LP prices seen heating up for U.S. corn harvest drying season

U.S. liquid propane (LP) prices could be headed for the ceiling, based on current supply/demand factors, setting up what could mean higher corn drying costs for farmers this fall.

To describe the LP market environment for this fall's grain drying, analysts are using colorful metaphors such as "train wreck," "tug-of-war," and "somebody is going to have to give up their airplane seat."

The rising U.S. LP prices are being underpinned by global demand.

"The prices are likely to stay high, because the oversea demand is strong enough and that can keep the overseas markets even higher," says Rajesh Joshi , editor for Oil Price Information Service (OPIS), a division of IHS Markit.

Joshi added, "China's end users of LP can already afford to pay these high prices, so there's no reason for prices to go lower. If U.S. LP producers can make more money overseas than they can domestically, their first option will be to sell on the export market."

Current Spot Prices

The current prices at the major LP trading hubs tell the story of what may come this fall.

For background, there are two main hubs where LP is traded: Mt. Belvieu, Texas, and Conway, Kansas.

While the Mt. Belvieu supply feeds the U.S. export business, demand from farmers is served by the Conway hub.

Conway's price is normally lower than the Gulf Coast location because the Midwest caverns are landlocked, and price adjustments are needed to account for pipeline costs to transport product to the Gulf Coast.

For August, data indicates that for the last five years Conway prices have averaged a 5¢- to 7¢-per-gallon discount to Mt. Belvieu, according to OPIS.

The only time that Conway's LP price is higher than Mt. Belvieu's is in the fall and early winter, Joshi says.

"This year is different," Joshi says.

This week, spot prices at Mt. Belvieu, on the Houston Ship Channel, are running between $1.14 and $1.15 per gallon vs. $0.51 per gallon a year ago.

At Conway, Kansas, spot prices for LP are between $1.17 and $1.18 per gallon vs. $0.46 per gallon a year ago.

This reversal in price leaders occurred in 2014, during the U.S. polar vortex weather anomaly.

At that time, stocks were dwindled in the months of February, March, and April of 2014.

After 2014, LP prices returned to normal and Conway has been consistently priced below Mt. Belvieu, until now.

U.S. LP Stocks

The story of a rise in LP prices can't be told without reporting the drop in stocks.

For all of the U.S., LP stocks, as of Wednesday, total 66.76 million barrels, compared with 89.3 million a year ago, according to this week's Energy Information Administration (EIA) report. That equates to a 35% reduction in stocks year-over-year.

In the Midwest, the region labeled by the EIA as PADD2, LP stocks total 20.7 million barrels vs. 24.8 million a year ago, a 15.2% drop, as of Wednesday.

At the Gulf Coast, the LP region known as PADD3, stocks total 33.8 million barrels vs. 52.5 million a year ago.

What's Happening?

There are three factors impacting the LP pricing situation this summer, according to the oil industry editor.

"Propane production has plateaued, crude oil production has flattened to a record-low, and LP exports have increased," Rajesh says.

The latest data indicates that U.S. propane production has dropped from a record-high 2.4 million barrels per day in early 2020 to 2.3 million per day in August.

Keep in mind that the return of production comes after a sharp drop from the 2020 high.

"Normally, that shouldn't cause much of a worry, because it's almost back up to the 2020 high. Yet, exports from the U.S. have increased to record-high levels," Rajesh says. Large companies have added dock capacity this year on the Houston Ship Channel and elsewhere, allowing for more exports."

Because propane is a product extracted from shale, it is associated with the crude oil market.

Therefore, if crude oil production declines, less LP is produced.

In addition, Canada, normally a backup for the U.S. Midwest hub, is exporting LP to sea. That means those gallons are no longer guaranteed.

With China recently buying record-large amounts of U.S. LP for its growing petrochemical plants, Canada railing less to the U.S., and the U.S. grain drying and U.S. heating season around the corner, this sets up a possible tug-of-war for LP supplies.

"If there is a normal winter, U.S. LP users may be able to dodge the bullet of high prices," Rajesh says. "But if the U.S. fall is wet and the harvest season for corn is late, increasing crop-drying needs, combined with a cold winter, things could get interesting."