The Nitrogen Outlook Examined

June 16, 2016 10:19 AM

The outlook for nitrogen among industry watchers is positive for farmers, but a moving target. There are a few factors that fuel that line of thought. The first is the influence of Chinese urea. Chinese urea has been considered a nitrogen price leader despite the fact that corn growers overwhelmingly prefer anhydrous ammonia. It is the intense and aggressive supply build on the part of Chinese producers and their willingness to offer product on the export market at-or-near break-even. It is certainly difficult to ascertain what Chinese producers are actually making off a ton of urea, but anthracite coal prices have taken a dive, and incentivised urea production in China.

If we believe the dive in urea prices and the consistent global supply build is related to anthracite coal prices, then a coal price recovery would be price-supportive for global urea prices, and, by extension, price-supportive for the entire nitrogen segment. Coal market analysts are beginning to murmur about such a recovery, and higher coal prices, no matter how thin the margins Chinese producers are willing to capture, will equate to higher Chinese urea prices.

At the same time, U.S. nitrogen production, including urea, UAN and ammonia, is set to increase by as much as 30% by the time projects underway are all up and humming. As these projects come online, natural gas prices will be one of the drivers of U.S. produced nitrogen prices. But if North American nitrogen producers are paying attention, they will have noticed North American P&K producers' current fiscal woes. I have written before that North American P&K producers have fallen behind the times by curtailing production in response to lower phosphate and potash prices. That has cost those producers marketshare in the global marketplace and will limit future projects, expansions and growth.

It is more likely that the new nitrogen production facilities will aggressively seek marketshare by keeping a lid on nitrogen prices. In other words, it is our belief that increases in U.S. nitrogen production will be a limiting factor on U.S. nitrogen prices which will have the potential to offset price increases in offshore nitrogen production, including Chinese urea.

IndexWe cannot forget the influence of corn prices on nitrogen prices. While I am personally unclear on how much sway corn prices truly have over fertilizer prices, low corn prices do have implications for some fertilizers. Nitrogen should be the nutrient most closely tied to corn prices since N demand is a certainty year-on-year. The cynical perspective would lead us to believe that when corn prices fall, nitrogen is slow to follow, but that nitrogen is quick to respond higher when corn futures firm.

The chart at right would dispute that claim, although for much of the life of the data expressed in that chart, corn futures have been in overall decline. We see how closely nitrogen has followed corn futures (expressed as new-crop revenue), mirroring the first leg down in the corn market beginning in May 2013. After that, the price margins between our four nitrogen products fell apart, and did not reflect corn futures prices very well until the N margins narrowed again in spring 2015. It was then that nitrogen once again coupled with corn prices.

All of the above makes nitrogen price projections murky. I strongly believe that domestic nitrogen production will limit U.S. nitrogen pricing at least through harvest and likely into summer 2017. Seasonal trends will still include the risk of higher prices at peak demand points on the calendar, but if nitrogen wants to stay priced where it is in the coming months, even with a sustained corn rally, we may wind up approaching nitrogen hand-to-mouth for fall, and look for opportunities to book for spring at mid-winter.