The NFiles: Crude Oil, the Dollar & Fertilizer Prices

February 11, 2016 12:33 PM
  • Anhydrous $129.80 below year-ago pricing -- lower $2.64/st this week at $583.96.
  • Urea $100.36 below the same time last year -- lower $2.04/st this week to $371.28.
  • UAN28% is $60.98 below year-ago -- higher 41 cents/st this week to $276.69.
  • UAN32% is priced $56.89 below last year -- unchanged this week at $310.33.

Nh3Nitrogen prices drifted lower again this week. Anhydrous and urea were both a few bucks lower regionally while UAN28% firmed slightly and state-by-state gains and declines resulted in unchanged 32%. All of our nitrogen products this week are priced below this week's expected new-crop revenue, however giving corn farmers some much needed budget relief.

Nitrogen and other fertilizers are under pressure from bulging global and U.S. stocks, weak demand and general commodity market weakness. Nitrogen is bucking the seasonal trend which historically has placed a price low around the end of January. Anhydrous and UAN have given clues that prices will bottom near-term, but our analysis this week suggests crude oil market softness is reflected in nitrogen prices.

We compared anhydrous and potash to WTI crude oil futures and found that both NH3 and K began to fall about one month after WTI began its second major leg lower in July 2015. NH3K_CrudeIt could be said that increased crude oil production has led to increased natural gas production which incentivized global N production. There are rumors of a pending global natural gas price war much like the one currently underway in crude markets which would place more pressure on nitrogen fertilizer prices.

We also compared our Nutrient Composite Index (NCI) to both WTI futures and the U.S. dollar index. Our NCI comparison showed a vaguely inverse relationship with the dollar and a better reflection of WTI price action. That is because our NCI includes urea and phosphates which are imported from outside North America to a greater degree than potash and NH3.

UANThis week, we note softness in the U.S. dollar and market watchers are looking for a test of support around 95 for the greenback. Meanwhile, March crude oil futures opened today below $28.00 and proceeded to fade into $26.00 territory. Unknown how long crude oil futures will stay below $30.00 per barrel. We expect crude to find a ten dollar-wide trading range and stay within it. Once crude breaks to the upside and establishes a new range, fertilizer prices may respond higher, especially if at the same time the dollar posts significant declines.

In the meantime, nitrogen manufacturers will benefit from low-priced U.S. natural gas. The United States is set to increase national nitrogen production capacity by roughly 35% in the next two years which will likely have a greater impact on domestic nitrogen pricing than any outside market, including the dollar, WTI and even corn. In fact, experts believe U.S. nitrogen production, which has been in decline since the mid-1990's, will soon outpace U.S. demand. UreaFertilizer prices have been slow to draft lower on commodity softness, but will likely be quick to firm on a sustained commodity sector rally.

Be ready to book spring/summer nitrogen soon. The seasonals suggest the bottom is right around the corner. But pressures from sagging commodities may continue to weigh on fertilizer prices right up through the spring thaw. We will wait on confirmation of a low before we book for spring applications.

December 2016 corn closed at $3.89 on Friday, February 5. That places expected new-crop revenue (eNCR) per acre based on Dec '16 futures at $611.88 with the eNCR15/NH3 spread at -27.92 with NH3 at a premium to December 2016 corn futures. The spread narrowed 4.08 points on the week.

This week, the average cash corn price built-in to nitrogen prices is $3.47 3/4 per bushel.

Nitrogen pricing by pound of N 2/11/15

Anhydrous $N/lb

Urea $N/lb
UAN28 $N/lb
UAN32 $N/lb
Midwest Average
$0.35 1/2
$0.41
$0.48 1/2
$0.48
Year-ago
$0.43 1/4
$0.52
$0.59 3/4
$0.57

 

The Margins -- Anhydrous is underpriced compared to the rest of the nitrogen segment. NH3 shorts urea 1/2 cent by the pound of N; UAN28% is overpriced compared to anhydrous by 1 cent; UAN32% solution is 2 1/2 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
35 1/2 cents
0
0
Urea
NH3 5 cents
41 cents
5 1/2 cents
1/2 cent
UAN28%
NH3 12 cents
48 1/2 cents
13 cents
1 cent
UAN32%
NH3 10 cents
48 cents
12 1/2 cents
2 1/2 cents

 

Index