The NFiles: Three Possible Price Paths for Nitrogen

September 23, 2015 12:47 PM

 

  • Anhydrous $40.89 below year-ago pricing -- lower $8.18/st this week at $660.96.
  • Urea $67.74 below the same time last year -- lower $6.53/st this week to $440.06.
  • UAN28% is $26.89 below year-ago -- lower $6.30/st this week to $307.40.
  • UAN32% is priced $1.29 below last year -- lower $4.21/st this week at $347.86.

9232015NH3Nitrogen prices fell again this week marking a month long downward trajectory. Anhydrous has been our biggest decliner posting nearly $45 in declines over the past four weeks. That is a 6.2% decline during that period. The rest of the nitrogen segment has been lower as well with UAN28% down 15.1%; UAN32% is down 3.9% and urea has fallen 5.1% during the same time. Meanwhile, UAN and urea have remained at a premium by the pound of N to anhydrous ammonia. One of three possible scenarios will play out.

One, anhydrous will correct higher to rejoin the rest of the nitrogen segment according to price margins by the pound of N.
Two, UAN and urea will fall to more closely align with anhydrous.
Three, the nitrogen segment will remain in a state of disparity.

In the first possible scenario, anhydrous would have to be posting a low here within the next few weeks, or at least before the rest of the N segment falls to parity with NH3. It is possible that anhydrous has overcorrected to the downside and will firm as the others hold steady. We have noticed that over the years, anhydrous has wanted to bottom just ahead of harvest and spend the remainder 9232015UANof the year priced above that price point. The case is easy to make for NH3 prices to be artificially low ahead of harvest suggesting not only is it time to book NH3 but that anhydrous will inevitably firm once the pre-harvest low is set. I stumbled upon an article published by The Western Producer magazine which agrees that fertilizer prices have bottomed in the early fall 19 out of the last 20 years. Click here to read the article from The Western Producer.

The second possible scenario will introduce the influence of imported nitrogen into the discussion. UAN from Egypt and North Africa and urea from China will drive UAN and urea prices based on the margins at the country of origin and wholesale values at import terminals. Thus far, retail prices have been slow to reflect lower wholesale prices as supplies are scarce in some parts of the country. Chinese economic struggles will impact urea prices, but so far that impact has been hard to measure and currency manipulation may offset any woes at manufacturers leading to neutral impacts on export prices. Egyptian natural gas prices will play a large role in UAN prices but recent infrastructure improvements there and in North Africa may keep a lid on U.S. UAN import prices for the time being. This scenario assumes that anhydrous will not rebound after placing a pre-harvest low, and history has shown that to be a slim chance at best.

9232015UreaThe third scenario seems almost as likely as the first. In this scenario, anhydrous will remain underpriced compared to the rest of the nitrogen segment. Since deliveries via the Mississippi River will soon be shut down seasonally, importers are rushing to fill orders and to get as much urea and UAN imported as they can before the closure. That levers for higher prices in the next few months. That supports our continuing disparity scenario as anhydrous will firm after posting its pre-harvest low, and UAN and urea will firm as well on limited supplies based on the seasonal end of barge traffic on the Big Muddy.

We have filled portions of our nitrogen for fall and for spring. Prices may continue to fall before fall applications, especially considering the weather hints at a quick harvest pace thanks to warmer, drier weather. However, spring prices will be above those of today and one must consider booking at least some nitrogen for spring delivery ahead of the annual winter runup.

Of the three scenarios discussed above, it is my belief that the first is the most likely which would have urea and UAN holding basically in place with a bullish bias -- to the tune of about $15-$20 per short ton regionally -- and anhydrous ammonia firming to a comparable price, adding roughly $40 per ton of its own. The table below shows where prices by the pound of N currently are and are the basis of the above analysis. Note the far right column labeled "Outstanding Spread". The outstanding spread is the level to which UAN and urea are currently overpriced to anhydrous ammonia. In a perfect world, our outstanding spreads should equal zero. So far we have never seen such parity. As with most of fertilizer's ills, price disparity in the American markets would be easily cured by increasing domestic production, placing UAN, urea and NH3 on level production footing.

December 2016 corn closed at $4.02 on Friday, September 18. That places expected new-crop revenue (eNCR) per acre based on Dec '16 futures at $631.47 with the eNCR15/NH3 spread at 29.49 with NH3 at a premium to December 2016 corn futures. The spread widened 3.55 points on the week.

This week, the average cash corn price built-in to nitrogen prices is $3.96 per bushel.

Nitrogen pricing by pound of N 9/23/15

Anhydrous $N/lb

Urea $N/lb
UAN28 $N/lb
UAN32 $N/lb
Midwest Average
$0.40
$0.49
$0.54 3/4
$0.53 3/4
Year-ago
$0.43
$0.56 3/4
$0.59 1/2
$0.53 3/4

 

The Margins -- Anhydrous is still underpriced compared to the rest of the nitrogen segment. NH3 shorts urea 4 cents by the pound of N; UAN28% is overpriced compared to anhydrous by 2 3/4 cents; UAN32% solution is 3 3/4 cents 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
49 cents
9 cents
4 cents
UAN28%
NH3 12 cents
54 3/4 cents
14 3/4 cents
2 3/4 cents
UAN32%
NH3 10 cents
53 3/4 cents
13 3/4 cents
3 3/4 cents

 

9232015NCI