The NFiles: Disparity in an Imperfect World

December 18, 2015 11:53 AM

12182015NH3

  • Anhydrous $77.25 below year-ago pricing -- lower $3.74/st this week at $641.72.
  • Urea $61.90 below the same time last year -- higher $1.36/st this week to $412.26.
  • UAN28% is $37.60 below year-ago -- lower -$5.11/st this week to $288.67.
  • UAN32% is priced $40.06 below last year -- lower $1.73/st this week at $316.21.

Declines outpaced gains in this week's nitrogen price action led by lower UAN28%. Anhydrous ammonia has been rangebound between $640 and $650 for several weeks now and both UAN32% and 28% have dipped below parity with NH3. Urea led gains in our fertilizer survey this week, extending its premium to NH3 back to 2 cents. That may mean that urea has some room to fall, but Chinese producers are looking to trim the global urea oversupply so we suspect the bottom may already be in for urea although if that is the case, and we believe nitrogen margins must arrive at perfect parity near-term, that means NH3 and UAN have overdone the downward price slide.

12182015UANPerfect parity, however, is more of a technical "perfect world" scenario. Nitrogen has proven it does not have to achieve perfect parity in order to thin the margins far enough to allow a better reflection of corn returns. Late in this week, corn prices are giving us some hope for a sustained rally although many believe traders are evening positions ahead of the end of the year, adding support from fund activity. If short-covering is to thank for this week's strong finish, it may be short-lived. Adding to strength in both corn and beans is word that the weather is not cooperating in parts of South America, which may result in lower yields.

We have maintained for several months that resolving the disparity between corn and fertilizer prices will be up to firmer corn futures. So far, nitrogen has done its part to improve its price relationship with corn. It will be important to crunch the numbers carefully when purchasing nitrogen for the 2016 crop and knowing what corn price you must sell at in order to maintain profitability. We have just wrapped up Pro Farmer's Quarterly Grain report which includes a page from the Inputs Monitor. In that 12182015Ureareport, we wade into dangerous waters by including target prices for fertilizer. In case you miss that report, we are targeting Anhydrous to bottom at $635; We are targeting UAN28% at $280 and 32% at $305; Urea should bottom around $400 although urea is the least bearish product in our nitrogen segment and the bottom may already be in.

December 2016 corn closed at $3.96 on Friday, December 11. That places expected new-crop revenue (eNCR) per acre based on Dec '16 futures at $628.10 with the eNCR15/NH3 spread at 13.62 with NH3 at a premium to December 2016 corn futures. The spread widened 8.12 points on the week.

This week, the average cash corn price built-in to nitrogen prices is $3.79 3/4 per bushel.

Nitrogen pricing by pound of N 12/18/15

Anhydrous $N/lb

Urea $N/lb
UAN28 $N/lb
UAN32 $N/lb
Midwest Average
$0.39
$0.46
$0.50 3/4
$0.48 1/2
Year-ago
$0.43 3/4
$0.52 1/2
$0.57 3/4
$0.55 1/2

 

The Margins -- Anhydrous is still underpriced compared to urea but UAN32% and UAN28% have dipped below parity. NH3 shorts urea 2 cents by the pound of N; UAN28% is underpriced compared to anhydrous by 1/4 cent; UAN32% solution is 1/2 cent below NH3 on price.

Nitrogen
Expected Margin
Current Price by the Pound of N
Actual Margin This Week
Outstanding Spread
Anhydrous Ammonia (NH3)
0
39 cents
0
0
Urea
NH3 5 cents
46 cents
7 cents
2 cents
UAN28%
NH3 12 cents
50 3/4 cents
11 3/4 cents
-1/4 cent
UAN32%
NH3 10 cents
48 1/2 cents
9 1/2 cents
-1/2 cent

 

121802015NIndexes