Farmer Fertilizer Focus - Ammonia

By: Josh Linville, Vice President- Fertilizer

Mon, 01 Aug 2022, 20:55

September '22 NH3/Anhydrous Ammonia

Josh Linville

Vice President - Fertilizer

U.S. midwest price graph

This is a new section as of this month that shows the price trend of the U.S Midwest average. 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

We are 60 days from November, European production remains down...hard to see prices falling...

There are still routes forward where we could see price ideas fall, but they are far and few between and I certainly would not count on them. At this point, a lot of the factors are pointing to NH3 producers/suppliers winning negotiations and that typically means higher prices still:

Sales options - if N.A. demand doesn't want to buy, exports remain a very feasible possibility
Global production down - given European production issues, the world has lost a lot of production and gained a lot of demand as European countries look to replace lost production
Calendar - there is only 60 days until the start of fall application. Producers/suppliers should be able to handle any demand downtime. Meaning they see little reason to drop price today if demand dries up.
Grain values - December '22 and '23 values remain solid ($6.60 / $6.12 respectively). Producers/suppliers know that farmers are about to bring in a lot of cash...

Still at play are global prices crashing and the possibility of an extremely poor fall weather period that could cause prices to falter. Like I said, we need to be vigilant but realistic. Producers/suppliers are in control and they like money.

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

If you are a fall NH3 applier, I would strongly consider locking your needs in. If you are a spring applier, you probably are not getting a price anyways so doesn't matter.

This a repeat of August because the POV remains the same. As long as European production remains down and grain prices remain healthy, there is little reason for prices to fall before fall application.

Ultimately, this will come down to each farmers decision. Farmers in the corn belt are going to raise every bushel possible as they are looking at very solid returns in 2023. No reason to skimp on rates. However, if you are in what is considered a "fringe" acre (i.e. not growing 200 - 300/acre corn!!!), look at your balance sheet for next year. All comes down to that.

What has happened in the last 30 days?

Europe production falters

The biggest story of August and frankly, what will likely be the biggest story of fertilizer year 2023, is losing the vast majority of European production.

We had spent a lot of time in recent months listing this as a bull factor. Now, as much as I like to take credit, never did I think we would see what happened. I thought we would see a couple to a few plants down which would bolster price ideas. Never did I think we would see what happened.

The long story short is that European natural gas values (we track Dutch TTF mainly as the indicator) went from in the $50's to as high as very low $100's. There was always question as to how high natural gas values would have to get to shut off production. The market got its answer.

As prices rose into the $70's and $80's, the production stoppage announcements started to roll in. It started with several plants in Poland. It then encompassed most of Europe. By the end, we believe that current operating rates around 20% (educated guess). Frankly, the world has lost an entire producing REGION.

Now the world is scrambling with what to do. Price ideas are obviously higher. We have lost a region of supply and gained a region of demand (not like farmers there are going to go without, they need fertilizer).

Since this occurred, we have seen values fall back to the upper $60's/lower $70's. Still not low enough to turn production on again (likely need to get back to $50's with the belief that values will remain there or go lower) but it is edging that way. We are also watching for signs of government intervention (possibly subsidizing the high cost of natural gas to keep production rolling) which could change everything again.

This will continue to be a highlight in the coming weeks/months and appears to be the focus of the nitrogen world.

Tampa NH3 price rallies for September...but not nearly as much as expected

There is a lot going on in the world of nitrogen in recent weeks. Fall demand is inching ever closer. European production has been slashed. Grain prices, while not keeping step with fertilizer price increases, continue to hold or push higher.

I like to admit when I am wrong and I called Tampa September wrong. We expected the price to rally from August (priced at $1,100) given the loss of European production. While we were right in that the price did go up, it only jumped $50 to settle at $1,150. I expected hundreds of dollars.

This was a big win for industrial demand as well as phosphate production in N.A. However, unless there is a stark change in the next 30 days, we have to assume this price continues to rally and possibly rally hard going forward.

U.S. Midwest NH3 values continue to climb

Big shock, right?!

There are just too many factors playing into producers/suppliers hands for it to not.

The calendar is getting short. Grain prices are holding/pushing higher. European production is largely lost. Etc.

The only thing I can say is that I'm impressed/surprised that it hasn't gone up more. While I certainly do not want to say that NH3 prices are cheap (I'm afraid of everyone throwing stuff at me next time you see me in person!!!), they are in line with urea and UAN.

Ultimately, the decision of if you put it on this fall or wait until spring needs to come down to you. I will say this: if too much of the industry waits until spring, we will have problems. This market is designed to have a somewhat normal fall/spring application split. Too much on one side or the other creates logistical issues. It can be done but not without its costs.

Need to keep eyes on the economy (i.e. recession)

I'm guessing most of you look at NH3 thru the prism of agriculture. We need to remember that there is a lot of industrial demand for it as well and that demand can help raise/lower price ideas.

Recession talks continue out there. How bad is it? How long will it last? Those sorts of things.

So far, we are not seeing this as a major recession that is causing NH3 industrial demand to falter. However, that is something to continue to watch.

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 - +2% or approximately $23 higher
Vs 90 days ago - +1% or approximately $16 higher
Vs 6 months ago - -2% or approximately $18 lower
Vs 1 year ago - +84% or approximately $468 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

Fall is right around the corner - for producers/suppliers, there is not much time between now and application. They can see the white's of their eyes. There could still be some pressure on their price ideas but being this close to application demand, they are much more likely to be able to sustain.
European production losses will hurt for the foreseeable future - it is a big loss to the global S&D. Even if they come back online, that process will take time (it isn't a light switch). More likely it would take weeks, not days. With so much fall demand around the world, if it turned back on today, the effect wouldn't be what many hope for.
Grain prices keep holding - let's face it, producers/suppliers know how high grain prices are. No, they have not kept pace with NH3 price increases but they are still healthy for '22 and '23. Likely you have been farming long enough to know that when prices are high, hands go out wanting a bigger piece of the pie. This year is no exception.

Bearish Factors

European governments can intervene – now that our number one bull factor has played out, this becomes our strong number 1 bear factor. Every government around the world knows that they have to feed their people. We could see governments in Europe step forward to subsidize the high cost of natural gas in order to resume producing nitrogen. That would throw every fundamental model out the window...and would put downward price pressure on global price ideas.
Just because we expect a fall application run doesn't mean we will have a fall application run - farmers could opt to wait until spring. Mother nature could simply say no. There is no guarantee that fall happens and if it didn't happen, there would be a lot of product sitting around. Spring demand/supplies would be a different story but the winter months would be a struggle.
Major recession - I'm grasping at straws here for a number 3 because I struggle to see prices down short term. However, this is one we cannot forget about. Back in 2008, the market was on fire and many claimed prices were going to the moon. Then the recession hit and cut the knee's out from under the industry. We look to history to keep from repeating those sins. That lesson is just as true today as it was back then. We are not seeing the same signs that it will repeat, but we know how quickly markets can change.

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

Hedge - if you are buying inputs and not selling grain, that is speculating. Same if you sell grain but not buy inputs because if you lock in one side of the equation, the other side can still burn you. If you decide to lock in your NH3 for the fall, please at least consider locking in some '23 grain. I know there are challenges and risks involved with doing that and I know that means it doesn't fit everyone's operation. I only ask that you consider it because the worst case scenario is that we buy NH3 today...and the price of grain falls apart.
Talk to your supplier about your intentions - you do not need to get into the grisly details but it is worth discussing your plans from a 50,000 foot level. If you are a normal fall applicator and you intend to wait for spring, give them a heads up. Likewise, if you tell your supplier all summer/early fall that you are not buying this high prices B.S., do not be surprised if it isn't there on November 1. As much as you are nervous about locking stuff in at these values, they are the exact same way. A lot of this industry was around in 2008. None of us want to repeat that.

Fertilizers

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