The NFiles: Nitrogen Lower Amid Uncertain Outlook

December 11, 2015 01:14 PM

12112015NH3

  • Anhydrous $73.59 below year-ago pricing -- higher 45 cents/st this week at $645.45.
  • Urea $71.63 below the same time last year -- lower $3.587/st this week to $410.91.
  • UAN28% is $27.84 below year-ago -- lower 19 cents/st this week to $293.77.
  • UAN32% is priced $32.34 below last year -- lower 15 cents/st this week at $317.94.

Nitrogen prices were generally lower this week although anhydrous firmed suggesting the price floor is not far off. Bear in mind our margin analysis, which has NH3 and UAN32% underpriced compared to urea and UAN28%. The implication is that urea and UAN may have run out of room to the downside and it is finally up to anhydrous to thin the nitrogen price margins from here. That means firmer anhydrous near-term.

12112015UANIf anhydrous does take the margin bull by the horns and thins the gap with price strength, that strength will be mild. The margins are already as thin as we have seen them for the life of the monitor so that might actually be a non-story. In other words, we may as close to nitrogen parity as we are going to get. Chinese urea producers have considered cutting urea production to prop up prices but other than that, there is little to indicate any nitrogen price firmness.

Three of our four nitrogen products moved by less than a dollar this week with urea down $3.45. If NH3 and UAN hold in place next week and urea decides to fall into parity it would mean urea has to fall just another 6 bucks to just shy of $405 per short ton. Given wholesale offers at NOLA, $405 is a real possibility however since U.S. urea prices are already 14% below last year -- compared to NH3's 10% falloff during the same period -- another 5 or 6 bucks to the downside might be a stretch. Especially given that tons are being diverted away from U.S. ports to Central and South America where urea fetches a premium to the U.S. import market.

12112015UreaOn the bright side, nitrogen is in good supply nationally and refill prices have been falling. So as dealers replenish what was applied in the fall, spring prices should be at least at the same price point, possibly below current prices. Lower prices by spring would buck the typical year's seasonal tendencies and a lot will depend on local availability and the amount of fall applied nitrogen in your crop district.

Our near term forecast, as you may have figured out already from the above, is uncertain. Fortunately, despite the uncertainty, we see very little that would spur prices sharply higher. We will wait for more than one nitrogen product to firm in our survey before we pull the trigger, and if 32% can break through the NH3 price, we suspect 28% may wind up priced below anhydrous as well. At that point in time, we will book UAN, be it 28% or 32%. No way do we want to book urea in a week like this when urea leads nitrogen declines. Next week will be telling and if urea continues lower, we will continue to wait out the downtrend.

One last thing on nitrogen. It bears mentioning that our expected new-crop revenue/NH3 spread is at the lowest level we have ever observed at just $5.50. That narrow spread indicates nitrogen is reflecting corn prices as closely as ever. That is due in part to last week's mild strength in corn futures which supported Dec 2016 futures above 4 bucks. If you have corn locked in at or above 4 bucks per bushel, anhydrous ammonia and UAN32% are affordable. Also note that this week, nitrogen is priced for $3.78 1/4 cash corn. That too is pretty close to NH3/corn price parity and it may be worth rewarding with some cash sales offset by nitrogen purchases for spring.

December 2016 corn closed at $4.03 on Friday, December 4. That places expected new-crop revenue (eNCR) per acre based on Dec '16 futures at $639.95 with the eNCR15/NH3 spread at 5.50 with NH3 at a premium to December 2016 corn futures. The spread narrowed 21.57 points on the week.

This week, the average cash corn price built-in to nitrogen prices is $3.78 1/2 per bushel.

Nitrogen pricing by pound of N 12/11/15

Anhydrous $N/lb

Urea $N/lb
UAN28 $N/lb
UAN32 $N/lb
Midwest Average
$0.39 1/2
$0.46
$0.52 1/4
$0.48 3/4
Year-ago
$0.44
$0.53 1/4
$0.57
$0.55

 

The Margins -- Anhydrous is still underpriced compared to UAN28% and urea but UAN32% has dipped below parity. NH3 shorts urea 1 1/2 cents by the pound of N; UAN28% is overpriced compared to anhydrous by 3/4 cent; UAN32% solution is 3/4 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 1/2 cents
0
0
Urea
NH3 5 cents
46 cents
7 cents
1 1/2 cents
UAN28%
NH3 12 cents
52 1/4 cents
12 3/4 cents
3/4 cent
UAN32%
NH3 10 cents
48 3/4 cents
9 1/4 cents
-3/4 cent

 

12112015NSpreads