed. Picture6

Urea prices have fallen farther and for a longer period of time than has potash. Chinese oversupply is to thank for the downward pressure, but supply constraints in the northern plains have little product positioned as of today and reports from importers have it that rough seas are slowing the flow of urea into the U.S. from outside sources.

We have seen a strong rebound here already and are 80% filled for spring. As with potash -- this is a a theme emerging -- if we get another week of increases in regional averages, we will complete bookings for the spring and summer of 2014.Picture5

UAN solutions will be in demand this spring and summer as sidedress and foliar applications or applications as an additive to a herbicide complex. Nutrient reduction strategies and farm economics will continue to favor UAN solutions because of UAN's versatility, but that increased demand will inflate pricing by spring.

We have seen prices begin to rise and as suppliers resupply for the coming crop year, new price points will be set above today's price. Price weakness may come early in the spring as anhydrous pricing makes Nh3 an attractive pre-plant and early sidedress option, but as the season goes on, look for UAN demand to spike, especially if we have another wet spring, and N makes its way to the tile.Picture4

Anhydrous ammonia has been very generous posting the largest and fastest fall of all the nutrients we track. Potash and anhydrous have followed expected new-crop corn returns the most closely of our nutrients, and our figures have anhydrous priced more than $30.00 below expected new-crop returns. That's easy math, even with corn at a $4 handle. We pulled the trigger two weeks ago on a confirmed bounce, and will look to finish booking for spring on confirmation of the floor.

Carry product from fall's narrow application window may limit Nh3 pricing and reports are there is a lot of product consigned, still waiting for a home. Stable production from Trinidad ammonia plants will keep a lid on Nh3 pricing in general, but it will not take much for anhydrous to run higher in a hurry. We are currently at 60% for spring/summer here, but it won't take much convincing for us to finish up booking for spring soon.Picture3

Phosphate demand is less in question than that for potash and as nutrient has fallen, of NP&K, phosphate has given the least amount of ground. This may indicate a narrower range and if the fall off was small, the rebound should act in kind. In other words, since P prices didn't completely tank, we do not expect a violent price recovery. Having said that, experts report to your Monitor that current price levels are unsustainable for phosphate and spring prices will be above today's.

We are 80% filled on phosphate and may wait until to see what spring demand holds for P. However, the DAP/MAP chart betrays strong upside potential near-term and if you have not booked at least 80% for spring phosphate, it is definitely time to pick up the phone.Picture2

Farm Diesel has been kind this year. While last year's summer price was quite a ways below this year's, by the time harvest rolled around, we found some great spots to cover portions of farm diesel. We are at 50% for spring here and part of me wishes we were farther ahead. Stick with me -- the East Coast is increasing their consumption of heating fuel to power home heat rather than expensive natural gas. If distillate supplies are diverted to keep the East Coast from freezing solid, farm diesel pricing may be impacted this spring, and, like propane, prices would likely remain high until the supply situation resolves.

National distillate supplies are below year-ago and below the five-year average. This, plus increased demand for home heat in the East Coast make me nervous on farm diesel above all others. This week we are at $3.46 -- that's 9 cents per gallon above our August and January purchases, but with just 50% covered for spring, we are compelled to look for a downside nod to increase coverage.Picture1

Propane Propane Propane... This has caused more than a few headaches. Agricultural demand for grain drying was four-times what the market expected according to EIA. Exports have ballooned over the past five years, the Cochin pipeline was down during November and December and winter weather starting early in North Dakota made road and rail transport a slippery and dangerous mess. Since the early onset of winter, that icy mess has found its way as far south as Louisiana and most of the country is under some form of hours of service waiver until March.

We noted the annual low in late July and booked at $1.34 at that time. Our recommendation for the coming year is to double your on-farm storage and make some sort of contingency plan for home heat, should the situation get out of control again next year. We will watch this market carefully and get you filled up as best we can, but when the time comes, prepare to fill very aggressively and some will choose to fill their entire winter's supply as early as they can.


 

 

 

 

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