Farmer Fertilizer Focus - Ammonia

By: Josh Linville, Vice President- Fertilizer

Fri, 01 Apr 2022, 00:09

NH3/Anhydrous Ammonia

Josh Linville

Director - Fertilizer

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

A lot of what will happen going forward will depend on the next 2 weeks. If weather cooperates and we have a solid spring demand run, it means we move into the summer with low inventories and the producers in control of the price. If weather continues to fight farmers, it means we head into summer with full inventories which would cause producers to need to fight for any open tanks which typically means lower prices.

For the world, it is continuing to suffer with the loss of Russian/Ukraine exports which account for around 24% of the global export total.

Long story short - globally it looks like prices are going to hold for the short term. Losing Russia and Ukraine exports is just too much of a hit and there isn't excess production that is just waiting for an opportunity to shine. Everyone is running full blast at these prices. In North America, it comes down to spring demand but ultimately, it seems it is still the producers market to control.

should you buy your fall '22 / spring '23 nh3 needs today?

How is that for short and to the point?!!!

Reason 1 is that there is not a fall or spring pricing program available today. The NH3 producers control the market well from this vantage point. They will wait until the spring season has come to a close before they offer a price to the industry.

Reason 2 is that if a price is offered today, it is likely to be close to today's values which are some of the most expensive prices that have ever been seen. If you secure that today, you would be locking in the highest price you have ever seen in your life 7 - 11 months before you need it.

Reason 3 is that the price vs corn is terrible. Not only would you be locking in the highest price every seen 7 - 11 months before application but you would be doing it at the worst value you have ever seen.

Could NH3 prices be higher this summer? Sure they could but at these kinds of values, there is plenty of downside and we have seen huge price changes in short time periods in other products. Why not NH3?

What has happened in the last 30 days?

April Tampa NH3 price was agreed at $1,625

That is a HUGE number. To put it into perspective:

February Tampa NH3 price was set at $1,135

March Tampa NH3 price was not agreed upon. With the world supply situation spiraling out of control, neither party was willing to meet the other.

That means that April was settled at almost $500 from the February price. For those across North America, Tampa is not a great indicator of where the Midwest price should be. Producers love to talk about it when the price goes up but ignore it on the way down. However, it is a really good indicator of how the world market is set up.

The Tampa price is one that is used for phosphate production as Mosaic is the buyer (Yara is the seller).

While there may not be a great correlation to Midwest values, it still reflects just how much the world NH3 market is struggling.

Oddly enough, midwest nh3 values are a discount to urea and Uan

Let's get this straight at the start: there is nothing cheap about current NH3 values!!!

Now that we have that out of the way, check out the charts below. They compare the price per pound of actual N for NH3 against the price per pound of actual N for urea and UAN. This quickly shows if current values are higher or lower than recent years.

For both urea and UAN, the line is on the higher side of recent years which shows NH3 being more of a discount than "normal".

If you have the chance to put on NH3, the current prices spreads are telling you to get it done. Markets change all the time but today, it is saying go with NH3.

World continues to suffer without Russian and Ukrainian NH3 exports

The global NH3 market has a lot of issues on hand right now but the largest today is the loss of Russian and Ukrainian exports.

Combined, these 2 countries account for almost 1/4th (23.6%) of the global NH3 export market. That means for every 4 tons around the world that is exported, one of those comes from these two nations. The globe was already trying to play catch up with supplies as the industrial complex woke up from Covid. Losing these 2 just made that situation much, much worse.

Waggaman, LA NH3 plant remains down/offline

The production start date of this plant continues to get pushed back with current reports/rumors that it will be down for most of April. For a market that is already dealing with tight supplies, this certainly does not help.

This NH3 production facility, which is 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.

Not much else to say other than supplies are tight. Tight supplies means producers control the negotiations and I have never met a producer that was bearish.

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 - +7% or approximately $99 higher
Vs 90 days ago - +8% or approximately $110 higher
Vs 6 months ago - +92% or approximately $707 higher
Vs 1 year ago - +138% or approximately $854 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

We are still paying for the huge fall run we had – as mentioned over the last few months, the huge fall resulted in very tight storage supplies this spring. There simply is not enough refrigeration/truck/rail/barge/pipeline capacity to refill the system in a couple months. Tighter supplies means producers look for premiums.
Global production losses hurt at home – the past year has seen more unplanned downtime at NH3 plants around the world than seen in a very long time, if ever. That, coupled with building demand, means that the global S&D is extremely tight. If we do not pay near global values at home, we have to be worried of those tons being exported which leaves us even shorter on supplies.
Big spring demand drains the system...again – this is more a summer situation but with inventories already tight leading into spring, that raises the chances that we drain the system going into the summer. We will have more time to refill the system but it does mean that the NH3 producer is much more comfortable and less likely to drop prices substantially.

Bearish Factors

High priced N causes corn acres to drop further – unfortunately for this bear factor, corn switching to beans does not move the demand needle nearly as much as some think. If the average N per acres app rate on corn is 155 lbs, then switching 1M acres to beans only means 95,000 tons of NH3 demand loss (if it all was only taken from NH3). However, lower acres combined with some rate cuts due to the high price may cause NH3 producers to have more on hand than expected as we move into summer.
Spring weather continues to fight the market – in the lead up to spring, one of my main concerns was that spring would start early, we would drain the system of NH3 and then fight to survive until planting started. Now, on April 2nd, I'm more concerned that mother nature is keeping too many out of the fields and that spring NH3 may fail. This would mean a big jump in urea and UAN demand but on the flip side, it would mean we end spring with a lot more inventory in place. This would put pressure on the producers to fight for any open storage in the system and that generally means lower prices.
Russian exports return / industrial demand falls - the world is hurting with Russian NH3 exports being cut off due to their invasion of Ukraine. Not only that but industrial demand has continued to grow. As quickly as those 2 factors drove world prices higher, it can drop them just as quickly.

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

Remember that NH3 is part of a world market. The globe is dealing with tight supplies as demand ramps up from the industrial and agriculture sectors. Not only that, but between 23% and 24% of the global NH3 exports come from Ukraine and Russia. Even if the spring isn't great in your area, it does not mean prices are going to bottom out.
Believe it or not but NH3 is currently a slight discount right now compared to urea and UAN. If you are an NH3 person and are having to pay current values, get it done. It doesn't look like urea or UAN are going to come tumbling lower by the end of spring. Get that N in the ground and feed that crop.
BE CAREFUL. Even more so with NH3. When dealing with the other fertilizers, overdoing it can result in wrecking your machinery and possibly yourself. With NH3, you can start taking others out with you. Puncture a nurse bottle when driving too quickly. Catch a line and snap it. All of a sudden, it isn't just you that needs to worry. It is everyone near the cloud. I'm not trying to be preachy here but please be careful out there.

Fertilizers

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