It s time to start buying propane for fall Expect to pay more to dry 2017 corn crop By Bryce Knorr, senior grain market analyst

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1 It s time to start buying propane for fall Expect to pay more to dry 2017 corn crop By Bryce Knorr, senior grain market analyst It s the end of winter hopefully and that means it s a good time to buy coats, long underwear and propane. While growers can expect to pay around 10 cents more a gallon for drying fuel than they did last year, prudence suggests getting some coverage in place to guard against volatility in the petroleum market and a seasonal move higher. Earlier in March when prices dipped I recommended booking 25% of needs. While a downdraft in crude oil could knock prices lower this summer, bump coverage up to 50% if supplies are available at a fair cost. Wholesale benchmarks are running around 55 to 59 cent cents for comparison. The end of winter traditionally is the best time to buy propane, but this trend has been skewed recently by both rising production and outside market volatility. Summer prices have been cheaper when crude oil crashed as it did last year on Britain s surprise vote to leave the EU, for example. There s plenty of potential for those types of gyrations again this year as world events unfold. But while U.S. production of propane continues to increase, so does demand, especially exports. That lowered U.S. inventories by a third compared to the previous year. Stocks normally rebuild over summer into fall for the start of the heating season, but prices typically rise too. Seasonal trends are also in play in the diesel market as demand from agriculture builds for spring fieldwork and planting. Wholesale diesel costs in the Midwest have stayed in a narrow range of about a dime so far in 2017, reflecting the rangebound trade in crude oil. Midwest supplies were down last week for the third week in a row, helping firm basis between cash and ULSD settled in New York Harbor. That too is a typical pattern for spring. Basis should begin to weaken into summer once farmers are done burning fuel, which is normally the best time to book diesel for harvest. But any swoon in the crude oil market could also be a buying opportunity. Red diesel seems reasonably priced right now given seasonal demand and the rest of the petroleum complex. Crude rallied more than $1 a barrel Wednesday after the government reported a smaller than expected increase in inventories last week. While supplies are at record levels, the U.S. continues to ramp up exports while production cuts from OPEC and its allies may be extended later this year. Disruptions out of producers in volatile parts of the world like North Africa and the Middle East are also encouraging some buying. Current fundamentals of supply and demand suggest a crude price around $50.50 a barrel according to my model, $1 above Wednesday s close. But that also means oil could range between $65 and $29 over the next year. The rally in crude Wednesday helped turn around the ethanol market. Prices there broke after the government said inventories built last week on rising production spurred by better margins. That s allowed plants to start pushing bids to attract bushels from farmers reluctant to sell with futures prices at lows for the year. Continued strong production means USDA could still be too low on its estimate of corn usage for the 2016 crop. Data on corn grindings for February and January ethanol production comes out next week that should shed more light on trend.

2 Days of Crude Oil Supplies 40 Current Year Prior Year U.S. Crude Oil Stocks 550 Current 5-Year Min. 5-Year Max. 500 million barrels

3 net position long/short Crude Oil Futures and Options Managed Money Crude Oil Futures 1/1/2014 1/1/2015 1/1/2016 1/1/2017 Source: CFTC, NYME $120 $100 $80 $60 $40 $20 $0 Crude Oil Commitment of Traders - Crude Oil ,500,000 2,000,000 1,500,000 1,000, ,000 - Crude Oil Open Interest

4 Weekly Ethanol Production and Stocks Stocks Production thousand barrels thousand barrels/day /1/14 2/1/15 7/1/15 12/1/15 5/1/16 10/1/16 3/1/17 Ending stocks Daily Production Ethanol production (gallons) from each bushel of grain used 2.60 Sep 14 Jan 15 May 15 Sep 15 Jan 16 May 16 Sep 16 Jan 17

5 Average Corn Belt Ethanol Plant Margins $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 $0.50 $1.00

6 Average Corn Belt Ethanol Prices $2.40 $2.20 $2.00 $1.80 $1.60 $1.40 $1.20 $1.00 U.S. Gasoline Stocks 270 Current 5-Year Min. 5-Year Max. 250 million barrels

7 Days of Gasoline Supplies Current Year Prior Year Refinery Capacity Utilization 100 Current Year Prior Year 95 per cent

8 Total Petroleum Product Exports thousand barrels per day Midwest Diesel thousand barrels thousand barrels/day Stocks Production

9 330 Mid Continent Diesel Seasonal cents/gal /5 8/5 9/5 10/5 11/5 12/5 1/5 2/5 3/5 4/5 5/5 6/5 $0.40 Mid Continent Diesel Seasonal Basis $0.30 $0.20 cents/gal $0.10 $0.00 $0.10 $0.20 $0.30 7/5 8/5 9/5 10/5 11/5 12/5 1/5 2/5 3/5 4/5 5/5 6/5

10 Group 3 Diesel Seasonal /1 8/1 9/1 10/1 11/1 12/1 1/1 2/1 3/1 4/1 5/1 6/1 $0.25 $0.20 Group 3 Diesel Seasonal Basis $0.15 $0.10 $0.05 $0.00 $0.05 $0.10 $0.15 $0.20 7/1 8/1 9/1 10/1 11/1 12/1 1/1 2/1 3/1 4/1 5/1 6/1

11 U.S. Diesel Stocks 180 Current 5-Year Min. 5-Year Max million barrels Days of Distillate Supplies 55 Current Year Prior Year

12 Crude oil $51 Energy Futures Price Curve Diesel $1.70 $50 $1.65 $49 $1.60 $48 $1.55 $47 $46 Crude oil Diesel $1.50 $1.45 $45 20 APR APR APR APR 2020 $1.40 Diesel Swaps Chicago Group

13 115 U.S. Propane Stocks Current 5-Year Min. 5-Year Max million barrels Days of Propane Supplies 135 Current Year Prior Year

14 Total Propane Supplied (Demand) thousand barrels per day Spot propane prices vs Crude oil Mid-Continent Propane Crude Oil $200 $180 $160 $140 $120 $100 $80 $60 $40 $20 $0

15 Ave rage 2017 Seasonal propane prices (Mont Belvieu, Texas) Average Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Seasonal propane prices (Conway, Kansas) Ave rage Average Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

16 CME Swaps Curve Mont Belvieu, TX wholesale price $0.64 $0.62 $0.60 per gallon $0.58 $0.56 $0.54 $0.52 $0.50 MAR May JLY Sep 17 Nov 18 Jan 18 Mar 18 May JLY Sep 18 Nov 19 Jan 19 Mar 19 May JLY Sep 19 Nov 20 Jan 20 Mar 20 May JLY Sep 20 Nov Source: CME Group $0.63 CME Swaps Curve Conway Kansas wholesale price $0.61 $0.59 $0.57 per gallon $0.55 $0.53 $0.51 $0.49 $0.47 $0.45 Source: CME Group