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July 2013 Archive for Inputs Insights

RSS By: Davis Michaelsen, Pro Farmer

Inputs Monitor Editor Davis Michaelsen adds his perspective into the happenings of the inputs markets.

China, Anhydrous and the Open Veins of Latin America

Jul 26, 2013

In 2009, President Obama visited Trinidad and Tobago for the fifth Summit of the Americas in an effort to improve relations between North and South America and island nations in the Caribbean. This was the first time the President came face to face with Venezuela's Hugo Chavez and other dignitaries from the region. Chavez reportedly gave Obama a copy of Eduardo Galeano's 1973 book, 'Open Veins of Latin America: Five Centuries of the Pillage of a Continent'. The symbolic gesture speaks volumes and the ideals expressed in that book live on beyond the March 2013 death of Chavez, and Chavez loyalists have vowed to keep up the fight.obama chavez

'Open Veins of Latin America' was a contentious work that outlined the exploitation of the citizens and resources of Latin America first at the hands of European colonizers, and then by U.S. Imperialism. But the governments of Brazil, Chile, Argentina and even the author's home of Uruguay all banned the book for its left leaning rhetoric. This is a one-sided work born of economic frustration, and anti-capitalist sentiment.

Trinidad & Tobago lies just 11 kilometers off the Venezuelan coast and is the leading supplier to the United States of ammonia. Relations between Trinidad and the U.S. are in good shape, and American agriculture has given Trinidad a solid revenue stream based on abundant natural gas reserves. But these reserves are currently threatened. A Monitor article from yesterday reports the two largest natgas refineries in Trinidad & Tobago shut down in 2012 due to declining reserves.

Meanwhile, China has made gains in LNG infrastructure and is now seeking consistent producers to fill its LNG dancecard. Among its first stops -- Trinidad and Tobago. With two Trinidad plants shutting down last year, ammonia production capacity was reduced by nearly 40%. If Chinese interests lock in part of the Trinidad natgas supply, prices for U.S. bound anhydrous ammonia could easily skyrocket as ammonia and LNG would be in direct competition for natural gas.

Maybe we are fear mongering here. The Chinese have too much to gain by collaboration with the United States, and as the middle class there and in other parts of developing Asia grows, U.S. crops will feed the cows, hogs and chickens that will provide the protein for this burgeoning demographic. On the manufacturing side, China and the U.S. share a symbiotic relationship as China provides low cost goods to American consumers at an affordable price. But this is a tenuous friendship born of convenience, not mutual admiration.

I was talking with a farmer the other day and as we rounded our 2nd adult beverages, he threw out the question, "do you think China will ever invade us and try and take over?" My answer was, "profanity, no!" China cannot grow corn like we do. They need our corn more than they need victory.

If Trinidad and Tobago share the sentiments of the still influential Chavez regime -- just 11 short kilometers away -- they will likely find sympathetic company in the Chinese. However, each of those nations has a need for a strong American consumer. If the citizens of the U.S. stopped buying Chinese socks and doohickies at Wal-Mart, that country could face some real economic peril. But if anhydrous prices itself off the farm as a result of increased LNG sendouts from Trinidad, U.S. total yields would suffer making export commodities expensive on China's end.

In the event that anhydrous ammonia becomes scarce, U.S. anhydrous users would be forced to switch to urea and the ensuing transition and learning curve could limit yields in the U.S. for a few seasons. Remember, China has been cranking out urea over the last two years as fast as they can make it, and more production capacity will come online in China in the coming months. Could it be the Chinese are lining up to corner natgas, stifling ammonia out of Trinidad so they can sell American farmers urea? It would not be the first time China jockeyed with fertilizer pricing based on tenders -- recall the potash holdouts of 2012 that led to strong declines in potash pricing and left Saskatchewan in a crippling oversupply.

Anti-American sentiment has a strong foothold in Venezuela, and with leaders in the region still touting economic exploitation in Latin America, Trinidad and Tobago may look to China as a way to continue to profit from natural gas and a means to make nice with Venezuela, all the while claiming the title of the tiny nation that beat American imperialism single-handedly and finally settled the score -- if only Chavez were around to see it.

I believe Trinidad and Tobago would prefer to keep supplying ammonia to the United States. But Latin American nationalism and Chinese import demand for LNG coupled with supply constraints and declining proven natgas reserves in Trinidad could produce a witch's brew of high prices and ammonia shortages. The need for domestic nitrogen production is becoming more evident by the day. Production capacity increases will be coming online in the Midwest over the course of the next 4-5 years -- the more the merrier.

Nitrogen demand in the United States will be strong in the coming season, as it has been in seasons before. Domestic nitrogen production is on its way to save the day, but the question remains if it will arrive in time to shelter growers from price spikes and ammonia shortages out of Trinidad.

Meanwhile, as our President continues to acknowledge the woes of the downtrodden socialist world, the American ag industry must insulate itself against global forces that would settle old scores and reopen old wounds.


Market Like You Mean It -- They Think I'm Crazy Around Here

Jul 19, 2013

wowglassesWe have a theory here at the Monitor that states growers will hit price resistance on NPK bookings at 18% of expected new-crop revenue, based on December corn futures. If we work the numbers using today's Dec corn price -- currently a convenient $5.00 even -- and yield estimates at 152 bu/acre, we arrive at $722.00 in expected new-crop revenue per acre. 18% of that is $129.96 per acre to budget for NP&K for the 2013-14 crop.

USDA's July 11 WASDE predicts, "The projected 2013/14 season-average farm price for corn is unchanged at $4.40 to $5.20 per bushel."
 

That does not seem like much, and it isn't. I worked up these figures around the same level for my presentation at the Des Moines Leading Edge conference and when I said corn pricing dictates NPK expenditures around $130/acre, the air went out of the room. Growers grunted and guffawed at spending so little, speculating on the tiny yield so little fertilizer would produce.

While the expenditure would do little to support a record breaking yield, on paper, that is how the 18% system is supposed to work. My theory was to forward book 18% when Dec corn is at a low, wait to fill in the rest of your needs at a rally on suggested increased returns. Not a bad thought, but a question came from the audience, "But what if cash prices wind up at $4.95?"

There are two options at that point. Cut back on P&K, or work the 18% backwards. Figure how much you expect to spend on NPK as a means to figure your selling target price for corn. Let's run the numbers. Figure a 175 lb/acre application of anhydrous. At today's 52 cents/lbN, that would total $91.00/acre. Throw in a sidedress of 32% at 30 lbs/acre and we add another $10/acre. That leaves us with $29 to spare for P&K. At current prices, that gets you 22lbs of DAP and 30lbs of K per acre.

Due to high crop returns, growers have banked a little P&K in the soil over the past few years, and most fields could stand to run a little short this year. But that leaves no room for a little lime, or sulphur or anything else. Bu ti do not like allowing fertilizer pricing to dictate the quality of the nutrient profile.N7 18

So I asked one of those growers what he expects to spend on NPK and he told me he can't see getting it done for less than $200 per acre. Now that's a figure we can hold on to. Here's the rub. $200/acre NPK would get you 192lbs/acre of anhydrous, 55.5 lbs/acre UAN32%, 83lbs/acre DAP and 60lbs/acre K. Now we seem a little P&K heavy, but a robust nutrient profile leads to robust yield. If these P&K numbers are too high, there is cushion for lime, sulphur, custom application fees, etc.

With our NPK budget set at $200.00/acre and yield at trendline 160 bu, in order to make our money back at 18%, corn prices have to reach -- deep breath, now -- $6.94/bu. That's $1111.11 in new-crop revenue per acre.

Remember from above, USDA's July 11 WASDE predicts, "The projected 2013/14 season-average farm price for corn is unchanged at $4.40 to $5.20 per bushel." Like I said, they all think I'm crazy here. But that is the reality of the math of it. When I came up with $6.94, news spread around the Pro Farmer offices that Davis was off his rocker and, of course, a friendly wager ensued, and while USDA does not expect corn prices to reach $6.94 -- or even $6 -- if it does, my coworkers owe me $6.94. Phosphate K2012

I've got $6.94 sitting in an envelope in my desk right now as I fully expect to have to pay up on this one, but the exercise is worth pondering. In lean years, growers have been known to stretch that 18% up to 20% and that would help a little, but the fact remains that a general downturn in corn prices is predicted. Nutrient efficiency will be key to maximizing profits in 2013-14. As we begin to look beyond the crop in the ground today, the fall application season draws closer everyday, and intentional marketers will have to get this figured out.

Be aware that profits from harvest are subject to expenditures on the front end. Simple, I know. But turning a profit and maximizing yield in light of lower projected corn prices separates the farmers from the boys. It will take some forethought and awareness of fertilizer pricing. This week's Monitor features outlooks for nitrogen, phosphate and potassium. All are expected to continue to slide through summer, with anhydrous giving the least amount of ground.

Stay tuned to your Inputs Monitor as you embark on the decision making process, going to church wouldn't hurt, and as always, market like you mean it.


Aquaman Stands at the Ready

Jul 12, 2013

aquaman2Pro Farmer's Leading Edge Conference was held at the downtown Marriott in Des Moines, Iowa earlier this week and growers from all over the country were on hand to brush up on their marketing skills, peer into the weather and land forecasts and, of course find out what's happening in inputs.

The event included a reception on Monday night celebrating Pro Farmer's 40 year anniversary and a lot of old Pro Farmer faces made an appearance. Tuesday morning, breakfast was at 6:30 and included a brief address from Iowa Secretary of Ag, Bill Northey. I have met with Secretary Northey on a few occasions to discuss Nutrient Reduction Strategies and other topics of note. This is where I pick up our story...

I made my way to the breakfast line, filled my plate, and found a seat. A short time later, Secretary Northey came and sat beside me and we started to chat. Soon after, Pro Farmer founder and Godfather, Merrill Oster came and sat on my other side. I was reflecting on the ag-intellect surrounding me and thought to myself, "boy howdy, you're really gettin' somewhere now!"

aquaman3I actually felt a lot like Aquaman at the Hall of Justice. Aquaman was one of those superheroes in league with Superman, Batman and Wonder Woman, but his powers were very specialized. He could breathe underwater, communicate with sea life and swim like a shark. On land, Aquaman was always happy to help, but his powers were really intended for undersea use. Rest assured, however, if the barracuda were ever to rise up or evil villains attack by submarine, Aquaman would be ready to answer the distress call, and America would be glad he did. When it comes to ag marketing, I am your Aquaman.

A Pro Farmer survey reports that most growers only check fertilizer pricing one-three times a year. The Inputs Monitor makes it easy to break that cycle by offering weekly updated pricing for your local area, piped directly into your computer. In the meantime, diligent Aquaman continues to do pushups and read from the founding fathers, always ready to defend justice and the common man, when the phone finally does ring.

Back at the breakfast table, there I sat, a lesser superhero at best, between Superman and Batman. I was in my Pro Farmer 'supersuit' and my presentation pants, ready for my 9:00 session. I casually reached for my carton of milk for a drink. Something across the room caught my eye as I tipped it back. In the split second my concentration lapsed, my milk took advantage and gushed down the front of my shirt and all over the front of my pants.

I glanced right and left, hoping neither of these guys had noticed, and as far as I could tell, they hadn't. I wiped myself from chin to knees as discreetly as I could, and thinking I had pulled it off, replaced my napkin on my lap and started in again on my eggs. That is when Merrill turned to me with his napkin and dabbed at my collar saying, "here, you missed a spot... let's get you looking good again."

As a rookie Pro Farmer Editor, I flashed back to all of the times as a child my father had to say things to me like, "quiet down son, the grownups are talking."

I fill a unique role at Pro Farmer, and yes, I help out daily with Pro Farmer's charts and on other projects as needed, all the while, keeping on top of the latest news and fertilizer pricing trends. I realize the Inputs Monitor may not be something you read every single day, but I guarantee that, whether you visit the Monitor today or a month from now, you will not only find updated, charted pricing data and advice alerts, but also the latest happenings around the global industry.Aquaman1

This year's Leading Edge Conference confirmed the value of the Monitor to me and to all of those in attendance. It was great to find so much support in the growing public, and if you happened to catch my presentation, you know there are global forces at work that impact the health and outlook of our own fertilizer industry here at home.

So while survey data suggests that fertilizer pricing probably only crosses your mind a few times during the year, when you want information, the Inputs Monitor is always ready, and will have all of the information you need and more. I continue to write daily posts whether people tune in or not, so there will be plenty of reading material when you swing by.

I understand that you have a lot to think about, and that fertilizer and fuel pricing is only a small portion of what's on your plate. Don't worry about it. Aquaman is diligently standing by, fully prepared to handle what the industry may throw at the farming citizenry. Armed with the three pronged trident of solid data, proven experience and a top notch support team, count on your Inputs Monitor to be there when it counts, at a moment's notice.


 

 

 

June In Review: Capture Savings Amid Lagging Corn Futures

Jul 05, 2013

weakcornI woke up the other day and realized June had come and gone, already -- where does the time go. The weather has finally straightened out and the spring soak has come to an end. The result is a wide variety of crop conditions between the fencelines. Much like last year, yields will vary strikingly as areas of strong growth are flanked by watered out plants.

USDA has raised its planted acreage figures in a surprising display of ag-optimism. December corn futures now sport a $4 handle and while revenue prospects at this level are short, I wouldn't pack up the kids and move to the city just yet. If you are an intentional marketer, and can time purchases just right, lagging corn futures can be offset by low input costs for next year's crop.

I've referenced it many times, but 2008 showed us that fertilizer will follow corn, and while nutrient falls off more slowly than does corn after a rally, it also lags the front end of a rally, however slightly. That will be our opportunity to take advantage of weakness in corn futures, and weakness in inputs. The truth is, weakness in Dec corn signals downside action for nutrient, and with urea, DAP and potash in a state of global oversupply, the cards are stacked in favor of buyers. Lagging futures prices coupled with plenty of product from a variety of sources could set off the 'perfect storm' of inputs discounts.ZCZ13 7 5

July will find many suppliers setting fresh pricing points as they make ready for fall. We will watch these numbers closely, and now that the Monitor has a full year of data to rely on, we can really start to dig into the trend. Corn will rally. When, I don't know. At some point, the reality of the yield potential will catch up to the market and should contribute to higher returns. But experts have predicted a downturn in commodity pricing in general for the next few years. That means returns may be limited for awhile, making every dollar spent count.

We have issued preliminary price targets for the coming year for nutrient and for farm fuels. For a look at where we believe pricing is headed in the coming months, give those articles a look. These pricing projections are early, but are the result of much consideration and guidance from industry experts, as well as our own data. We will revise these numbers as the market dictates.

The table below compares retail inputs pricing as collected by your Inputs Monitor from the first week of June '13 to the first week of July '13 and includes math for year-on-year.

 
Anhydrous
DAP
MAP
Potash
UAN28
UAN32
Urea
6/3/13
$869.07
$632.60
$649.52
$579.29
$400.86
$438.54
$563.51
7/1/13
$859.57
$628.58
$648.48
$580.50
$399.31
$444.20
$553.30
Month-over Change
-$9.50
-$4.02
-$1.04
+$1.21
-$1.55
+$5.66
-$10.21
7/6/12
$794.92
$685.00
$659.08
$633.05
$411.83
$503.50
$717.75
Year-over Change
+$64.65
-$52.40
-$10.60
-$52.55
-$12.52
-$59.30
-$164.45

As you can see, the month-over data suggests a bear run for nutrient in progress, and while the year-over comparison includes some strong moves to the downside, the expectation is for resupply to set new, lower pricing points this month.

Analysis --

Anhydrous posted the only gains year-over adding $64.65 in the last twelve months, but in June, NH3 softened $9.50/ton in the regional average suggesting a fair amount of downside potential here. Also working in favor of lower anhydrous pricing is the notion that end users may still have some anhydrous credits in place at suppliers as the weather did not allow iron in the field in some locations, and a certain amount of NH3 just didn't make it out of the nurse tank. This may be interpreted as weak demand from suppliers upstream and put downward pressure on NH3. But anhydrous remains the least expensive form of N at 52 cents per pound of N.

All other nutrient fell over the last year. Phosphate trailed on robust supply and production supported by strong applications in the Corn Belt in '11 & '12. This is also viewed from upstream as softening demand and while producers will continue to churn out product at current levels, pricing expectations are at or below the present day.

Potash threw a fit -- a dollar move constitutes a fit for K -- during the month of June, but fell year-over by a respectable $52.55. This was fueled by China's pricing point set by a hold-out on Canpotex which was supported by supply via rail from FSU sources. But the FSU has announced curtailments on K shipments to China and Canpotex member PotashCorp has slowed production to gnaw away at the current 20% oversupply. These features may hold potash in place with more downside potential than upside risk. But with a product that throws fits in increments of just a few cents at a time, we do not have much concern over K pricing taking off on us.

Perspective --

Moving forward, we expect a general softening for nutrient by fall. This does not mean that the expectation is for a constant downward track, in fact, we suspect it may take some fishing on the part of suppliers to find pricing points that work for both end users and retailers. Corn will continue to hold sway, but as fertilizer chases corn revenue, growers who find the right opportunities to book fertilizer and fuels for the coming year will probably find favorable pricing amid a complacent environment for commodity investment. If traders think things are going too well for the crop -- and they do right now -- December corn will continue to languish at low levels. But watch out for negative data either out of USDA or Wall Street to inject unexpected strength into December corn futures, signaling upside risk for nutrient.

Uncertainty can fuel volatility. But the uncertainty we currently observe is translated into apathy for commodities as traders focus elsewhere to chase profits. But Pro Farmer's Crop Tour could really strike a blow to market assumptions and if negative yield data is reported during the August count, expect a rally in December corn futures, shutting off the opportunity to book inputs in a lagging corn futures climate.


 

 

 

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