May '23 Farmer Fertilizer Focus - Ammonia

By: Josh Linville, Vice President- Fertilizer

Fri, 28 Apr 2023, 13:31

May '23 NH3/Anhydrous Ammonia

Josh Linville

Vice President - Fertilizer

U.S. midwest/Tampa price graph

This is the AVERAGE of the entire Midwest which means that your values WILL be different than what the graph reflects. Please do not take this into your retailer and say "why isn't my price the same as here". That is comparing apples to oranges. You might be on the cheaper or more expensive side of this graph. This doesn't take into account logistics/storage/interest/insurance/shrink/etc.

The takeaway from this graph is that in the last month, prices have been jumping which comes as little surprise given European production issues.

For more an international flavor, here is the monthly price graph for Tampa NH3. Again, this should be taken more from a price direction POV than an actual price. Tampa is one of the most visible prices that trend along international movements.

What everyone wants to know first, what do we think will happen going forward

Global

Honestly, I've been confounded by the fact that global NH3 values have fallen as hard as they have. With Russian exports nearly zero and Europe still struggling with their return to full production, I thought the lack of supply would help boost price ideas/raise price floor. That has not been the case and is likely a testament of how bad global demand is.

While I think the bearish price pace will slow, it is hard for me to say that the price slide will stop. Until the market proves otherwise, I'm in the bearish camp.

North America

Lot of signals are pointing to a spring application demand that fell short of expectations. Couple signals, and a couple folks that I think a lot of their POV, point to a spring application that fell well short of expectations. If true:

I'm in the bear camp as high inventory carryover into the summer months will weigh on price ideas.

However, we have not seen any sort of a price indication/rumor/etc. for either summer or fall NH3 values. Your retailer has no say in what the price will be or when those prices are announced. The manufacturers set the price and then come to the market. Do not beat your retailer up for a price they cannot get you.

should you buy your spring '23 nh3 needs today?

Global

Global values continue to sink and inventories appear decently easy to find. With small possibilities that Europe/Russia could return, seems as though a conservative approach continues to work.

North America

Well, for most of you, spring application demand is WAAAY behind you!! For a couple areas, there is still some demand coming and the market feels long inventory and would LOVE to be your supplier.

Need to continue discussing needs with our retailers but continue to wait on remaining spring purchases as values continue to drop.

The biggest danger in this approach is not talking to your retailer. They see this market the same as you and I. They cannot purchase product today and hope that you show up to purchase it. If they get it wrong, they carry that product into summer where lower prices are coming. They simply cannot digest those kinds of resets. Be cautious but be talking.

general global nh3 information

What has happened in the last 30 days?

Russian exports continue to struggle (global story)

It isn't surprising that we have seen values drop from last year high's. It is simply very difficult for the market to maintain those types of values.

On the flip side, it is absolutely amazing that global values have dropped as much as they have even with the ongoing production/supply issues.

Russian exports continue to be seen at near zero. Folks, they are the world's largest exporter during normal times and they remain cut out. Their export pipeline runs thru Ukraine and out to sea from there.

The first hurdle of returning is having the confidence and ability to load a boat in a hot zone like that. This isn't urea we are talking about. If an NH3 ship get hit/sank, it will be real bad. I've heard stories of how bad it is when a little hose on a nurse bottle break. Can you imagine a vessel releasing?

The second hurdle of returning was that the pipeline ran right thru the zone of fighting. Again, can you imagine the release and devastation if that pipeline was operational and happened to be ruptured?

The third hurdle of returning has been the lack of power. A pipeline that long cannot transport product from beginning to end just by shoving it in. There are pump points along that helps to keep the product flowing. As the Russian military got beat back, they went scorched earth and destroyed the electrical grid on their way out. No power = no flow.

Today, it appears a lot of power has been returned and the UN/world appear willing to purchase Russian product as it wants lower food costs. However, we are not seeing their exports return.

Eventually, Russia will find a way to bypass the Ukrainian pipeline by building their own ports. This process is already being worked on but will take time to complete and become operational. Until it does, the world will be without its largest player.

European production still struggles (global story)

While not nearly the size of player that Russia is, Europe struggles adds fuel to the fire.

Today's production levels are a vast improvement from where they were. We had seen their operating rates dip to as low as 20 - 30% of normal as natural gas values skyrocketed last August. Today, that rate has improved to 60 - 70% of normal. That is a huge gain and simply something very few saw happening this quick.

While that is a win for the world, it does not solve the remaining 30 - 40% still offline.

As long as this remains turned off, global demand is higher (they have to replace what they are not producing) and global supplies are lower.

If we were to see a return to form for demand, it is going to find that the global S&D is nowhere near what it considers normal. That doesn't mean prices are guaranteed to go higher...but it is something to watch for.

May Tampa NH3 values set $55 lower than April to continue the bearish trend (global story)

The Tampa NH3 price just continues to surprise us.

One note for the North American crowd: Tampa going up or down does not necessarily mean inland prices will do the same. The market loves to talk about it when Tampa rises and they sort of have a point. It is an indication of global price strength. North America does not operate on an island so it needs to watch the globe. However, that story quickly disappears when Tampa falls but the same theory goes. While it may not be an immediate one for one reaction, it is an indication of a trend that needs to be considered.

The May price was announced a further $55 from April. So how does that shake out vs recent history?

October '22 Tampa NH3 - $1,175
January '23 Tampa NH3 - $975
April '23 Tampa NH3 - $435

So today, Tampa is $380. That is just shy of $800 lower than than the high in October and all of this has happened with continued issues for Russian and European supplies.

Remember that prices will not fall forever...but today, it is hard to see a reason to step in front of the buzz saw.

North American spring demand appears to have fallen short of expectations (N.A. story)

Most of the folks that I chat with agree that spring NH3 across North America failed to meet expectations, though there have been a couple pieces of feedback that it has been better than some of the "worst case" expectations.

Here at StoneX, we went into March forecasting 2.07M tons of spring NH3 demand. With feedback from the market and some other pieces of information, we decided to drop that number down to 1.9M. This isn't the biggest cut ever seen...but it has implications.

If this (or lower) is true, it means the market will likely carry more tonnage into the summer period. These nitrogen plants produce product every month of the year. That includes the low demand months as well. When the system is emptied, it is a win for the manufacturer. They see a system void of physical product and full of sales potential. Vice versa holds true. When we carry a lot of inventory into the summer, the sales opportunities are few and far between. That is a worry.

The second biggest danger for a manufacturer is having to cut their price to make sales as it eats into margin and ultimately, their paycheck. The biggest danger is missing sales, filling storage and having to shut off an otherwise profitable production plant.

If this carryover story holds water in the coming weeks/months, we could see summer fill prices even more aggressive as manufacturers fight for the few demand point. That's a win for the buyer.

Where are current values in relation to the past

U.S. Midwest Wholesale price average

Vs 30 days ago - -19% or approximately $120 lower
Vs 90 days ago - -45% or approximately $430 lower
Vs 6 months ago - -60% or approximately $780 lower
Vs 1 year ago - -65% or approximately $968 lower

U.S. Southern Plains price average

Vs 30 days ago - -10% or approximately $51 lower
Vs 90 days ago - -44% or approximately $390 lower
Vs 6 months ago - -56% or approximately $625 lower
Vs 1 year ago - -61% or approximately $775 lower

Bull/Bear Factors

Because no market is ever guaranteed to go higher/lower, we try to consider the factors that can sway values so that we are able to act when they occur rather than react.

Bullish Factors

Prices have already come down tremendously - while this does not mean that prices cannot continue to fall, the amount that NH3 values have already fallen is astounding. The further it falls, the "stickier" price ideas get.
If global nitrogen plants go down for summer repairs, it could limit supplies - following Covid restrictions, we saw a huge wave of nitrogen plants being idled in order to make much needed repairs. That situation helped to buoy price ideas as supplies were limited. Today, plants that have been profitable have been VERY profitable. It makes sense that they would be run at max volume. Many plants could be in need of repairs and this summer would be a PERFECT time for them to do so (little demand/growing supplies) to offset lower prices.
NH3 values are already attractive vs other nitrogen forms - for those regions that apply NH3 directly, they may be in for a shock. Current NH3 values are already very attractive when compared to alternative N forms. Doesn't mean anyone will be excited to step in early but it certainly checks a box in the "list of reasons to buy".

Bearish Factors

North American spring appears to have fallen short of demand expectations - going into spring, we pegged demand at 2.07M. Since, we have dropped our demand to 1.9M based on high starting NH3 values and poor weather. Today, there is a growing chorus that 1.9M could/should be lowered further (urea prices skyrocketing certainly back that narrative). If true, excess inventories will be carried into summer and act as an anchor on the market.
Any return of Russian exports - global NH3 values have fallen tremendously at the same time that the world's largest exporter was largely absent. What would happen if an already bearish market saw their return? I'll give a hint...it doesn't result in higher prices.
Return of European production rates - again, even with Europe still less than normal production rates, global NH3 values have seen little reason to hold their price. If the remaining plants were to restart, global demand would drop and supplies grow. That's bearish.

Where are the current nh3/grain ratio values today?

We believe that only looking at the flat price of either grains or fertilizer can be misleading:

Only selling grain can hurt you if fertilizer prices rise substantially
Only buying fertilizer can hurt you if grain prices fall

We look at the ratio "value" to get a better indication of where we are or how many bushels of X does it take to pay for 1 ton of fertilizer.

Would you rather:

Spend 150 bushels to pay for 1 ton of potash
Spend 100 bushels to pay for 1 ton of NH3

When we compare the current ratio value against recent years, we start to see if we are high or low.

YOUR VALUES WILL LOOK DIFFERENT

This graph looks at the NOLA NH3 price vs the flat grain price. There are no logistics on either product. Your location will look different due to fertilizer logistical costs, grain basis, etc.

Josh Linville’s focal points

North American inventory carryover into summer - while it is still too early to call definitively, it feels as though spring demand was poor. If spring demand was poor, that means there is more inventory/tonnage already in storage than was expected. If there is more storage already filled, that is less sales opportunities for manufacturers. If they cannot find places to sell, nervousness takes hold and lower prices enter the fray to make sure they do not max their own storage. It can be a slippery slope.
Russian exports - as the world's largest exporter of NH3, their volumes hold sway on global price ideas. Today, their exports remain near zero...so what would that mean for global price ideas if they started to return? Best to keep a close eye on them.
European production rates - today, it looks less likely that we will see the remaining 30 - 40% of European production that is still offline come back in the near term. Europe doesn't account for a huge percentage of global production...but they account for enough to matter. If suddenly they came back online, it would raise global supplies/lower global demand.
Crop values - as the Northern Hemisphere moves into their summer months, time becomes the friend of the buyer. With crop prices under pressure recently, buyers are not going to be excited to purchase their next needs in the short term. However, plenty of buyers have seen what happens when crop values jump. If that happens, watch that number because it could rise and rise quickly.

All data was sourced from StoneX unless otherwise noted.

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