Farmer Fertilizer Focus - Ammonia

By: Josh Linville, Vice President- Fertilizer

Tue, 03 Aug 2021, 14:23

NH3

Josh Linville

Director - Fertilizer

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

NH3 looks like it is pretty well priced today and is going to struggle to drop between now and fall. Spring could be a different story but that brings its own issues.

When I look at current NH3 prices vs Urea/UAN, it is cheaper than it needs to be (from a purely price comparison POV, don't tar and feather me!!!). Producers could have come out with higher prices and the differentials to grains/Urea/UAN would have supported it. Once demand starts to step forward in a bigger way, I'm guessing we will see prices respond positively.

Many farmers that typically apply in the fall are likely asking themselves if they can wait until spring. That is your call to make. There are some pitfalls associated with waiting.

Will mother nature give you enough time in the spring to get it done?
Will you have to delay planting because you waited?
Will we actually see NH3 values down (if fall doesn't happen, that will overload the system and put a higher premium on inland storage)?

Again, it is your operation and the only person that can make the decision is you.

If you do decide to wait, I only ask that you talk to your supplier. They are built for a "normal" fall/spring split. If enough demand slides to spring, they may not be able to respond fast enough to that shift. It is worth having the conversation.

Also, if you buy your NH3, consider selling bushels against it. If you lock in your NH3 and the price of corn plummets, that price looks infinitely worse.

What has happened in the last 30 days?

Summer fill / fall prepay programs have been announced and prices are "OK"

Let's make sure we are on the same page. I'm not in love with this years NH3 program prices. They are really high. Especially when we compare them against last summer's values.

However, strip away the emotional response and we see NH3 values that are not half bad vs grains and N upgrades (urea/UAN). Therein lies the issue for this year, that darn emotional response...

No one else can make your decision for you. However, I will say that I thought we would actually see the NH3 prices higher than where they came out. Assuming urea and UAN hold together on current values, NH3 remains the best N option out there...

Global inventories/supplies remain tight

This has been a situation for several months now. There are reports galore discussing tight NH3 inventories across the globe and it doesn't seem like that has subsided.

Last last week, it was reported that the August Tampa NH3 price was set at a $40 premium to July. While Tampa is not a good indicator for what will happen across the U.S. Midwest, it is a great indicator for what happens internationally.

Let's face it, sellers/producers will look for any excuse they can to raise prices. Global inventories being tight can easily become an excuse.

Fear of farmer demand this fall likely keeping a lid on demand to date

Ultimately, any market comes down to demand. That means you!

Prices are obviously really high vs the same time last year and I believe there is a lot of fear in the market that farmers will pull back on applications this fall. Go down to the bulls/bears section and read in the bears about how contracts are written in favor of the producer. That means a retailer is stuck in the middle and that is a bad place to be. We could see demand be more conservative than normal due to that fear and drag its feet on buying more layers for fall.

I doubt that it will result in prices dropping but it could keep a lid on values until demand steps forward again. How long that lasts is anyone's guess.

Where are current values in relation to the past

For NH3, we use Midwest index as our base point as it is the easiest spot to track.

Vs 30 days ago - +1% or approximately $5 higher
Vs 90 days ago - +2% or approximately $15 higher
Vs 6 months ago - +50% or approximately $214 higher
Vs 1 year ago - +121% or approximately $353 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

NH3 is well priced vs upgrades (UAN/Urea) – as farmers, you are looking for the cheapest route forward so you can keep more of the money you bust your butt to make. Nitrogen is no exception. With NH3 being a discount to both UAN and Urea, we should see the market do everything it can to put on NH3 this fall. Higher demand typically equates to higher prices.
Fall demand expectations remain very high – given the data we have today, we are using 91M acres of corn for 2022 in our demand models. This means another year of high demand for N products in general. Weather permitting, this fall should be a big application which will keep supplies tight going into the winter period.

Bearish Factors

Farmer planting indecision – there are so many high risk factors in the air right now, I'm not sure how most farmers make a decision on what they are going to do 6 - 9 months out. Once you lock up your NH3, you are locked in on your 2022 planting decisions. If enough of the market struggles to make that call, it may delay demand stepping forward. If that demand delays long enough, it might put pressure back on the producer.
Fear of the storage fee/cancellation clause – in case you were not aware, producers write the NH3 sales contracts in their favor. Typically, the buyer has until Dec 31 to pull the tonnage. If not pulled (late harvest/poor weather/etc), it is then the producers decision of what to do. If prices look like they are going to rise, they will cancel the contract and take back the tons. If it looks like prices are going to drop, the buyer must still pull the tons and are subject to a $15 - $20/month storage fee. It is a no win for the buyer and this could keep demand at bay for a little while.

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 160 bushels to pay for 1 ton of NH3
Spend 80 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

NH3 is pretty reasonably priced when you compare it against urea and UAN. Maybe not so much when you compare it against last years NH3!!!
All joking aside, these are going to be tough calls to make. The price of all fertilizers are sky high, not just NH3. That means emotions will be running high as well. It is really easy for me to say this but if possible, remove emotion from the equation. Make business decisions for your farm. That may mean locking down current NH3 values. It may mean waiting. That is your call.
I've been asked a few times if I think NH3 prices will dip by spring. I think there is a decent chance. However, I'm worried of the ramifications of waiting until spring. Can the market keep up with that much demand at once? Will mother nature allow us to get all the NH3 applied before it is time to plant? Always remember that price is only one factor in your decision making process.
If you are a normal fall application person and you decide to wait until spring, there is nothing wrong with that. I only ask that you have that conversation with your normal supplier/retailer/coop/etc. They are set up for "normal" fall/spring splits. If everyone decides to change and no one lets them know, the spring consequences could be bad.

Fertilizers

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