Farmer Fertilizer Focus - Ammonia

By: Josh Linville, Vice President- Fertilizer

Mon, 05 Dec 2022, 00:26

December '22 NH3/Anhydrous Ammonia

Josh Linville

Vice President - Fertilizer

U.S. midwest/Tampa price graph

As mentioned last month, this is something new that we have included into the monthly update. 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

Price ideas should be slightly lower/lower for spring sales in the coming weeks

Today, NH3 manufacturers/suppliers are trying like hell to keep replacement values higher. The idea is that lowering the price today would not likely cause anymore demand to step forward so why do it.

However, we are quickly approaching winter prepay season for spring needs which means manufacturers/suppliers will reprice and I believe that value will be lower than where we are today.

Global supplies are getting better which was seen when the December Tampa price was set $120 lower than November. Fall demand appears ok but far from expectations/last fall. Lastly, urea values have cratered (read the urea section where I eat crow on my piss poor call on the market last November!!!) which will weigh on NH3 price ideas.

This said, I do not think it will get back to the summer '22 price levels. More likely they will keep price ideas higher in hopes that farmers are forced to purchase their nitrogen needs.

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

Really nothing to add here.

Fall applicators know what they need/do not need. Spring applicators simply have not seen spring price programs because manufacturers have not released them and will not until very close to year end.

Once we see programs released, I'll try to send a mid-month update.

What has happened in the last 30 days?

Some European production has turned on...but not all

I'm going to leave the below unchanged from last month with this addition: we need to watch European natural gas values. Since the November report, those values fell to the lower $30's. However, they have since climbed into the lower $40's. We do not believe this will change operating rates at this price range but if it continues to climb, there is a reason to worry. With a lot of global prices hinging on European production rates, this will continue to be very important.

The nitrogen market has continued to circle around the European natural gas crisis.

Around the same time that Russia invaded Ukraine, Russia shut natural gas flows thru the Nordstream pipeline. With Russia being the largest provider of natural gas supplies, this caused European values to skyrocket with little hope of dropping. As a result, European nitrogen production rates dropped into the 15 - 30% of normal range. The world quickly learned that western and central Europe were big producers of NH3 and that loss helped global values move higher.

However, sometimes it only takes a little bit of hope.

A warm start to the European fall/winter has helped to reduce residential demand. Industrial demand has waned due to the high price (free markets doing free market things). European governments, anticipating Putin's move of shutting off supplies, filled storage well before normal.

All of these have contributed to the current Dutch TTF natural gas futures dropping to the upper $30's which has caused some nitrogen production to come online again. Some plants, such as those in Poland, officially announced their restart process. Others have been more coy but are highly rumored to be restarting. Not being vocal about restarting makes sense from a manufacturers POV. If you tell the world you are restarting, you are telling the world that there is more supply and less demand which should cause prices to fall...which they do not like!

There are even more plants that are rumored to be restarting but we haven't added to our list until we are more confident.

One discussion point in the market is that from a financial POV, it doesn't make sense for these restarts. When looking at a fertilizer cost of production against current fertilizer global values, they are right but as is typically the case, it is never that clear.

Some of these plants are not solely focused on fertilizer. Many of them service premium products such as DEF or have by products which are highly priced. While they may lose money on fertilizer, the gains on other products can more than outweigh he losses.

We also have to consider the fact that some of these plants may never restart if they do not do that now. Nitrogen plants are hard enough to restart when the production downtime has been minimal and outside temperatures are warm. The process is much harder when they have been offline for longer and outside temps plunge. Given the age of some of the plants, if they did not restart before winter, they may never turn on again. From that vantage point, it is better to restart and lose money until the market improves than it is to leave it offline and possibly lose the plant forever.

All in all, these restarts have surprised many in the market. The chances of market conditions improving to this point seemed all but zero...but the last couple years have taught us that anything is possible!

Europe needs to continue to be our focal point for global nitrogen markets.

December Tampa NH3 price falls $120 from November!

Demand appears down a bit domestic N.A. and globally. Supplies are improving with production restarting in some areas. The combination of higher supply and lower demand has helped to push price ideas down globally.

Whether this negative price trend continues or becomes a one off event will depend on what happens in the next 30 days.

U.S. NH3 starting to look high priced vs urea

As mentioned before, NOLA and global urea values have been falling hard over the last few weeks. This has helped to pull Midwest values down with it.

To give a sense of how much cheaper Midwest urea is right now, the graph below looks at the Midwest average price in regards to price per pound of actual N for all three sources. It isn't often that urea is this cheap vs the alternatives and when it happens, it doesn't last nearly as long as this cycle has.

This is something that will need to be watched as it could affect price ideas. UAN and NH3 need to be aware of demand switching which could hurt their plans as they move into winter/spring. On the flip side, urea needs to be cognizant of the fact that a tidal wave of new demand could be coming very soon. This is not to say that I expect huge percentage shifts but a small percentage of a very big number is still a big number.

Where are current values in relation to the past

U.S. Midwest Wholesale price average

Vs 30 days ago - less than 1% lower or approximately $5 lower
Vs 90 days ago - +8% or approximately $95 higher
Vs 6 months ago - -3% or approximately $45 lower
Vs 1 year ago - -5% or approximately $74 lower

U.S. Northern Plains price average

Vs 30 days ago - flat to current market
Vs 90 days ago - +30% or approximately $320 higher
Vs 6 months ago - -7% or approximately $100 lower
Vs 1 year ago - -11% or approximately $175 lower

U.S. Southern Plains price average

Vs 30 days ago - flat to current market
Vs 90 days ago - +10% or approximately $100 higher
Vs 6 months ago - -11% or approximately $137 lower
Vs 1 year ago - -14% or approximately $175 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

Solid N outlook for FY '23 (unchanged from November) - grain prices continue to hold and 2023 crop mix estimates continue to point to solid overall nitrogen demand.
Europe turning on but still a lot offline (unchanged from November) - the situation in Europe has improved dramatically vs original expectations. However, there is still an amount of production that remains offline and it will take time to make up for past lost production. Global inventories remain tight.
New production capacity remains far off (unchanged from November) - a new nitrogen plant takes years from paper to producing. We have a solid vision of new world production coming online now thru 2025. Unfortunately for buyers, global demand will grow at a faster pace than supply during that period. Not to say that you will not be able to get product. It does mean that high general price and high price volatility are likely to stay.

Bearish Factors

Europe restarts have occurred – as mentioned last month, Europe has seen a surge in production rates which were not expected from many in the marketplace. The fact that these supplies have returned are a shock to many. Tampa price dropping for December is a big indicator of that. If Europe maintains or even improves its production rates, it will continue to weigh on the market.
Recession hits harder than anyone expects (unchanged from November) - we are already in a recession. I know certain political people are trying to redefine what a recession is but all of my schooling points to we are already there. It just seems like a light recession. Just because it is light now doesn't mean it cannot get worse. Cost of living continues to skyrocket higher. It is more expensive for everything. If we start seeing major cutbacks by people, this recession could grow and take down industrial NH3 demand with it.
High price and/or poor weather equals poor fall demand (unchanged from November) - if we get thru the fall season and find out that demand was very low, this would mean a higher inventory carryover to winter than expected. Production sites are going to continue to produce at these price levels. Storage is very finite with NH3. Producers could get aggressive on their prices during the winter to clear tonnages. Likely we would see the spring story become "little fall demand means big spring demand so prices should be up" but before spring, fill tons would be lower.

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 focal points

Fall demand (I know, duh) - last fall was the largest agriculture application that we have on record. I cannot stress how difficult it would be to repeat that this coming fall. We could see farmers dragging their feet in hopes of lower pricing in the future. We could see mother nature spoil the fun. Or we could challenge last years pace. How good/bad the fall run is sets the tone for the rest of winter and next spring.
Global recession - NH3 is not just used for agriculture uses. There is a lot of industrial usage as well. We could be looking at a tremendous amount of ag demand (and we are) but if the industrial sector starts to fall apart (never say never, we made that mistake in 2008), it will not matter.
European production rates - western and central Europe account for a little over 8% of the global produced tons of NH3 and most of those plants are offline and appear to be for the foreseeable future. On the flip side, if those plants started to come back either due to natural gas values falling or governments stepping in to subsidize, the market will feel that pressure quickly.

All data was sourced from StoneX unless otherwise noted.

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