The first question a lot of farmers ask me when I talk to them is, "When will fertilizer prices come down?". The truth is, they have, but only slightly since the same time last year. The more important question is, "How close are fertilizer prices to corn prices?". the graph below details the year-to-year price comparisons of our seven nutrients and two fuels along with expected new-crop revenue.
The average percent of change on fertilizers according our our survey is -6.38% since September 22, 2014. Meanwhile, expected new-crop revenue based on new-crop December futures has increased 11.8%. On paper, that would sound like a great improvement in the spread between corn returns and fertilizer prices, but since corn prices have been soft, and fertilizer prices have been high, the combined 18.18% change in that relationship still isn't enough to have filled the gap completely.
Part of the reason for increases in expected new-crop revenue is a firmer trendline yield figure. In 2014 we were using 165 bu per acre as our trendline national average yield. In 2015, we bumped that number up to 167 to account for the prior year's high national average yield. In other words, part of the increase in new-crop revenue was due to higher volumes harvested per acre as well as slightly higher December futures prices.
But compared to our nutrient composite index, there is still some work for corn and fertilizer prices to do. In the graph below, the blue bar represents last year's price as of September 22, 2104 and the red line is our current price as of the week ended September 18, 2015.
Anhydrous ammonia fell 5.82% over the past year and is currently at $660.96 per short ton regionally. In both years we note that Michigan prices were the highest in our survey priced at $802.97 in Sept. 2014 and at $724.00 in the current week. From year-to-year, Kansas has been our low water mark on NH3 price, and the difference between the Michigan's high and the Kansas price in 2014 was $121.60. This week, that difference is larger at $143.29.
That is a symptom of higher demand for nitrogen in the eastern Corn Belt than in the west as persistent rains kept nitrogen demand alive well into the early summer. It is also worth noting that western growers, especially those in Nebraska and western Iowa were able to apply sufficient anhydrous in the fall to soften demand for spring anhydrous. Michigan prices didn't fall below that level until early January 2015 suggesting Michigan NH3 prices are not likely to fall near-term and may not fall much when they do.
It is important to note that over the past year, anhydrous bottomed in late August to early September and then firmed roughly $20 by the short ton regionally and stayed there until the end of summer 2015. That suggests the time to book anhydrous for fall and for spring is now.
UAN solutions are mixed year-on-year with 28% falling 8.04% and 32% falling just 0.37% during the same period. Here again we see the impacts of late season nitrogen demand in response to rains washing nitrogen away and growers looking for a potent solution to N loss. As with anhydrous, we have observed that UAN tends to bottom ahead of harvest and firm from there. We have advised to book a portion of UAN for spring at current prices.
Urea fell the most sharply of all of our nutrients, skidding 13.34% over the past year. This is due to strong imports from China but also the notion that urea spent much of 2014 wildly overpriced. Since China changed their export tax from a split annual tax to flat, importers in the U.S. have taken advantage and booked more urea throughout the year. That has led to lower prices. The devaluation of the yuan may continue to pressure prices, and as dealers restock urea, those who book a greater amount of imported product than domestically produced urea will be able to offer a lower price.
Phosphates have fallen about the same amount over the past year as anhydrous with DAP down 5.27% and MAP down 5.14%. An acid shortage and high sulfur and ammonia prices propped phosphate prices up. Those feedstock prices have slipped and while the acid shortage remains, U.S. phosphate producer MosaicCo. said in a press release this week that they would not raise their domestic phosphate production levels due to projected demand softness. Phosphate prices are extremely uncertain, and as U.S. producers continue to place production risk on foreign sources, prices will be dependent on imported vales which are likely to firm through the winter once the Mississippi River shipping lanes close for the season.
Potash has been priced at the bottom of our survey for almost the entire year and the graph expresses a 6.69% decline year-on-year. MosaicCo. also noted it will mothball a Saskatchewan potash project and cut K production, again on weak projected demand from farmers. In this case, Michigan and other eastern Belt growers enjoy a lower price than western farmers. Nebraska, North Dakota and Kansas are all priced above Michigan, Ohio and Indiana. Even Iowa and Illinois are priced above eastern Belt potash. If eastern growers take advantage of the lower local prices on potash, soil K levels will be cheaper to replenish which levers for healthier plant growth.
Potash has trended sharply lower over the past few weeks and will likely hold around our current $450 per short ton through the winter months.
Fuels have given growers something to celebrate. Farm diesel is down 38.18% from the prior year on robust distillate production, weal global demand for diesel and lower WTI crude oil prices. We have relied heavily on our heating oil/farm diesel spread to indicate market moves and we currently see no reason to over extend on diesel. We have, however booked 30% for spring delivery as WTI prices are expected to firm into 2016.
Propane has fallen by about the same amount, down 34.19% on the year. That is due to extremely high national propane supplies in national storage. Growers have been skittish about propane since the 2013-14 price spikes, and for good reason. That led many to seek opportunities during the summer to fill storage on the farm. As this growing season has gone on, the weather finally dried out, and early reports are that harvested corn will require very little propane to dry.
That helps us out with next year however as we expect next year's offseason LP price to be above this year's. Since propane does not go bad in the tank, supplies booked at this year's low price will still be good to go next time farmers need it.
Our Nutrient Composite Index affirms what the individual nutrients are telling us... fertilizer and corn have some work to do before they come together. Firmer corn prices have done most of the work year-on-year to thin the revenue gap, and our NCI/New-crop revenue spread is thin this week at roughly $25.00. We expect that figure to equal zero as an indication that fertilizer prices are reflecting the realities of corn prices.
So there you have it. Corn prices have come up and fertilizer prices have fallen... but there is more work to be done on both ends to encourage farmers to be willing buyers of a full compliment of nutrient for the upcoming crop. We expect growers will sit on their hands as long as they dare, as they did last year. Industry experts expect neutral pricing on nutrient with a mild bearish bias.
Historically, we have seen opportunities just ahead of harvest and just after the the first of the year. Margins may be tight again next year, as they have been for quite awhile now, and that will mean paying extra attention to cutting costs without adding significant risk to the crop.