The NFiles: Seasonals Betray Murky Market's Intent

February 26, 2016 10:16 AM

 

  • Anhydrous $147.07 below year-ago pricing -- lower $15.60/st this week at $565.25.
  • Urea $113.49 below the same time last year -- lower $5.23/st this week to $360.16.
  • UAN28% is $69.40 below year-ago -- lower $5.19/st this week to $268.36.
  • UAN32% is priced $66.73 below last year -- lower $5.39/st this week at $303.26.

 

NH3We booked diesel earlier this week for spring/summer fieldwork at what the fundamentals suggest could be the seasonal diesel low. Part of the reason we pulled the trigger was in response to reports of wheels turning in the deep south. A farmer from Texas even tweeted he has corn emerged already. Since both farm diesel and fertilizer have been spiraling downward since harvest based on price-negative fundamentals, we have anticipated spring demand would be the impetus for higher prices.

Indications are strong that the downtrend has already come to an end. Since prices are so low compared to last year and to expected new-crop revenue, we have some breathing room on price. That being the case we will wait to see if we get a "V" bottom in fertilizer next week. To be honest, with or without that V on the chart, we are inclined to book early next week. Based on price movements from years past, we are overdue for a seasonal rally in fertilizer prices, and with spring fieldwork underway already, we believe there is nothing more that needs to happen in order for prices to place a definitive price floor.

UreaWholesale urea values have jumped as much as $55 since placing a low on the wholesale end a few weeks ago. Urea has been a leader in the nitrogen segment. Price strength in urea will likely add at least mild support to UAN and anhydrous. Our nitrogen margins have loosened slightly over the past week which may be an indication that nitrogen will firm although thinner margins have been more an indication of nitrogen's relationship to corn prices than nitrogen price moves.

There are a million ways to look at nitrogen price potential but in the end it really comes down to a gut feeling that prices will bounce next week. Factors are loading up for nitrogen sellers to take advantage of seasonal demand strength in a year when most fertilizer producers are playing prevent defense, and will struggle to maintain returns to shareholders.

The outside markets are a mixed bag, which muddies the waters a bit. April crude oil futures are creeping higher. Crude oil has gotten a lot of the credit for the slide in the commodity sector and for the past few months, a case can be made that fertilizer has followed that trend. Firmer crude oil does not necessarily mean nitrogen prices will firm as part of general commodity price strength, but there is a chance that nitrogen prices will draft higher on a WTI bounce.

This week, we have seen the opposite response in grain markets with corn beans and wheat under pressure for most of the week. Meanwhile, natural gas is testing long time lows of its own, opening Friday at $1.78. If domestic nitrogen producers can lock in low natural gas feedstock prices, U.S. nitrogen prices will fall down the road, but the nitrogen on the market right now was manufactured with much more expensive natural gas, which suggests the industry may already be eyeing a price hike near-term.

UAN I strongly believe nitrogen's downtrend has been exhausted and fresh demand news is all the segment needs to justify some price discovery -- which in this case could mean discovering how much farmers are willing to pay for nitrogen. At these low price levels, nitrogen is a value which gives me confidence to wait for just a few more days before booking spring/summer supplies. I fully expect to report a more narrow anhydrous/new-crop revenue spread next week and scattered higher N prices with an uptrend of price discovery to follow through spring. Take some time and make ready to book N. Keep an eye on your email for an Inputs Monitor advice ALERT -- and if you have not already, book 100% of farm diesel for spring and summer fieldwork today.

December 2016 corn closed at $3.86 on Friday, February 19. That places expected new-crop revenue (eNCR) per acre based on Dec '16 futures at $606.84 with the eNCR15/NH3 spread at -41.59 with NH3 at a premium to December 2016 corn futures. The spread widened 24.01 points on the week.

This week, the average cash corn price built-in to nitrogen prices is $3.37 3/4 per bushel.

Nitrogen pricing by pound of N 2/25/15

Anhydrous $N/lb

Urea $N/lb
UAN28 $N/lb
UAN32 $N/lb
Midwest Average
$0.34 1/2
$0.40
$0.47
$0.47
Year-ago
$0.43 1/4
$0.52 1/4
$0.60
$0.57

 

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

Nitrogen
Expected Margin
Current Price by the Pound of N
Actual Margin This Week
Outstanding Spread
Anhydrous Ammonia (NH3)
0
34 1/2 cents
0
0
Urea
NH3 5 cents
40 cents
5 1/2 cents
1/2 cent
UAN28%
NH3 12 cents
47 cents
12 1/2 cents
1/2 cent
UAN32%
NH3 10 cents
47 cents
12 1/2 cents
2 1/2 cents

 

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