Farmer Fertilizer Focus - Ammonia

By: Josh Linville, Vice President- Fertilizer

Sat, 26 Feb 2022, 03:51

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NH3/Anhydrous Ammonia

Josh Linville

Director - Fertilizer

josh.linville@stonex.com

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

Buckle up, North American folks, spring is about here!!

For now, the manufacturer is in the drivers seat in price negotiations. They are highly aware that the massive fall run reduced inventories to exceptionally low levels. They are also highly aware that there is no way to refill storage across the Midwest before spring starts. That, coupled with continued belief that spring demand will be solid, has given them the ability to hold prices where they are since the conclusion of the fall run.

However, demand is about to have its say. If we start applying hard in the first half of March, producers will have "won" and values should remain high. If we get to the 2nd half of March and demand has been poor from either farmers stepping away or mother nature saying no, those same bullish manufacturers will start getting VERY nervous about carrying inventories into the summer.

Long story short - we are likely to see values hold or trend slightly higher thru preplant. Once into the sidedress season (eastern cornbelt), values should start to fall as everyone chases remaining demand before the start of summer.

What has happened in the last 30 days?

NH3 price is begging farmers to switch to urea (unchanged from last month)

If you have heard me speak/present, you have probably heard me say "every price is trying to tell you a story if you know how to interpret it". For those that are new to this newsletter, the below graphs look at the NOLA (New Orleans, Louisiana) urea price vs the western and eastern cornbelt NH3 price with both broken down to a price per pound of actual N (what you actually care about). It then looks at the difference. When the price is toward the top, NH3 is a discount vs urea. When it is below, NH3 is a premium vs urea.

When looking at the green lines around September/October, a story emerged. The market was telling us that NH3 needed demand because it was so cheap in comparison. We started to say that you should really consider locking up NH3 before it rallies. It was around this time that I told my dad that once they started applying, he better not let the tractor seat go cold. He needed to get everything applied as quickly as possible so an early winter did not kick him out of the fields.

Today, the red line is well below average. What that is telling us is that NH3 doesn't want your demand. It is telling you that if possible, it would rather you switch your demand to urea. This is due to the massive fall run emptying inventories and the systems inability to get refilled by spring.

This does not take into account the benefits/costs of using urea over NH3. In fact, this does not take into account a lot of different factors. This is just one thing out of a thousand that you need to consider.

Otherwise, NH3 is a stalemate (same as last month)

The NH3 market has done nothing in the last 30 days due to the stalemate between demand and supply.

On the demand side, the market is unwilling to step forward with prices where they are. Better to wait until the last minute in hopes that prices fall. Even better to wait until the last minute to make sure you need the product and do not get stuck with today's values thru to fall.

On the supply side, producers are well aware of how tightly supplied the market will be to start spring. They see their storage numbers...or lack of. They know their replacement system better than we ever could (I've seen it and they are not lying). Their approach is that if they wait long enough, demand will be forced to move first.

There really isn't much reason for either side to move from their position in the next month. Do not be surprised if this section is really short for March.

Louisiana NH3 production plant went down

An NH3 production facility in Louisiana, owned by an Australian company named IPL, went down during the month of February. We estimate that this plant can produce approximately 800K/year or 2,200 tons per day. Not only did the plant go down, it is expected to remain down thru the month of March.

We were already dealing with a tight supply situation. This only made it worse. Normally when something like this happens, the market tries to push the price higher. That has not occurred. My best guess is that they are content with current margins and do not want to risk angering demand further.

Still, this was an ill-timed production issue. I do not believe it was done intentionally. These plants are making FAR too much money in revenue today to purposely go down. These things happen. Nitrogen production is a very high temp, high pressure process that is hard on equipment. Breakdowns occur and occur often.

Where are current values in relation to the past

For NH3, we use Midwest Wholesale Average as our base point as it is the easiest spot to track.

Vs 30 days ago - unchanged
Vs 90 days ago - +3% or approximately $37 higher
Vs 6 months ago - +106% or approximately $699 higher
Vs 1 year ago - +181% or approximately $873 higher

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

Big fall run means struggle to refill (same as Feb) – we will be starting the spring season in North America with much fewer tons in storage than normal after a HUGE fall run. Put yourself in the shoes of a producer. They know their system will not be full by spring. They know typical demand to expect with the market calling for 91 - 93M acres of corn. They know that demand is bigger than supply. That spells steady to higher prices when demand hits.
International/industrial demand remains high – what many do not know is that there is a big market for industrial demand around the world and right now, that demand continues to run into tight supplies. If farmers push back and say no thank you this spring, they can take those tons and go to the industrial sector. Today, producers have options.
Any winter production issues – unfortunately, this has played out with the Louisiana plant going down for over a month. This makes an already tightly supplied market even tighter and further emboldens manufacturers to keep their prices high.

Bearish Factors

Farmers decide to wait and see what happens with urea/UAN/grain values – I know I do not need to tell you but it is worth saying. Once you put NH3 in the ground, you are set in terms of what you are going to plant. However, if you drag your feet and skip NH3, you leave yourself open to switching if one grain stands out. We could see this happen on a bigger scale than normal. If preplant NH3 demand is poor, we could see manufacturers freak out and start chasing demand with lower prices.
Spring stays wet/cold until planting begins (same as Feb but most important bear factor) – every single factor for the NH3 market could be pointing higher but if farmers are not able to get into the fields with toolbars, none of it matters. If we end up with a really poor spring application weather window, producers will be begging people to buy their product. It can change that fast.
Fear of summer resets (same as Feb) - fertilizer is a weird market. Most markets are driven by fundamentals but fertilizer is one that sometimes emotion dictates the price. If producers start to become more fearful of not selling everything before summer price resets, we could see them become aggressive early. When others see that, they could do the same. In this market, sometimes the smallest spark can start a forest fire.

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 100 bushels to pay for 1 ton of NH3
Spend 200 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 Midwest Wholesale Average 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 Thoughts

Know that weather is the first, second and third most important factor in the failure/success of NH3 agriculture demand. Every single thing I have written in my time in the fertilizer sector discussing NH3 ended with the same statement..."weather permitting". If I offered you free NH3 to apply in your fields and it stayed cold/wet thru all of spring, it would do you no good. This can make a bullish market bearish and a bearish market questioning its existence.
I mentioned this last month but it needs to be repeated in case it helps even one person. Know what you did or did not get done last fall. Please do not make the mistake of over purchasing for the spring. Did you get more done in the fall? Does that mean you need less than normal in the spring? I realize I do not need to bring this up but I do in case it helps that one person. Prices are high around the world. Eventually they will correct and correct hard.
Barring a horrible weather cycle thru March and April, preplant NH3 prices look to hold. If you need tons for preplant, you should be talking to your supplier even if you are unwilling to purchase today's values. Give them a chance to put their name in the hat for tons when season starts. If the spring starts earlier than normal and it starts hard across North America, we will drain storage quickly and be dependent on long haul trucks, daily flows thru the eastern pipeline, railcars, etc.
Make rational decisions. I get that a lot of the Midwest is still looking at NH3 values in the $1,400 - $1,500 and higher. Those are sickening values and I cannot even fathom writing a check of that size. All that said, try to make the best unemotional decision that you can. At the end of the day, it is a numbers game. If the price supports the crop, then roll with it.

Fertilizers

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