The NFiles: Nitrogen Waives-off River Woes

January 7, 2016 12:51 PM

 

  • Anhydrous $117.30 below year-ago pricing -- lower $15.65/st this week at $602.76.
  • Urea $75.96 below the same time last year -- lower $3.94/st this week to $387.94.
  • UAN28% is $49.93 below year-ago -- lower $5.26/st this week to $280.72.
  • UAN32% is priced $44.38 below last year -- lower 21 cents/st this week at $313.31.

NH3Anhydrous ammonia was sharply lower this week, skewing our nitrogen margins just a bit, however, the margins remain thin and continue to suggest nitrogen prices are set to follow corn prices more closely near-term. Over the past few weeks, UAN has oscillated around parity with NH3 but this week, neither UAN nor urea could keep pace with anhydrous's downside charge. That means one of two things. Either anhydrous has overdone it to the downside and will reverse or UAN and urea will recognize their overpriced condition and soften to remedy the disparity.

Truth be told, with the spread between expected new-crop revenue and anhydrous prices narrowing to just 97 cents means that anhydrous is priced right in the ballpark according to December futures. Since the nitrogen margins are indeed very thin this week, the entire nitrogen segment is priced well according to December 2016 corn futures. We have long expected the narrowing of UANthe nitrogen spreads would also lead to a narrowing of the spread between expected new-crop revenue and anhydrous ammonia.

Farther down the road, we will keep this analysis in our back pocket and when nitrogen margins widen, we will take it as a clue that nitrogen is set to firm relative to December corn futures.

This week's declines in nitrogen come as river transport is hampered by near-record floods on the Mississippi River and elsewhere. This suggests dealers are well supplied and do not fear supply disruption based on the condition of the nation's waterways. As an example, South Dakota is down nearly $90 per short ton this week. That may be attributable to supplies imported from Canada, but Missouri should certainly be feeling a pinch if fertilizer dealers are concerned with taking deliveries of product to be transported via river. But Missouri anhydrous is $10 lower this week.

If anything has the power to inject a fear-premium into U.S. fertilizer prices it has to be River transport difficulties. A $16 decline in anhydrous this week along with decent declines across the board suggest U.S. retailers are well supplied and do not fear for refill.

ureaThin nitrogen product margins, a narrow new-crop revenue spread and a lower prices in the face of heightened river transport concerns all tell us nitrogen is as well supplied as any commodity right now, and we expect that trend to continue through spring applications. That will keep a lid on prices. Late winter demand for nitrogen including UAN and urea will likely support mild increases in nitrogen prices. We will book the remainder of our needs ahead of that potential price support.

Now is a good time to get caught up if you have not already with our advice to fill up to 50% of your expected spring and summer nitrogen needs. We do expect UAN to soften slightly in scattered locations but urea is a bit of a wild card since producers are muttering about trimming the global oversupply with production cuts. If you have not yet done so, book 50% of your spring/summer nitrogen at current prices and look to complete prebooking sometime in late February.

December 2016 corn closed at $3.97 on Friday, January 1. That places expected new-crop revenue (eNCR) per acre based on Dec '16 futures at $601.79 with the eNCR15/NH3 spread at 0.97 with NH3 at a premium to December 2016 corn futures. The spread narrowed 5.56 points on the week.

This week, the average cash corn price built-in to nitrogen prices is $3.61 per bushel.

Nitrogen pricing by pound of N 1/7/16

Anhydrous $N/lb

Urea $N/lb
UAN28 $N/lb
UAN32 $N/lb
Midwest Average
$0.37
$0.42 3/4
$0.50
$0.48 1/4
Year-ago
$0.44
$0.51 1/4
$0.59
$0.55 3/4

 

The Margins -- Anhydrous is once again underpriced compared to the rest of the nitrogen segment. NH3 shorts urea 3/4 cent by the pound of N; UAN28% is overpriced compared to anhydrous by 1 cent; UAN32% solution is 1 1/4 cent above NH3 on price.

Nitrogen
Expected Margin
Current Price by the Pound of N
Actual Margin This Week
Outstanding Spread
Anhydrous Ammonia (NH3)
0
37 cents
0
0
Urea
NH3 5 cents
42 3/4 cents
5 3/4 cents
3/4 cent
UAN28%
NH3 12 cents
50 cents
13 cents
1 cent
UAN32%
NH3 10 cents
48 1/4 cents
11 1/4 cents
1 1/4 cent

 

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