US Harvest Delays Increase Energy Demand

Farmers are facing more complicated decisions this harvest season because of crop delays. Corn and soybean harvests are progressing at the slowest pace since 2009. As of October 6th, the US corn crop was only 15% harvested and soybeans were just 14% harvested, compared to their respective five-year averages of 27% and 34%. This means there are more than 60 million acres of both corn and soybeans still sitting in the fields. Some of these crops are not even mature, let alone dried to a desired moisture level. September allowed for an extended growing season with generally favorable weather. However, as October progresses, the forecast has become less friendly for crop development and harvest. Cooler temperatures are moving in, with freezing already occurring in the Northern Plains. Winter weather will add challenges to harvesting the already wet crops and could negatively impact logistics for delivering propane when it is needed most.

In years like this, farmers tend to harvest crops at higher moisture levels rather than letting them naturally dry to the desired level in the fields. Crops could be left in the field possibly until spring, but leaving crops in the field can result in losses due to wind, snow, and ice. Estimates for field losses for March and April harvests are uncertain but range anywhere from 7% to 65%. Alternatively, crops could be harvested now and dried with rapid heat-drying systems. Farmers will have to decide if the potential yield loss from leaving crops in the fields is less than harvesting and spending the money to dry their crops.

The two most important variables that determine the cost of drying crops are energy prices and the moisture level of the crops. Instead of leaving the crops through the winter, many farmers will harvest this fall, before the crops have dried to adequate moisture levels. When corn reaches maturity, the moisture content is around 30%. Ideally, the farmer then lets the crop dry naturally in the field down to at least 25%, at which point corn is more easily harvested (see Figure 1). Corn must then be dried down to 15% to reach most buyers’ specifications, or the farmer will receive a discounted price. If moisture levels are too high, above 20% for example, there may not be anyone who is willing to buy the grain. For soybeans, moisture is usually capped at 13% in order to avoid a price discount. Farmers also must be cautious not to overdry because that increases cost and could end up lowering the value of their grain through lowered test weights. Still, if farmers have invested in driers and are able to dry their own crops, they are usually better off doing so than selling at discounted prices, and in many cases, they will have no choice this year due to the wet crops.

Fortunately, this year there are opportunities to take advantage of relatively low energy prices, which should help to ease the pain of the harvest delays and high moisture crops. A general rule of thumb is to multiply the propane price per gallon by 0.022 for each point of moisture that needs to be removed. Using an example of cash prices for propane in Central Illinois of USD 1.00/gal, this equates to roughly USD 0.02/bu per point of moisture. For example, if a farmer has corn at 25% moisture and wants to dry it to 15%, it would cost USD 0.22/bu (USD 1.00 x 0.022 x10) (see Figure 2). If the price of propane doubles to USD 2.00/gal, drying costs move up to USD 0.44/bu. These are just rough estimates because other variables, such as outside air temperatures, play into the equation, making each farmers’ situation different.

Depot propane prices have not traded below USD 0.50/gal since 2016. Record production of US propane and natural gas has driven spot prices to multi-year lows in recent weeks (see Figure 3). While the supply growth has been impressive, Rabobank expects the market risk to shift to the upside for prices, as rapidly increasing export capacity keeps the forward balances tight. Further upside risks from weather are also a key factor. Current forecasts are calling for an early cold shot in the Midwest, which could spur a short covering rally in both heating fuels.