The NFiles: Anhydrous Narrows N Margins

January 27, 2016 03:44 PM
  • Anhydrous $121.90 below year-ago pricing -- higher $4.01/st this week at $591.70.
  • Urea $94.36 below the same time last year -- lower $5.64/st this week to $373.01.
  • UAN28% is $55.94 below year-ago -- lower 64 cents/st this week to $276.74.
  • UAN32% is priced $49.49 below last year -- lower 88 cents/st this week at $312.05.

NH3SpreadThe premium UAN and urea have held to anhydrous has been conspicuous in our analysis leaving us to speculate whether UAN and urea would soften to align with anhydrous or if it would be the other way around. This week narrowed the margins between our nitrogen products on the basis of anhydrous price strength. Much of the strength in the average NH3 price however was due to an $85 bump in South Dakota prices. But half of the states in our survey ticked at least mildly higher while only two states posted a lower NH3 price. That suggests the bottom may be in for anhydrous.

Lagging international demand is currently weighing on UAN and urea prices. That along with a global supply overhang is expected to limit UAN and urea price strength heading into spring applications. The main concern for spring prices -- and it is not a huge concern -- is transport and distribution. In areas where dealers have been slow to fill inventories, a supply crunch could support higher prices, but in general, we do not expect a problem.

UANEven with firmer anhydrous, nitrogen across the board is priced very favorably when compared to expected new-crop revenue. The average adjusted price for our nitrogen products is $18.72 below this week's expected new-crop revenue per acre. UAN32% is the highest priced form of nitrogen in our survey this week as UAN28% and urea each edged 1/4 cent toward parity with NH3. Thin nitrogen margins suggest nitrogen is better able to reflect corn prices and if nitrogen wants to be priced as much as $25 below new-crop revenue, we are not complaining, but it does argue against the thin N margins equal a better reflection of corn prices theory.

Inputs Monitor data shows a similar series of price moves in October 2013. The margins had spent nearly a year working toward parity, and anhydrous ammonia fell below expected new-crop revenue. From there, the margins almost immediately completely fell apart and urea skyrocketed. Nitrogen has been working on repairing the margins ever since.

UreaBefore anhydrous fell below expected new-crop revenue in 2013, nitrogen margins were thin for almost a year when UAN, urea and anhydrous followed corn prices very closely. This week may mark a turning point for nitrogen and its relationship to corn prices, but since this week's firmer anhydrous price is due mostly to extreme price strength in South Dakota, we may see NH3's downtrend resume next week.

December 2016 corn closed at $3.92 on Friday, January 22. That places expected new-crop revenue (eNCR) per acre based on Dec '16 futures at $616.92 with the eNCR15/NH3 spread at -25.42 with NH3 at a premium to December 2016 corn futures. The spread widened 7.95 points on the week.

This week, the average cash corn price built-in to nitrogen prices is $3.49 3/4 per bushel.

Nitrogen pricing by pound of N 1/27/15

Anhydrous $N/lb

Urea $N/lb
UAN28 $N/lb
UAN32 $N/lb
Midwest Average
$0.36
$0.41 1/4
$0.48 3/4
$0.48 1/4
Year-ago
$0.43 1/4
$0.51 3/4
$0.57 1/4
$0.56

 

The Margins -- Anhydrous is underpriced compared to the rest of the nitrogen segment. NH3 shorts urea 1/4 cent by the pound of N; UAN28% is overpriced compared to anhydrous by 3/4 cent; UAN32% solution is 2 1/4 cents above NH3 on price.

Nitrogen
Expected Margin
Current Price by the Pound of N
Actual Margin This Week
Outstanding Spread
Anhydrous Ammonia (NH3)
0
36 cents
0
0
Urea
NH3 5 cents
41 1/4 cents
5 1/4 cents
1/4 cent
UAN28%
NH3 12 cents
48 3/4 cents
12 3/4 cents
3/4 cent
UAN32%
NH3 10 cents
48 1/4 cents
12 1/4 cents
2 1/4 cents

 

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