Farmer Fertilizer Focus - Ammonia

By: Josh Linville, Vice President- Fertilizer

Fri, 27 May 2022, 20:33

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NH3/Anhydrous Ammonia

Josh Linville

Vice President - Fertilizer

josh.linville@stonex.com

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

It looks like domestic (N.A.) and global prices will continue to see softness in the near term.

From an international POV, the world continues to make small steps toward normal which helps lower price ideas. We haven't seen a outrageous Black Swan event in 5 minutes which is nice!!

Especially now as we move into the summer months for the northern hemisphere, demand should start to wane even further while production continues to build inventory levels. This combo "should" put downward price pressure on the market like was just seen as the Tampa June price dropped $425 from the May value.

From a domestic N.A. POV, we frankly have not see summer fill/fall prepay numbers yet. While we are seeing small price drops at certain points, we have not see the massive drop that would mirror what has been seen around the world. I think this is coming, though. Producers need/want to put on a sales book early with these kinds of margins. They also do not want to run the risk that grains continue to fall and put them in worse condition.

In order to bring demand forward, producers/suppliers will need to drop their price from spring values. Otherwise, they run the risk of the demand side tell them...well, you fill in the blank! If demand pushes back, producer/supplier inventories grow which puts more pressure on them.

All in all, it seems there is a lot more downside on the current NH3 markets than upside.

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

No!!

Not really much of a need to rehash as all of the points above could be copied and pasted in this section.

The spring run was pretty poor which means that inventory carryover to summer is going to be higher than expected. Having more inventory carryover means less tank space to fill. Less tank space to fill means producers/suppliers need to get more aggressive to put THEIR product in YOUR tanks. Aggressive typically means lower priced, in case you were wondering!!!

While my answer to if I think people should buy is a simple no, do not let that make you lazy.

You need to keep a solid watch on this market. When the summer/fall numbers start coming out, I expect that we will see them aggressive at first to "get the demand ball rolling" and then start pushing higher once the floor is set. We do not want to be in POV of overreacting to something that doesn't really make sense but we also do not want to stop watching and miss a short term opportunity.

What has happened in the last 30 days?

June Tampa price was set $425 lower than May which was $200 lower than April!

Last month, I was excited to tell you about the Tampa price dropping $200 from April. Imagine how thrilling it is to say June was another $425 lower!

While we and many others in the market expected to see prices further down, seeing the price dropping $425 is huge. It might have happened before month to month but I cannot remember it. This signifies that the global market is continuing to take steps toward finding its normal. It is balancing the S&D and working out of the horrible supply situation it was in.

However, for those of you in N.A., listen to me when I say this: The Tampa price dropping $425 does not mean your price drops $425. I know exactly what you are thinking: "why is it every time that price rises, my price goes up quickly as well?". I get it and fully understand where you are coming from.

Frankly, its a sales tool. I've been there. I've made the statement. I'm not proud of it but I have.

Tampa should be seen as a directional move. Tampa falling should signify that domestic prices will fall as well...eventually. It just doesn't mean it is falling today.

We are about to cut our spring NH3 forecast...

If you have had a great spring, be thankful. My family is in that small corridor across the U.S. that has had a good spring. Inputs are in the soil. Spraying is coming along nicely as is planting. However, we are not the norm.

If you were south and west of that line, you have dealt with horribly hot and dry conditions which do not exactly scream "spend a ton of money on inputs for a crop that may never grow". If you were north and east of that line, you have dealt with horribly cold and wet conditions. You couldn't get a tractor in the field if you wanted to. Want to apply anything? It better fly.

That said, we have heard some disappointing demand numbers in the Eastern Cornbelt. Enough so that we are contemplating slashing our spring demand number.

At the beginning of the fertilizer year (July 1, 2021) our fall/spring demand forecast was 2M/2M. Following the great fall, we revised it to 2.3M/1.7M. Most of the west got done but a lot of the East is spring only. Now, with what we are hearing, we are considering moving to a 2.3M/1.4M.

300K tons of NH3 doesn't seem like a big deal...until we consider its size. On dry fertilizers, if you have carryover, you can steal a bin. That luxury does not exist for NH3. Storage space is finite and everyone in the supply chain knows it.

If this is truly the case, the sales side of the equation will be dealing with more pressure than they have been accustomed to...

Global (Morocco) continue to report buying lower priced NH3

OCP (the phosphate producer company based in Morocco) has been reported to be buying NH3 vessel quantities at sub $1,000 delivered. Like Tampa, this was expected but how quickly it got sub 4 digits was a little surprising and indicates the world is "healing". Maybe healing is a weird way of saying that but go with it!!

These little nuggets continue to paint a picture of a market that is seeing value fade.

North American natural gas values are rising and rising fast

Don't worry. N.A. nitrogen producers are just fine, making plenty of money and should continue to produce NH3 normally.

OK, before you get angry, that statement was meant as a joke!!!

Seriously though, we have seen U.S. natural gas prices skyrocket recently. While producers are still making plenty of margin and should continue at max production, it is raising the price floor. Prices can theoretically only go so low below cost of production because if it crosses that line, production will stop to stop the bleeding. Basically, this

Again, this is nothing to worry about but something we may need to discuss more in the future.

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 - -13% or approximately $188 lower
Vs 90 days ago - -4% or approximately $56 lower
Vs 6 months ago - -1% or approximately $19 lower
Vs 1 year ago - +112% or approximately $686 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

Our corn acreage expectation for '23 is RISING – this spring has not played out as many expected and is resulting in the 2022 corn acreage DROPPING. While we could still see a solid crop grown here and around the world, we are becoming more accustomed to things not going right. Today, our way too early expectation for the '23 corn acreage total is 93 - 95M. That is a lot of N demand...
This spring may cause more farmers to focus on fall application – we came out of fall '21 with our heads high following a phenomenal application. We had to lower our spring demand forecast as a result and no one expected any issues hitting that number...except we are currently considering lowering that number after a terrible fall. This recent event could actually drive more farmers to fall application to keep from repeating this spring.
Continued grain price rally - should a rising grain price directly mean that NH3 prices rise? No. However, if corn were to jump substantially, that would mean farmers make more money as they look forward. Seeing the chance to make that money, we would see demand rise earlier than normal as everyone rushes forward to lock up their needs for the '23 crop. That surge in demand is met by unchanged supply which causes prices to rally. I do not like it anymore than you do...but that is how it works.

Bearish Factors

Tampa/global NH3 values are falling – no way around this. We are seeing multiple storylines of global values falling. The June Tampa price dropped $425 vs May which had dropped $200 vs April. Global buyers like OCP/Morocco have been linked to sub $1,000MT delivered. The trend lower is hard to ignore.
Current Midwest values have not fallen significantly following spring – producers/suppliers wait until the end of application season before rolling out their typical summer discounted supply program. Today, we have not see those programs offered as producers/suppliers are still waiting and watching.
Current NH3 is high vs most of our metrics - high vs historical prices? Check. High vs current corn values? Check. High vs urea which can be an alternative for farmers? Check. High when we compare the minor drop in Midwest prices vs the massive price drops around the world? Check. Is a correction near term guaranteed? Of course not. Do more signs point lower than higher. I think so.

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 patient...but be ready. This is my POV but today, there is nothing to do from an action perspective. Producers have not released their summer fill/fall prepay programs. That means your supplier has nothing to offer that isn't based off current values which are insanely high still. Do not let that quiet period lull you to sleep. While I have nothing definitive to share, my gut feel is that these programs get announced by the time I send the July newsletter.
Get ready for a hard decision on a high price. Very likely that these values, when announced, will not be near the spring values. That said, they also are not going to be anywhere near the values seen the last couple summers. This is probably going to be one of the hardest buy decisions you have ever made and I'm including that decision you might have made to pay a premium to have green paint!!!!
When the programs are released, do not take it out on your supplier. Trust me when I say that your retailer/coop/etc. would MUCH rather sell you cheap N. For many of them, their margin does not change whether it is $300 or $1,500. However, the $1,500 price carries a lot more risk/interest/etc. that eats into their margin. That aside, many do not care about that side. They would rather sell you cheap just because (I would). I'll get it if you get mad but make sure it is not misplaced anger.
MAKE RATIONAL DECISIONS. When the programs get released, make calm and rational decisions on whether to buy or pass. Part of you will let anger brew. I get it but coming from personal experience, angry decisions rarely work (just ask my wife, I've made more than my fair share). Part of you will let fear of not getting product rise. You cannot stop this from happening. You CAN recognize it and use that to your benefit.

Fertilizers

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