The NFiles: Nitrogen Margins Continue to Narrow

October 29, 2015 10:17 AM

 

  • Anhydrous $78.64 below year-ago pricing -- lower $1.69/st this week at $651.07.
  • Urea $71.44 below the same time last year -- lower 88 cents/st this week to $420.57.
  • UAN28% is $26.32 below year-ago -- lower $4.95/st this week to $295.04.
  • UAN32% is priced $29.63 below last year -- higher $2.63/st this week at $324.05.

10292015NH_StoryNitrogen prices were lower overall although UAN32% did firm slightly on the week. That moved 32% out of parity with anhydrous ammonia by about a half cent, but 28% did inch closer to parity and both UAN solutions are now priced just 1/2 cent above expected margins. Still not too shabby. The margins are currently as narrow as we have seen them in quite some time and that generally indicates nitrogen will more closely follow the price path of U.S. corn.

Midwestern temperatures dipped sharply this week with some northern areas getting a little snow on Wednesday. That will help to cool soil temperatures and will likely bring anhydrous buyers to market for fall applications. Last fall's applications were below average. This year, retailers expect fall NH3 applications to rise above last year's to a more normal season. Longer term, anhydrous demand may shift to UAN or urea with an emphasis on sidedress rather than large preplant applications. That is due to an increasingly hostile regulatory view of anhydrous, legislation regarding compliance via Positive Train Control regulations and safety concerns on the farm.

10292015UANStoryWe have seen OSHA propose to firm its anhydrous safety policies in North Dakota and we have heard similar mutterings out of Missouri and other states. We have referred to anhydrous as something of a boutique product that is used mainly here in the United States, and if the regulatory environment continues to sour on NH3 transport and distribution, prices will have to respond higher to compensate transporters and distributors for mandated system upgrades. In other words, anhydrous prices may begin to swell in the coming years compared to other forms of nitrogen. Our margin analysis will let us know when that begins to happen and will likely spur demand for UAN and urea.

Chinese urea production is reportedly slowing, and Egypt is struggling once again with natural gas supplies. Between increased NH3 regulations and continuing reliance on imported UAN from Egypt and North Africa, nitrogen prices are expected to firm between now and spring although we do not yet believe the annual price low is in. Next week may confirm the floor for us, but presently, anhydrous still has a little room left to soften regionally. As we have said before, book nitrogen for fall if you can find a bid at $600 or lower per short ton. $625 would even do the trick. December 2016 corn futures are gradually firming and since we believe growers will fill their nitrogen needs first and P&K second, demand prospects for fall N are improving.

10292015UreaStoryAcreage projections for corn are climbing slightly and many expect at least a 1-2.5 million acre increase in corn plantings this spring at the expense of soybean and wheat acres. That also levers for anhydrous demand both in fall and spring, although some spring demand will shift to UAN and urea.

December 2016 corn closed at $4.03 on Friday, October 23. That places expected new-crop revenue (eNCR) per acre based on Dec '16 futures at $635.04 with the eNCR15/NH3 spread at 16.03 with NH3 at a premium to December 2016 corn futures. The spread narrowed 0.01 points on the week.

This week, the average cash corn price built-in to nitrogen prices is $3.83 1/2 per bushel.

Nitrogen pricing by pound of N 10/29/15

Anhydrous $N/lb

Urea $N/lb
UAN28 $N/lb
UAN32 $N/lb
Midwest Average
$0.40
$0.47
$0.52 1/2
$0.50 1/2
Year-ago
$0.45
$0.54 1/4
$0.57
$0.55 1/4

 

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

Nitrogen
Expected Margin
Current Price by the Pound of N
Actual Margin This Week
Outstanding Spread
Anhydrous Ammonia (NH3)
0
40 cents
0
0
Urea
NH3 5 cents
47 cents
7 cents
2 cents
UAN28%
NH3 12 cents
52 1/2 cents
12 1/2 cents
1/2 cent
UAN32%
NH3 10 cents
50 1/2 cents
10 1/2 cents
1/2 cent

 

10292015NitrogenIndexStory