Farmer Fertilizer Focus - Ammonia

By: Josh Linville, Vice President- Fertilizer

Fri, 04 Jun 2021, 22:29

ANHYDROUS AMMONIA (NH3)

Josh Linville

Director - Fertilizer

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

Let's cut to the chase. The coming summer fill/fall prepay values are going to be significantly higher than last summer. The only question in my mind is will we see summer/fall values higher than this spring (I think we will).

Everything is coming up aces for NH3. Global inventories are tight. Urea and UAN values continue to climb. Demand for next years crop continues to appear solid. Inventories in North America are likely much lower than normal following a great fall and good spring. Buyers are already asking a lot of questions out of fear of missing out.

There is just little reason why producers need to come out cheap this time around. The only question in my mind is will they stay conservative by keeping prices only up a little to make sure they get sales on the books or will they get aggressive and see what the market will bear.

What has happened in the last 30 days?

Nothing as we wait for producer summer fill and fall prepay programs

In fact, the only thing that has really happened with NH3 has more to do with the nitrogen alternatives, urea and UAN. As urea/UAN prices continue to climb, price ideas for NH3 summer/fall programs continues to go higher.

It will be interesting to see what approach producers take. They want to maximize profits by pushing values as high as possible. On the flip side, if they overbake the value and scare away demand, they could be left holding the bill for much of the summer.

As always, it is a balancing act on their part. I would expect that we see the first act in the next couple weeks.

Where are current values in relation to the past

For NH3, we use a Midwest average of several storage facilities as our base point as it is the easiest spot to track.

Vs 30 days ago - +1% or approximately $4 higher
Vs 90 days ago - +4% or approximately $14 higher
Vs 6 months ago - +112% or approximately $182 higher
Vs 1 year ago - +88% or approximately $161 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

Global inventories are not only tight, production continues to struggle due to Covid delayed repairs – around the world, NH3 has become extremely difficult to find. That has been a big driver of why values have climbed so much in recent months.
U.S. 2022 corn acreage expectations of 91 - 92M – I am well aware that it is far too early to make predictions set in stone for the '22 crop. So many things can change very quickly (last years dericho event). However, today expectations are that next years corn crop will be healthy and that requires a lot of nitrogen.
NH3 price ideas get pulled higher as urea and UAN values continue to climb – if NH3 doesn't see its value climb and UAN/urea does, NH3 will become more and more attractive. That means more demand flows to it as the market sees a discount opportunity on its nitrogen. Eventually, enough demand flows to it that it breaks the price and pushes it higher.

Bearish Factors

If a production plants upgrades (urea/UAN) goes down, a lot of free NH3 becomes available – this is always a little bit of a stretch. Sort of like making decisions based on politics. Just hard to call. However, given some of the production issues in North America and around the world, it is not out of line to think it is feasible.
If producers get to brave on their fall prepay price, it may scare demand away – there is still plenty of time between today and the start of fall NH3 application. If producers start too high and demand collectively says no, nothing would happen initially. Everything else is going in the favor for producers so they would be content to wait. But if demand holds out long enough, eventually upper management begins to wonder what is happening and prices could start coming off.
Fall application is never guaranteed and unpulled contracts carry massive penalties – fall 2020 was a phenomenal season. However, it wasn't that long ago that almost nothing happened in the fall and the market had to start paying hefty monthly penalties until those contracts were complete. Even if NH3 prepay values are attractive, demand may wait until close just out of fear.

NH3 VALUES ARE HIGHER. GRAIN VALUES ARE HIGHER. ARE WE BETTER OR WORSE OFF THAN WHERE WE WERE?

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 60 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 West/East Cornbelt NH3 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

Be prepared for some hefty prices when fall prepay values start getting offered. With urea and UAN prices continuing to climb and global NH3 inventories really low, it is hard to see a path forward where NH3 doesn't come out substantially higher.
If you decide to buy your NH3, really consider selling some grain. These ratio relationships are high enough today. Imagine what it will look like if you buy NH3 at high values and then grain values start to plummet. We are in a higher risk environment today. We need to get our minds thinking from that direction.

Fertilizers

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