The NFiles: Nitrogen Flying in Formation at Value Levels

February 5, 2016 10:34 AM
  • Anhydrous $126.16 below year-ago pricing -- lower $5.11/st this week at $586.60.
  • Urea $101.14 below the same time last year -- higher 31 cents/st this week to $373.33.
  • UAN28% is $60.15 below year-ago -- lower 46 cents/st this week to $276.28.
  • UAN32% is priced $53.76 below last year -- lower $1.72/st this week at $310.33.

AnhydrousOur nitrogen margins fell apart a bit this week with urea and UAN32% more than 2 cents per pound of N above this week's lower anhydrous price. Based on the fundamentals, nitrogen prices should continue slightly lower near-term but the time is fast approaching for prices to bottom seasonally.

Supplies in the U.S. ended 2015 above the previous year. This marks the fifth consecutive year of supply increases. The more than ample supplies will limit upside risk, but as farmers pre-book for spring, demand will likely buttress prices.

Reports have surfaced that Chinese fertilizer production -- including urea and phosphate -- has risen 92% in the past two years. Russian UAN exports have increased, and global ammonia supplies are robust as well. There is some concern that if crude oil and other commodities find price strength, fertilizer will follow. Crude oil prices have firmed in spite of strong inventory builds lately suggesting fund money and chart watchers are driving crude price action.

FormationBut other commodities have struggled to maintain strength which should have a greater impact on fertilizer prices. March corn failed to hold above $3.70 this week and while we do not believe fertilizer prices are following corn prices blindly, we are coming to view the two as flying in formation. Fertilizer does not follow corn exactly, but anhydrous has shown the tendency to follow corn's general price path. Having said that, understand that the formation flown by corn and fertilizer is a very loose formation. At times, expected new-crop revenue has been as much as $120 above fertilizer costs, and currently has flipped to new-crop revenue at a $32.00 discount to fertilizer.

UANThat is why we watch our nitrogen margins so closely. As we have said many times, our belief is that when the per pound of N prices of anhydrous, UAN and urea are close together, the segment is more apt to fly in tight formation with corn. When those margins fall apart, so do the margins between new-crop corn and nitrogen.

As I am writing this, I have anhydrous and potash charts imposed over a WTI chart, looking to see if WTI is part of that loose formation. Since mid-October 2015, potash and anhydrous have also traced a path similar to crude oil. The relationship between potash and WTI crude during that period is striking. But I believe, since we have not seen WTI flying in that formation until October 2015 for the life of our price survey, it is merely a sign of crude oil's current leadership role in global commodity pricing.

UresaYour takeaway here is pretty straightforward. Nitrogen will follow corn when the nitrogen product margins are narrow, creating a context for the corn/nitrogen price path. With nitrogen prices currently below new-crop returns, consider nitrogen a value. Take advantage of rallies in corn when new-crop is at a premium to nitrogen. Then, lock in those nitrogen prices at the time of your sale. This strategy will work out even better if one reowns those sales on paper to protect a particular corn price point. That way, you have locked the formation in time and price and can assure a profitable growing season.

December 2016 corn closed at $3.93 on Friday, January 29. That places expected new-crop revenue (eNCR) per acre based on Dec '16 futures at $618.60 with the eNCR15/NH3 spread at -32.00 with NH3 at a premium to December 2016 corn futures. The spread widened 12.85 points on the week.

This week, the average cash corn price built-in to nitrogen prices is $3.48 1/2 per bushel.

Nitrogen pricing by pound of N 2/4/15

Anhydrous $N/lb

Urea $N/lb
UAN28 $N/lb
UAN32 $N/lb
Midwest Average
$0.35 1/2
$0.41 1/4
$0.48 1/2
$0.43 1/4
$0.52 1/2
$0.59 1/2
$0.56 1/2

The Margins -- Anhydrous is underpriced compared to the rest of the nitrogen segment. NH3 shorts urea 2 3/4 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.

Expected Margin
Current Price by the Pound of N
Actual Margin This Week
Outstanding Spread
Anhydrous Ammonia (NH3)
35 1/2 cents
NH3 5 cents
41 1/4 cents
7 3/4 cents
2 3/4 cents
NH3 12 cents
48 1/2 cents
13 cents
1 cent
NH3 10 cents
48 cents
12 1/2 cents
2 1/2 cents