June '23 Farmer Fertilizer Focus - Ammonia

By: Josh Linville, Vice President- Fertilizer

Mon, 05 Jun 2023, 18:24

June '23 NH3/Anhydrous Ammonia

Josh Linville

Vice President - Fertilizer

U.S. midwest/Tampa price graph

This is the AVERAGE of the entire Midwest which means that your values WILL be different than what the graph reflects. Please do not take this into your retailer and say "why isn't my price the same as here". That is comparing apples to oranges. You might be on the cheaper or more expensive side of this graph. This doesn't take into account logistics/storage/interest/insurance/shrink/etc.

The takeaway from this graph is that in the last month, prices have been jumping which comes as little surprise given European production issues.

For more an international flavor, here is the monthly price graph for Tampa NH3. Again, this should be taken more from a price direction POV than an actual price. Tampa is one of the most visible prices that trend along international movements.

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

Global

Even without product from the world's largest exporter, Russia, global values of NH3 have continued to decline. While I do not think we will see their full return, that factor remains in play.

Until the market can prove otherwise, our POV is that global NH3 remains under price pressure.

Also, do not lose sight of Europe. We have seen 3 recent announcements that production has either ramped up or restarted. While that is far from Europe being back to normal, it represents another reason why prices could decline (increased supply/lower demand).

The NH3 market needs demand to step in/recover sooner than later or the bearish trend looks like it will continue.

North America

Values across the Midwest have remained under pressure. Part is due to much poorer spring demand than previously thought. Part is due to buyers being extremely reluctant as we move into the summer months.

Appears values will remain under pressure until manufacturers/suppliers can clear spring carryover tonnage, set a summer fill program to help balance the S&D and shift focus of market to fall.

We dropped our U.S. spring NH3 demand number from the high of 2.07M to our current 1.7M. That is a drastic drop and equates to heavy carryover inventory. In short, the supply side of the market needs buyers to step in and take this inventory off their hands. Once that happens, they can focus on fall where the S&D starts new.

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

Global

While I do not think values will fall forever, I'm still more nervous on the current downside price potential than upside.

Until the market proves otherwise, price trends are saying to delay purchases.

Again, they will drop...until they do not. Perhaps demand starts to spike as global industrial demand resumes. Perhaps we see a rash of production plant turnarounds this summer that limits supply. There are several reasons prices could jump but today, they seem to be the exception, not the rule.

North America

Today, the outlook and trend continue to lower. Because of that:

It appears that values should remain flat to weak near term so best to wait and watch...but keep an eye on things.

There are several factors that are going to lean on current prices. General trend. Litany of reasons for buyers to not step forward. Economy still seems sluggish. The list goes on.

However, just because the outlook appears weak does not mean there will not be solid opportunities. Today, the corn/NH3 ratio is solid. While I might think that NH3 could see prices down short term, I could also see corn values down even harder. We might be right on the one but wrong on the whole.

Keep your eyes open and if that price happens to work for your operation, I do not think it is worth chancing it. Lock in that profit.

general global nh3 information

What has happened in the last 30 days?

StoneX continues to stand behind lowering U.S. spring demand to 1.7M

The demand forecast for U.S. NH3 has been all over the place.

At the start of the fertilizer year (July 1, 2022), we put spring demand at 2.0M
Following the fall, we raised the forecast slightly to 2.07M
As the month of March came to an end and April appearing tough, we lowered the number to 1.9M
Finally, we recently decided to drop that number to 1.7M due to NH3's high cost vs urea, poor spring weather window, etc.

Basically, this means that we increased the number of tons that are still sitting in the system as we near the completion of fertilizer year 2023 and the start of fertilizer year 2024.

With more tonnages believed to be left unsold in the system, this will place more downward price pressure on summer NH3 values. NH3 storage is a very finite resource. If manufacturers/suppliers are nervous that there is limited fill space, they could become aggressive in price to make sure they make the sale as the alternative could include having to shut down a nitrogen plant due to lack of sales opportunities.

This is only one of many factors that go into determining the market price but it can become a rather large factor very quickly.

U.S. exports continue to Europe

While the outlook in Europe continues to improve in terms of nitrogen plants restarting/increasing, that does not mean the export opportunity from the U.S. has completely dried up.

The market currently has official import/export data thru to March 2023. That data continues to reflect a large chunk of exports departing the U.S. for European countries to backfill production being offline.

This has been a major boost for manufacturers. Without this export opportunity, even more product would be left clogging the system and weighing on price ideas. If we continue to see European plants restarting or increasing production flows, it should result in this arbitrage opportunity drying up and forcing more tons to stay "home". However, as long as it remains, this helps relieve manufacturers of long positions and helps them keep price ideas higher than they would be.

June Tampa NH3 value falls a further $40MT

While the size of price drops have gotten smaller, the negative price trend continues.

Today, the Tampa NH3 price sits at $340 and is an impressive drop from where the high was set not so long ago.

While the price correction is nowhere near the triple digit moves that were seen recently, it continues to show that the overall global price trend is negative.

European nitrogen production increasing on lower natural gas values

In recent weeks, we have seen/heard reports of 3 nitrogen plants ramping up in Europe.

Yara's Ferrara plant
Azomures Romanian plant
Grupa Azoty's Poland plant

This still leaves European production far from 100%...but every baby step is a step. Dutch TTF values have continued to fall. Nearby months have been in the $7 - $8MMbtu range while winter months fell to a low in the $13's. If we continue to see these values under attack, it gets easier for remaining European plants to resume production.

Ukraine/Russia negotiations include allowing Russia to export NH3

I am goin to start this with a simple statement: I do not believe these negotiations will be fruitful.

However, given the impact on the world NH3 marketplace, we have to watch. It would be a game changer.

There continue to be reports of Ukraine and Russia discussing allowances on both sides. While neither party appears willing to give up too much in negotiations, it is heartening to even see discussions.

In the last month, there was talk of Russia attempting to gain access to their export pipeline that runs thru Ukraine. We have heard that the capacity and capability has been returned to the pipeline but as long as the conflict continues, Russia would be ill advised to resume shipments.

If in the low chance that negotiations start gaining traction, it would mean the possible return of the worlds largest exporter. That much product returning to the global marketplace would see supplies jump and price ideas dive.

Again, this does not appear to be a high likelihood event but in the case that it does happen, we must remain on our toes. If the last 2 - 3 years have taught us anything, it is be prepared for anything...

Where are current values in relation to the past

U.S. Midwest Wholesale price average

Vs 30 days ago - -17% or approximately $90 lower
Vs 90 days ago - -46% or approximately $365 lower
Vs 6 months ago - -67% or approximately $865 lower
Vs 1 year ago - -68% or approximately $910 lower

U.S. Southern Plains price average

Vs 30 days ago - -14% or approximately $65 lower
Vs 90 days ago - -32% or approximately $190 lower
Vs 6 months ago - -63% or approximately $700 lower
Vs 1 year ago - -67% or approximately $838 lower

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

Continued U.S. export to Europe - as long as the European arbitrage opportunity exists for U.S. manufacturers, expect it to be a relief valve of sorts. We have seen reports that a few European plants have resumed production but it is still far from 100%.
Likely Russian exports remain very low/zero - while there is some hope that Ukraine/Russia negotiations may result in Russia resuming normal shipments, that hope is no more than a glimmer. It appears these discussions are basically dead in the water. While Russia is attempting alternative routes, those will take time. It looks like the world will have to continue to operate without Russian exports.
Global economy improves - don't laugh...it could happen!!! If global economies were to start booming again, it would help to greatly increase global demand of NH3.

Bearish Factors

Possible return of Russian exports - if by some sort of miracle Ukraine/Russia are successful in negotiations, we could see Russian exports resume rather quickly. That much increased supply in that short amount of time would shock the market.
High inventory carryover into summer - this is going to be a major barrier for sellers this summer. Buyers smell blood in the water and after years of high prices, it feels that few are going to be sprinting to make purchases.
Stagnant demand - while we can hope that global economies start booming again, that certainly isn't high on many radars. Seems that more and more are jumping onto the "stagnant to bearish" market storyline. If that happens/continues, NH3 industrial demand drops and could take prices 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 150 bushels to pay for 1 ton of potash
Spend 100 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 NOLA 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 focal points

Russian export flows - whether this is thru Ukrainian negotiations or the completion of new logistic routes to sea, Russian exports must be watched. As the normal global leader in export flows, their return would have a large say in global values and it wouldn't be from a bullish POV.
North American manufacturers summer/fall approach - we could either see summer/fall values set very low in an attempt to make the price a no brainer or we could see them set at higher prices in hopes that demand is forced forward. How they take this step will determine how the summer/fall plays out in terms of buyers stepping in early or deciding to roll the dice.
Grain/NH3 ratios - take a peek at the ratio graphs above. There are some REALLY solid relationships out there today. Just because the outlook on NH3 might appear softer does not mean today isn't the best opportunity. We could see NH3 values slide but grain values fall significantly harder. It's a package deal folks. Lock up that profit while it is there.

All data was sourced from StoneX unless otherwise noted.

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