High fuel costs could last Diesel and propane may not get much cheaper in 2019 By Bryce Knorr, senior grain market analyst

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1 High fuel costs could last Diesel and propane may not get much cheaper in 2019 By Bryce Knorr, senior grain market analyst In July I recommended using a dip in the energy market to lock in propane for fall drying and step up diesel coverage to two-thirds of harvest needs. Despite a modest pullback in crude oil Wednesday, those prices look cheap compared to where the petroleum market is at today. For buyers needing fuel, bargains may be hard to come by. And the pain at the pump could continue into Based on current fundamentals of global supply and demand, crude oil could average $64.67 next year, just $1.50 cheaper than in That means farmgate diesel could average nearly $2.50 a gallon in And without a prolonged downturn in crude, costs may not get much lower than that to provide real buying opportunities. Of course, crude is a volatile market that trades in wide ranges some years. It s traded in a range of $17 this year but lows were made in February. Since then, futures have risen more or less steadily depending on the news flow out of OPEC and its allies. China swung the market this week. New retaliatory sanctions were expected to be placed on imports of U.S. crude and trade data showed Chinese imports already slowing in July. But the U.S. is such a major producer now that China couldn t ignore our supply. It sanctioned products like diesel and gasoline, but not the crude its refineries need. Saudi Arabia also appears to be having trouble boosting production and trouble spots remain around the world, including Libya and Venezuela. The latest forecasts show world inventories tightening more in the year ahead, making pullbacks difficult until the news flow turns bearish. A meltdown in financial markets could accomplish that goal. But U.S. sanctions on Iran and Russia may make it harder for those countries to operate, though both desperately need petrodollars. A warm El Nino winter in the U.S. could ultimately benefit growers if less heating oil gets burned, increasing supplies of distillates. Winter normally is the best time to book diesel anyway because farmers here aren t using as much. In the short run, weather could cut the other way. Hurricane Harvey disrupted supplies of fuel from the Texas Gulf a yea ago, and its impact is still being felt in the propane market. The Texas benchmark for propane continues to run nearly 20 cents a gallon higher than costs out of the Conway, Kansas hub. Propane appears to making its seasonal run higher into the heating season, with only limited buying opportunities available now. The strong feel to the petroleum market has helped growers on the revenue side of their income statements. Ethanol remains at a significant discount to gasoline, supporting blending and keeping production strong. Plants churned out near-record amounts of the biofuel last week, though that increased supplies and kept ethanol prices on the defensive.

2 Crude Oil Commitment of Traders - Crude Oil ,000,000 2,500,000 2,000,000 1,500,000 1,000, ,000 - Crude Oil Open Interest net position long/short Crude Oil Futures and Options Managed Money Crude Oil Futures $ $ $ $ $ $20 0 1/1/2014 1/1/2015 1/1/2016 1/1/2017 1/1/2018 $0 Source: CFTC, NYME/CME

3 thousand barrels/day U.S. CRUDE OIL PRODUCTION AND RIG COUNTS Production Rig Counts Source: U.S. EIA, Baker-Hughes oil and gas rigs 550 U.S. CRUDE OIL STOCKS Current 5-Year Min. 5-Year Max. million barrels

4 Stocks WEEKLY ETHANOL PRODUCTION AND STOCKS Production 1150 thousand barrels thousand barrels/day /1/16 11/1/16 1/1/17 3/1/17 5/1/17 7/1/17 9/1/17 11/1/17 1/1/18 3/1/18 5/1/18 7/1/18 Ending stocks Daily Production 2.95 ETHANOL PRODUCTION GALLONS FROM EACH BUSHEL USED Sep 14 Jan 15 May 15 Sep 15 Jan 16 May 16 Sep 16 Jan 17 May 17 Sep 17 Jan 18 May 18

5 Average Corn Belt Ethanol Plant Margins $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 $0.50 $1.00 Average Corn Belt Ethanol Prices $2.40 $2.20 $2.00 $1.80 $1.60 $1.40 $1.20 $1.00

6 U.S. GASOLINE STOCKS 270 Current 5-Year Min. 5-Year Max. 250 million barrels DAYS OF GASOLINE SUPPLIES Current Year Prior Year

7 REFINERY CAPACITY UTILIZATION 100 Current Year Prior Year 95 per cent TOTAL PETROLEUM PRODUCT EXPORTS thousand barrels per day

8 thousand barrels MIDWEST DIESEL Stocks Production thousand barrels/day

9 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 MID CONTINENT DIESEL SEASONAL BASIS $ $0.15 $0.10 cents/gal $0.05 $0.00 $0.05 $0.10 $0.15 7/5 8/5 9/5 10/5 11/5 12/5 1/5 2/5 3/5 4/5 5/5 6/5

10 330 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 $0.15 $0.10 GROUP 3 DIESEL SEASONAL BASIS $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

12 Crude oil $72 $67 ENERGY FUTURES PRICE CURVE Diesel $2.30 $2.20 $62 $2.10 $2.00 $57 $52 Crude oil Diesel $1.90 $1.80 $47 Aug 2018 Aug 2019 Aug 2020 Aug 2021 $ DIESEL SWAPS Mid Continent Group

13 U.S. PROPANE STOCKS 115 Current 5-Year Min. 5-Year Max million barrels DAYS OF PROPANE SUPPLIES

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

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

16 CME Swaps Curve Mont Belvieu, TX wholesale price $1.00 $0.95 $0.90 $0.85 $0.80 $0.75 $0.70 $0.65 $0.60 $0.55 $ Aug 18 Nov 19 Feb 19 May 19 Aug 19 Nov 20 Feb 20 May 20 Aug 20 Nov 21 Feb 21 May 21 Aug 21 Nov 22 Feb 22 May 22 Aug 22 Nov per gallon Source: CME Group CME Swaps Curve Conway Kansas wholesale price per gallon $0.95 $0.90 $0.85 $0.80 $0.75 $0.70 $0.65 $0.60 $0.55 $0.50 $0.45 Source: CME Group