Farmer Fertilizer Focus - Ammonia

By: Josh Linville, Vice President- Fertilizer

Tue, 03 May 2022, 13:32

NH3/Anhydrous Ammonia

Josh Linville

Director - Fertilizer

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

I can honestly say I never expected to see this poor of a spring run. The last 30 days have largely been a bust for a lot of North America due to weather. The west and south continue to fight thru horribly dry conditions while the east and north deal with wet and cold.

As we moved into the spring period, a lot of our forecasted demand was expected to be seen in the eastern cornbelt. The western cornbelt had a tremendous fall run and had little left to do. That is why, when we got the updated corn planting report yesterday, it was so telling:

A lot of the territory that should have had a lot of NH3 applied is way behind. That means bad things for NH3. That means a much higher chance that inventories going into the summer will be higher than what was previously expected.

Due to that, we are now leaning toward Midwest NH3 values weakening as producers/traders/suppliers start to come to terms with having more product/positions in hand as we move close to the summer months. This should mean a more aggressively priced summer fill but will not necessarily mean a cheaper fall prepay number.

From the world vantage point, it seems that while the supply situation is still tough, global players are coming to terms with it. The Tampa NH3 price for May was set lower than April. Add to that the fact that lower still pricing was reported on a spot sale out of Trinidad and it likely causes demand to lock up in hopes of lower prices still.

With international prices showing a downward trend, demand will start dragging its feet in hopes of further price cutting which will lean on price ideas further.

DO NOT TAKE THIS NEWS AS AN INDICATION THAT PRICES WILL BE A FRACTION OF WHERE THEY WERE THIS SPRING. There is a lot of hope that prices will go into a freefall and we will start seeing pricing similar to summer '20. While anything is possible, that is not likely. At this point, we need to hope that prices fall out of the quadruple digit range and into the triple digit range....

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

Nope, not from what I am seeing today

There are a few things that are leaning on NH3 price ideas as we move thru the spring:

Poor spring run in North America will result in higher than expected inventory levels - producers like having empty storage coming out of fall and spring. It means they have plenty of options of where to ship their summer produced product and also means they can be more bold/bullish on their price ideas. When storage is full, it puts pressure on producers as they start worrying about where they will ship. They have to get more aggressive than their competition.
International price ideas are falling - the Tampa price, while not a great indicator for Midwest values but a talking point when it suits the seller, has fallen vs April. Combined with the reported "cheap" sale of tons from Trinidad and it appears that global prices are easing. While Midwest buyers questions about it will likely be shrugged off, the pressure will be there.
It will be on the producers to bring demand forward - at these types of price levels, many buyers are going to take a wait and see approach. Fall season is 6 months away. Next spring almost a year (not that you can buy that far out). I expect a lot of buyers will drag their feet for their fall tons with the idea that it is better to wait until the absolute last minute to lock up needs. That means retailers will be nervous about buying as well. That puts a tremendous amount of inventory risk on the producer that they do not like.

The day will come when it is time to buy. I do not know if that day will be due to a low NH3 price with producers desperate to put on a sales book or because grain prices rally and make the ratio worthwhile. I do not see either situation today. That's why I'm not in love with the idea of buying today for the fall. Better to wait and see what happens.

What has happened in the last 30 days?

May Tampa NH3 price settled at $200 cheaper than April!

OK, maybe I shouldn't be celebrating the fact that May Tampa NH3 was settled at $1,425. That is a really big number. It has been so long since we have seen any good news that it is hard to not be a little happy!

The Tampa NH3 price is more of an indication of how bullish/bearish the global market is. It does not have huge implications on Midwest values. It is one of those things that producers like to talk about when Tampa is rising as it is another talking point to bring buyers forward. When the price in Tampa drops, it is largely shrugged off. Funny how that works...

Still, we will take any good news we can get.

Spring N.A. demand appears lackluster so far

It has been a strange spring season for N.A. If you look above at the corn planting map, it is plainly obvious just how behind we are. At these types of corn prices, farmers will do whatever they can to get the seed in the ground...and yet we are that far behind on planting. Just imagine how much behind we are on applying NH3.

For those in the western cornbelt, you had a tremendous fall application period. There is no doubting that. A lot from the west always comment that their application is done and there is no spring demand remaining. That is right...for your area.

What that point misses is that a lot of the spring application occurs in the east...where it has been wet...very wet.

Farmers in that area are going to have a choice to make when it finally gets dry.

Delay planting further and apply NH3
Skip NH3, get planting done and proceed with applying urea/UAN as a replacement

For many, it isn't a choice. They will jump headfirst into planting and will figure out there N needs after that is complete.

This isn't to say that spring NH3 is completely finished. They have a lot of sidedress NH3 capability...but it is going to struggle to make up for a lack of preplant season.

This could have NH3 producers shaking in their boots a bit...

Waggaman, LA NH3 plant is back online

While it may be too little, too late for the spring run, the Waggaman facility was announced to be back online and producing once again a couple weeks earlier.

While not the silver bullet that is going to solve all the world NH3 high priced woes, in today's market, we celebrate any good news we can find. Having this facility back operational is good news and could lean on prices a little more.

Otherwise...quiet

The Midwest average did not change in the last month. NH3 producers likely know that if they drop their price today, it will do very little to change demand. Buyers are not applying because they cannot get tractors in the fields. They could give NH3 away for free and it wouldn't solve that issue.

While we expect to start seeing downward price pressure in the coming weeks, from a producers POV, it is better to wait until demand steps forward and then get aggressive. At least at that point, you might accomplish making sales...

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 - completely unchanged
Vs 90 days ago - +10% or approximately $132 higher
Vs 6 months ago - +35% or approximately $388 higher
Vs 1 year ago - +137% or approximately $860 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

Tight spring application window – while not likely, producers/suppliers may take the approach that when weather shapes up, that there is a very limited window that the market can operate in. That means a lot of demand in a very short time which means buyers are forced to buy whatever is there. If producers are brave enough to take this position, it could push prices slightly higher...but not likely.
Global production losses still hurt – just because the market is showing slight improvement today does not mean that we have completely healed from all the issues we have been thru. The global S&D is still tight and if we see a surge of pent of demand (which may be dragging its feet in hopes of lower pricing), we could see prices pop again.
Rising grain prices bring summer/fall demand forward – the higher the corn price goes, the more tempting it is to step forward and buy fall needs today. We have all seen it before. Grain prices rally...fertilizer prices rally. Almost go hand in hand. If corn continues to jump (maybe because of late planting?) and demand surges for fall needs, that puts a lot of power in the hands of the sellers/producers.

Bearish Factors

Higher than expected inventory carryover to summer – this has been a tough spring and there are not many products who have had it worse than NH3. The poor weather conditions throughout all of spring have made it very difficult to pull toolbars thru the fields. That means there is more product sitting in storage tanks today than was originally expected. Producers know this all too well and could start getting nervous that they need to get ever more aggressive on their pricing this summer to make sure it is THEIR tons that find homes...not the competition.
Spring weather continues to fight the market – this one is certainly playing out today. If/when demand hits, producers are going to want to make sure they sell their tons before the competition. Not only to clear inventories before the summer months but also because current pricing has tremendous margin built in. When the last stroke of demand hits, I would not be surprised to see pricing under pressure.
The world continues to normalize - this does not necessarily mean that the Ukraine invasion stops, European natural gas values return to single digits, etc. It means that the world normalizes these events as they are today. It is sort of like gas prices. Years ago, anything above $2/gallon was seen as outrageous. Today, many would jump for joy at the idea.

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

Be prepared because this summer is likely going to have one of the toughest decisions you have ever made when it comes to buying your NH3. While some of the stars are lining up to drop prices from where they are today, it is VERY unlikely that we get anywhere close to what we all consider "normal". We are in a high priced cycle. This summer is going to be tough.
If you buy your NH3, consider selling some grain. If you sell grain, consider buying some inputs against it. As a farmer, you have the unique ability to lock in your inputs and outputs...well, sometimes you do! If there is an opportunity to lock in a ratio that makes sense, do not get cold feet.

Fertilizers

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