Farmer Fertilizer Focus - Ammonia

By: Josh Linville, Vice President- Fertilizer

Tue, 05 Jul 2022, 13:51

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NH3/Anhydrous Ammonia

Josh Linville

Vice President - Fertilizer

josh.linville@stonex.com

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

I...do...not...know...

If you are wondering why you are registered for this with that award winning POV, I wouldn't blame you.

For North America, I lean toward if you are going to apply this fall, go ahead and get it locked up.

Globally, a lot depends on what happens with European natural gas values but the market is already tighter than normal and any further hiccups will further strengthen price ideas so not a bad idea to lean into needs thru the remainder of 2022.

For North America, it really does pain me to say that for fall needs but I struggle to see prices down. The part that scares me that I will be wrong are:

Inventories were high coming out of spring - spring demand never seemed to be there and we have heard a lot of feedback that buyers never stepped forward. Carrying excess inventory into the summer should mean a bearish market...in normal markets.
The start of summer fill values are historically very high - it looks like we are going to be looking at farmer values near or above $1,000. Looking at that price vs historical values shows us that this is far and above anything ever seen before to start.

Unfortunately, I do not think these will be enough to offset the global issues. Europe continues to struggle with excessively high natural gas values. As of this morning, the Dutch TTF has rallied to over $50 MMbtu equivalent which means it is costing just shy of $2,000USD to produce NH3. Like all products, we are a part of the global marketplace. What happens in a place like Europe matters to ever corner on earth.

This is probably the hardest newsletter I have written to date just because of all the high risk factors that are at play. Keep your eyes open...

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

If you need product thru the remainder of 2022, yes.

Given the fact that you will likely be seeing price near or above $1,000, it is REALLY hard to say you should seriously consider locking that up for the fall. That said, if it makes more sense to apply in the fall than to wait until the spring, don't be shy...

We expected to see values down significantly from spring values due to poor demand and high inventory carryover. The producers delivered with summer fill values down a third from where spring finished. Unfortunately, we live in an age where they can cut the price by a third and it STILL results in a quadruple digit value to you.

Rather than try to make excuses, here is the list of reasons that I think values will hold/push higher:

Europe production suffering under high natural gas values - as of this writing, values rallied to over $50MMbtu USD equivalent which means it should be costing them around $2,000 USD to produce NH3. It doesn't matter if you reside in Europe or not, this will be felt if it continues.
2023 demand looks like it will be solid again - it is way too early to be thinking about the 2023 crop...but then again, we are now in the fertilizer year 2023 which means we need to think ahead. Even taking a very conservative view on next year we come up with at least 90M acres of corn. That is a lot of demand.
Fall season is based on limited NH3 storage - once producers are able to stretch beyond the summer fill period, the ball is back in their court. NH3 storage is a very finite asset. Producers are very well aware of this and they know that puts them in the drivers seat from negotiation POV's. I've yet to meet a producer that was bearish!
Grain values, while lower recently, are still very high - fertilizer prices are still extremely high but so are grain values. Theory goes that as long as grain values are up, fertilizer demand will be up. That's a negotiation win for the producer.

I would be remise to not consider the other side. If Russia suddenly pulled out of Ukraine and started guaranteeing European natural gas flows, prices would plummet. That would help global values drop. We could also see fall demand across North America be much less than normal which puts pressure on the producers.

In the end, this POV changes by the week/day/hour based on what is happening. Right now, it seems like we need to start looking to step in for fall needs but a case can easily be made on the flip side.

What has happened in the last 30 days?

July Tampa NH3 price down a further $40 from June...but that might be the last drop for a bit

As much as I like writing about prices being down, this might be the last one for a bit.

While it was expected, the international market was pleasantly surprised to see the July Tampa NH3 price drop a further $40 from June at a value of $960. This marks the first time that NH3 has been a triple digit number for several months.

Unfortunately, that streak may resume sooner than we think.

With European natural gas prices skyrocketing, North American producers once again have options. Much of the Tampa price is dictated by phosphate production demand as that is all the Tampa price is: agreement between Yara supplying NH3 and Mosaic buying NH3 to produce phosphates in Florida. Now, with Europe natural gas prices pushing European cost of production values near $2,000, they will be eying ships going that way.

There is a lot of time between now and the end of July. We will enjoy the lower price but will continue to keep an eye forward.

Summer fill values are out and they are high vs historical pricing

We have now seen a few North American NH3 producers come out with their summer fill programs. The values were cut by a third or more vs the springtime high's. From a spring value perspective, the cut was massive and a huge help for buyers. However, from a historical perspective, it is extremely high and has caused many buyers to question the risk they will be taking.
There was a wide discrepancy between regions around the U.S. and we also have to note that logistics for NH3 are MUCH higher than that of UAN and dry fertilizers. One also has to remember that summer fill values are just that, summer shipments. Those that are reliant on fall shipment product will be seeing a different (likely higher) price.

All that said, western cornbelt values were seen the mid-$800's/low $900's. It was a very short lived program with producers pulling values before the long holiday weekend. We have not seen them resume sales at this time.

As mentioned above, fall prepay (fall shipment) tonnage pricing is typically higher (decently higher) than summer fill. If one has room to put product in, it is worth a look.

European production rates are once again being pressured

This was touched on above in the Tampa NH3 section.

As of this morning (July 5), European natural gas values had climbed above $50 and had the global NH3 market worried that the high cost of production would result in lowered production rates. Current estimates on their cost of production for NH3 is just shy of $2,000.

As bad as that cost of production is, it doesn't touch the fear of Russia cutting gas flow rates. In recent days/weeks, it has been reported that Russia is eyeing a 40% cut in natural gas shipments to Europe. If this holds true, governments will need to start considering who takes priority in receiving shipments. That comes down to what is more important: industrial demand or residential demand.

I'll let you in on a secret, residential demand will take priority!

It is too early to call it a devastating event for the global NH3 complex but we need to stay very vigilant in the coming weeks/months as this could have huge effects on the global market.

2023 crop year demand looks solid out of the gates

Yes, I know it is only July 5th.

Yes, I know it seems way too early to talk about 2023 crop.

However, we have now started the '23 fertilizer year which means we have to look forward.

While it is far too early to call with a ton of accuracy, we are currently putting our 2023 corn acreage number at 90M with a lot more upside than downside potential. Frankly speaking, we have to make up for what wasn't grown this year...

That means North America is in line for another big fertilizer demand year. We do expect that farmers will do what they can to lower their application rates without harming their yield potential but even with demand down, it should be high enough to keep the S&D tight.

Could a late spring planting result in a late fall harvest?

I cannot stress this one enough.

This spring was tough. It was a lot more tough for some. Planting was very far behind recent years for several weeks. Luckily, it caught up in the end but we need to consider what that late planting might mean.

While summer weather could make the fall harvest period "normal", we need to keep tabs on it. The chance of a late harvest has risen with the late planting. If you live/operate in an area that was late, you should think thru what that could mean for fall fertilizer application and what you can get done.

If there is a heightened chance that your harvest will be late and your application period cut in half (for example), that needs to be factored into how much you secure to apply.

I am not saying do one thing or another. Simply trying to make sure we are looking forward and not getting caught with tonnage at the end of fall that will be charged penalties until next spring.

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 - -36.5% or approximately $490 lower
Vs 90 days ago - -43% or approximately $638 lower
Vs 6 months ago - -38% or approximately $515 lower
Vs 1 year ago - +33% or approximately $211 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

2023 demand expected to be high – while it is far too early to call 2023 crop acreage expectations finalized, we are building a POV that is supportive of solid demand continuing. Our conservative corn acreage sits at 90M (could easily be 93 - 95M). That continues the trend of solid NH3/N demand.
European natural gas could float world NH3 price ideas – with European producers likely looking at near $2,000/ton of NH3 costs, the fear that production will drop further is justified. They have weathered this storm before but this might be the time that snaps.
Poor spring '22 weather could push more demand to fall application - the spring that North America just witnessed was tough. A lot of demand that expected to get to the fields never got the chance. We could see the market lean further into fall application to make sure this is not repeated.

Bearish Factors

Demand will shy away – this was bear factor number one last month and remains this month. With prices where they are for summer fill (and likely higher for fall prepay), buyers are going to be all too aware of the downward price risk. That means more will drag their feet on purchases. If enough do this, it can put pressure on the producer.
If Russia ever calms down – not only would this mark the return of normal Russian exports but would also mean European natural gas values plummeting. Not likely but something we need to watch.
Will farmer demand shy away from fall application? - doubtful but again, something to watch. Farmers are not forced to apply in the fall. We could see a wide swath decide to delay to the spring. That would cause tons of issues in the spring but would lean on values late fall/winter.

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

Make sure your bank is ready to fund your farm this year if you rely on their loans. It is going to be a costly one...
The grain/NH3 ratio charts are going to show much higher than recent years and it looks like that is going to continue. If you can secure all of your inputs, sell your grain and secure a solid profit that you are happy with next year, do not let these charts scare you away from that. I only look at the markets from a fertilizer POV. You have to look at your organization from dozens of POV's. Please keep that in mind.
Figure out what you can and cannot get done this fall. We are at a higher risk of a late harvest (though these 90 - 100 degree days may reduce that quickly) this fall after a late planting. We do not want to get into a situation where we put our name on too many tons and then either lose them because the price went up or get charged a monthly storage fee because prices are falling.
Figure out what it means if you elect to skip fall for spring application. Can you get it done? Can your supplier get you enough product? Will mother nature allow you to get it applied?

Fertilizers

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