Farmer Fertilizer Focus - Ammonia

By: Josh Linville, Vice President- Fertilizer

Sat, 01 Jan 2022, 20:25

NH3/Anhydrous Ammonia

Josh Linville

Director - Fertilizer

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

Unless corn/urea/UAN values go into freefall, it sure looks like preplant NH3 values are going to hold. I do not expect to see those values going much higher in the near term but producers are comfortable enough that they should hold prices steady, with or without demand.

Globally, inventories are tight and there was no better example as when the Tampa NH3 January price was set. When announced, the value jumped $125 higher than the December price. While Tampa is a terrible indicator for inland North America, it is a great indicator of the international market.

For North America, this fall NH3 application was one for the ages. I'm not willing to say it yet as we still have research to do but I will not be surprised if by February we are saying that this was one of, if not the, biggest fall application in history. The weather and incentive to apply were perfect.

However, that means that we enter January VERY low on inventories. Guess who benefits from that...the producer of NH3.

What has happened in the last 30 days?

NH3 has finally caught up with "normal" urea/UAN price spreads

I know this is the same subject that we have hit on the last few months but it is important to track. The difference between NH3 and Urea/UAN on a price per pound of actual N is back to within "normal" spreads.

What does this mean? Well, it means that producers are going to think twice before trying to push the value of NH3 any higher.

If urea and/or UAN values start to crater, NH3 will be left as the high priced alternative and could see downward pressure. Same can be said on the upside...

What...A...Fall

As I mentioned above, this could very possibly be the biggest fall application we have ever seen. It was that perfect. The only complaints that we heard were that some areas got too dry and the ground would not seal.

So what does that mean going forward?

First, it means we drained this system. Everything is either empty or near empty as we closed out 2021.

Second, it means that demand in the spring will be less. With so much put on in the fall, we absolutely chewed into some of our spring NH3 demand.

Third, the market NEEDS spring demand lower because it will not be ready.

I know that third one doesn't seem right but hear me out. This fall ran very close to the end of December for a lot of areas. That means we not only emptied the system but kept it empty. For a lot of the Midwest U.S., spring can start as early as March 1 - 15. I am here to tell you that if that early of a start happens, the product will not be there.

The system just isn't build to refill everything that quickly. A couple years ago, the western Midwest had a pipeline that carried NH3 very efficiently. Well, that pipeline was abandoned due to the cost of repair. That means those tons now need to be ferried either by rail or truck. Not the most efficient methods. That puts stress on the ENTIRE system.

I have seen it first hand. If we start spring at all early, watch out. We could be discussing limited tonnage for a while...

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 - unchanged or approximately $1 higher
Vs 90 days ago - +78% or approximately $602 higher
Vs 6 months ago - +114% or approximately $731 higher
Vs 1 year ago - +276% or approximately $1,006 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

Big fall run means struggle to refill – as mentioned above, this is a HUGE win for producers. They know they cannot refill the system before spring. They will have little pressure to drop their price for winter fill or spring prepay.
Seeing more and more reports of higher corn acreage in 2022 – we continue to use 91M acres to be planted in 2022 for our demand models. If some of these 93 - 96M acre projections become true, we will have vastly UNDERESTIMATED N demand which will have a bullish result.
Any winter production issues – I'm not in the game of trying to predict production issues such as the artic blast last February which shut down a lot of N.A. N production. It is simply impossible to do. However, I will predict that if anything like that happens again, the effect on the NH3 and N market as a whole will be devastating. Inventories are already tight. Loss of production would only make the situation worse.

Bearish Factors

If corn values falter, it will be hard to justify fall application – it seems that Dec '22 corn values are stuck around that $5.50 area. If we see that value break below (think $5 - $5.25), it is going to get really hard for a lot of acres to justify corn...
Are we overestimating corn acres? – in the bullish box, we discuss the effect it would have it acres are higher. The opposite is just as true. What if Chinese demand goes away. What if Washington D.C. actually starts pursuing doing away with the ethanol mandate. All very low likelihood scenarios but things we need to watch.
Really poor start to spring - one of my biggest fears is an early start to spring which see's supplies unprepared. However, the opposite holds true. What happens if we have a drawn out winter or a very wet start to spring? What if farmers across the Midwest are unable to get to the fields prior to April 10? I'm guess you decide to plant rather than apply NH3. That means demand plummets and takes price with it.

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

Know what you did or did not get done this fall. Please do not make the mistake of over purchasing for the spring. Did you get more done in the fall? Does that mean you need less than normal in the spring. I realize I do not need to bring this up but just in case it helps that one person...
Do not be surprised to see NH3 values dropping for sidedress/late spring demand. A lot of times, we are in the middle of preplant demand and then hear stories of prices dropping. Those dropping prices are usually tied to later ship tons. There are a lot of eastern Cornbelt acres that will sidedress. If you are one of those and can wait, then by all means but if you are not, do not make a bad decision based on bad timing.
Make sure you are ready to go when mother nature allows this spring. We may end up with another fantastic application window. Then again, we may not. Better to be prepared and knock it out quickly.
Make rational decisions. I get that a lot of the Midwest is still looking at NH3 values in the $1,400 - $1,500 and higher. Those are sickening values and I cannot even fathom writing a check of that size. All that said, try to make the best unemotional decision that you can. At the end of the day, it is a numbers game. If the price supports the crop, then roll with it.

Fertilizers

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