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September 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.

Look for the Hook

Sep 27, 2013

We have offered advice to subscribers over the past few weeks to fill anhydrous, DAP and potash for fall applications, and a portion of K for spring. Industry watchers continue to give the FSU too much pull in the potash pricing game and some had it that what went on between two potash companies would lower not jut potash pricing, but nutrient as a whole.

The charts below indicate our current position against year-ago prices at the retail level. We pulled the trigger just yesterday on extended coverage for fall DAP and K, and had advised filling fall NH3 on September 5, just as we believed the market was bottoming. Spring numbers are still up in the air and we have a lot of ground to cover between now and then. We expect a general pause in the downside momentum, if nothing else, to capture fall demand. We will have a better picture of what lies ahead for spring once we get through the first of the year.

Anhydrous Ammonia -- Early projections have corn plantings down slightly and while some would say that suggests lower N demand, notable increases in wheat and cotton will more than make up for the difference. In fact, our numbers show growth in nutrient demand year-on-year in the 4.7% range on an average expectation of a 3% rise. That means manufacturers will need to provide more tonnage of N, at lower expected prices.

NH3year over2013The Chinese export window is set to close soon and will crimp the abundance of urea for a time. River constraints are not horrible right now, but load and draft restrictions due to low spots in the channel are still in place from last year's drought. There have been talks of leaving the river open for an extra two weeks to allow extended transit of goods like fertilizer upriver, but if buyers have been on the sidelines this whole time, retailers could easily find themselves in a supply crunch.

Anhydrous followed urea lower to realign the 11 cent margin between the two by the pound of N. If urea is set to pause, anhydrous will at least do that as well, and probably try to breathe some price strength back into urea for spring.

Anhydrous ammonia moved $2.52 higher in this week's Monitor Index to $696.57 -- $142.18 below year-ago pricing.

DAP -- What goes for DAP here also goes for MAP, just on a smaller scale. Ammonia prices carry a lot of upside potential on the wholesale scene and we expect that has excited both anhydrous and DAP pricing. Increased cotton acreage would impact demand for phosphate mildly, but declines in corn acreage would moderate a demand spike, and volumes at current acreage expectations for wheat, cotton and corn plantings are in the neighborhood of 7.5 million tons.

DAPyear over2013Phosphate is produced in the United States at a rate that requires only roughly 10% imported material annually to meet demand. Phosphate has followed potash lower due to market pressure, the decline in the Indian rupee and suppliers that have been largely absent up to now, unwilling to buy-in before the price slide runs out.

The chart at left indicates that the downtrend has been broken and, looking at last year's numbers, DAP is acting like it is expected to, and may reinflate before spring. We do not see a need to jump in on spring phosphate at the moment, and while the dead of winter may push prices higher, we expect a downtick just in time for spring bookings. Having said that, if the uncertiainty makes you nervous, hedge 20% of spring phosphate at today's price.

DAP firmed $14.14 in this week's Monitor Index after several weeks of decline. Now priced at $544.53 -- $108.26 below year-ago.

Potash -- K is our wildcard. Executives from PotashCorp have characterized the effects of the FSU potash war as "paralyzing". That is a magic word to some. Market paralyzation signals opportunity near-term and volatility in the medium term. Potash may continue to slide through the winter, but the worst of the FSU bluster seems to be past, now that Baumgertner is only under house arrest, not in a KGB prison. Cotton is potash intensive in some areas and acreage increases here could increase domestic K demand.

Kyear over2013The NH3 and DAP charts both show timely hooks where the average retail price has rebounded. Those hooks indicate our purchases were well placed, but no such hook appears in the K chart -- yet. According to last year's movements, which by all indications were basically "normal", K is set to pause and capture fall demand. We are still waiting on the chart hook to indicate the true floor, but as I drove through central Iowa yesterday, I did see that first broadcast of dry fertilizer onto corn stubble underway in Hamilton County. The long awaited entry of buyers will indicate potash is priced to spark demand, and a falloff isn't likely from those levels until after the first of the year.

We have warned that some nutrient may have to be booked on a downward trajectory this fall, but no downtrend lasts forever, especially in fertilizer. This is the downward trajectory we referred to. If you have to, look at it this way, prices are currently so much lower than last year, its is hard to go wrong, even if the market continues to soften after you book. We see limited downside potential based on seasonal demand in the now-term. But lower prices could well be the reality ahead for spring, so hold at 20% for spring and fill remaining fall K needs at current pricing.

Potash fell just $5.43 in this week's Index to $505.56 -- $96.02 below year-ago.


 

P&K -- Forget the Rumor, Sell the Fact

Sep 20, 2013

MosaicCo released near-term guidance for P&K earlier this week and noted continued caution on the part of buyers as suppliers wait out the downtrend. As a result of declines in P&K Mosaic lowered both volume and price guidance.sadcorn3

But the lowered guidance takes into account two items that I call into question. The first is CEO Jim Propanko's comment regarding crop returns. In MosaicCo's press release, Propanko says, "The long-term positive outlook for crop nutrient demand has not changed; high commodity prices are driving record farm returns and making our products more affordable than ever before. These strong fundamentals are expected to drive near record global phosphate and potash shipments in calendar 2013."

Record Farm Returns --

The high commodity prices that Propanko mentioned must surely have been a reference to old-crop marketings -- has he seen the Dec corn chart? -- as new-crop threatens a 3 dollar handle. Old-crop returns will drive sales in as much as it fills farmers' pockets. But with meager returns promised by futures, without some price strength in Dec. corn, taking a risk on a corn pop when booking inputs is unlikely. If anything, new-crop fundamentals will limit demand, particularly for P&K until corn futures turn higher in earnest.

zcz139 20Historically, yes, today's Dec. Corn price at $4.57 is much better than just a few years ago, but at Pro Farmer's projected 155.3 bu average yield, today's futures price suggests returns right around $700.00/acre. If you rent land at USDA's national average of $136/acre and spend $200/acre on fertilizer, your profit margin is already down to just $364/acre before pesticide, herbicide, application fees, operating costs, farm hands and fuel. I'm no math-magician, but this does not feel like a high crop return anymore -- not when compared to the last few years, anyway.

In an effort to manage price risk, growers could hold to the old standby, 18 percent rule. At $700.00/acre in expected new-crop revenue, 18% spent on fertilizer would get you to $126.00/per acre for NPK. At current Monitor Index pricing of 43 cents per pound of N & K and 56 cents per pound of DAP...sadcorn2

  • 170lbsN = $73.10;
  • 100lbsP = $56.00;
  • 60lbsK = 25.80.

 

These are per acre prices and add up to $154.90/acre for total NPK. Declines in nutrient have made it easy to get excited about wide margins, but corn prices will have to cooperate, and give buyers an inspiring lift to shake dollars loose. In the above scenario, history tells us that, in order to adhere to the budget, growers will shave off a little P&K to save money.

It makes much more sense for Propanko to lower volume and price guidance on this basis. Anytime someone hails nutrient price declines and favorable economics, the potential return -- or lack of -- on that investment cannot be ignored.MObox

Rumors of War --

The second assumption that Mosaic makes is that the breakup of Belorussian Potash Company will continue to pressure prices lower. Belarus, without question will struggle with the transit limitations placed on Belaruskali tenders by Uralkali's exit. Belaruskali can produce all they want, but have limited capacity for sendout logistics.

Meanwhile, many now believe Uralkali's volume-over-price strategy will not pan out, or lead to dramatically lower K pricing. The entire industry is in standdown, waiting for these price declines to run out. This is 'buy the rumor, sell the fact' in black and white and as rumors of more and more price declines in potash circulate, suppliers are held captive on the sidelines. Adding to the confusion is the fact that phosphate is declining sympathetically with potash.

Both volume and price guidance were lowered by MosaicCo this week with respect to P&K. On the basis of new-crop returns, I don't see it. On the basis of the FSU potash war, when it comes time to 'sell the fact', the fact may be that while suppliers warm the bench, potash and phosphate emerge from the rumormill priced higher than expectations. That would put off a lot of P&K until spring, which would lead to an industry inflated with lofty expectations, and lacking in actual commerce for the entire winter, building demand all the while.sadcorn4

The truth is, buyers are eyeing fertilizer price declines as purveyors look for the magic 'buy-in' price peg. Once that first buyer enters the market and pulls the trigger, it will likely pause the price declines, and the ensuing demand may limit any further downside potential.

Everybody knows that guy at the auction... the first one to bid that wrecks it for the whole bidding peanut gallery. Yes, a timely pause at the auction can win you a few bucks and a good deal on a horse. Jumping in too early can jack up the price for the whole auction house, and make one very unpopular at the Stockman's Cafe. However, sit on your hands too long and all the horses may be gone before you decide to raise your hand or 'yelp' a bid.

Perspective --

MosaicCo's report indicates they have lowered both volume and price guidance for shareholders. That means Mosaic expects to make less money and less product. I do not agree that farm economics are as favorable as Propanko said, nor do I agree that FSU potash will run North American prices lower for much longer.

sadcorn1Having said that, the number one influence over the continued price slide for P&K is the fact that there is no demand. Monday's Monitor numbers will tell us more, and a few states have yet to catch up with the declines. These will drive regional average prices lower, but key states -- most notably, Missouri -- have seen the reversal in NH3 already, and during the spring of 2013, Missouri was the price volatility leader.

Declining corn prices, rumors of war and lowered prices and volume are not a recipe for favorable farm economics. Near-term P&K pricing will be driven by demand and once buyers enter the market, we expect P&K pricing to forget the rumor, and sell the fact.

 


 Photo credit: D. Michaelsen, Inputs Monitor

 

The Syrian Solution & Putin's Potash Problem

Sep 13, 2013

When President Obama addressed the nation earlier this week, it was to update the public on his intentions in regards to the use of chemical weapons in Syria. Obama called the actions in Syria a violation of international law and a danger to the security of America. Estimates put the death toll over the last two years around 100,000 in Syria and even more have fled to neighboring countries in a region riddled with despotism and bitter religious conflict.franklin and eleanor fdr bio part 1 l

America has been positioned in the middle of conflicts like this before -- most recently in Iraq and Afganistan. Neither of those have gone according to plan. As troops withdrew from Iraq and benevolently put power in the hands of locally installed authorities, sinister elements who had been driven underground by military action reemerged, ready to pick up where they left off.

Obama quoted Franklin Roosevelt who said, "Our national determination to keep free of foreign wars and foreign entanglements cannot prevent us from feeling deep concern when ideals and principles that we have cherished are challenged."

Putin's Pen --

In response to Obama's speech, Russian President Vladimir Putin penned an op-ed piece to the New York Times that easily made as much sense as President Obama's glorified call for inaction. My generation was brought up to fear the Russians -- the Great Bear. Relations between the Soviet Union and the United States eroded quickly after the cooperative efforts to oust Hitler and the big three at yalta lhis Nazi regime in WW2, and the sociopolitical paths of the two superpowers diverged.

I remember President Reagan's famous plea to Mikhail Gorbachev, "Mr. Gorabchev, tear down this wall." Since then, the nations of the former Soviet Union have struggled to carve a national identity amid civil wars, nuclear disasters and political upheaval. However, in reading Putin's words, one might think he's been boating with Jimmy Carter or trading war stories and sipping brandy with Hanoi Jane or releasing doves with Maya Angelou.

But Putin has a diplomatic crisis of his own going on with Belarus. Noone has been gassed, but the CEO of Uralkali has been taken prisoner and faces charges at the hands of Europe's last dictator, Belorussian President Alexander Lukashenko. Prominent Uralkali investors have also been tagged for arrest, and if they are smart they are hiding out, doing a little boating of their own.

Lukashenko has one over on Putin at present. Belorussian officials have said they will pursue $100 million in assets from Uralkali to compensate Belarus for perceived misdealings by Uralkali while the two were part of joint venture Belarus Potash Company.

New Russo-diplomacy --

As Vladimir Putin asks the United States to follow a diplomatic course on Syria, one wonders if for his next trick, he will pull a potash executive out of a Belorussian prison -- watch me pull this bear out of my sable hat. The trouble is, the Lukashenko regime relies on potash revenues for a good portion of its national income and is anxious to save face. When Uralkali split from thewe will break you! Belorussian Potash Company, trade routes via rail to China and points west fell under Russia's control and into Uralkali's back pocket.

Not only is Lukashenko's revenue threatened, but also his reputation as one not to mess with. Faced with refusals from Minsk to release CEO Baumgertner, Putin has curtailed crude shipments to Belarus and is eyeing a cut to imports form Belarus of dairy and pork. Add dairy and pork to reduced sendouts of potash, and Lukashenko has a real revenue problem. The three combined tally roughly half of Belarus' export revenue.

Putin's response to Obama's speech revealed a Russian President who would condemn the use of force outside the allowances of international law and lean rather on diplomatic solutions. In his New York Times Piece, regarding Syria, Putin wrote, "We need to use the United Nations Security Council and believe that preserving law and order in today's complex and turbulent world is one of the few ways to keep international relations from sliding into chaos."

A long way from Nikita Khrushchev banging his shoe in the table, promising to break us. Stopping the United States from intervening in what Putin called, "...an armed conflict between government and opposition in a multireligious country," was as simple as reminding President Obama of his own treatise with the United Nations not to strike unless in self defense or by the decision of the U.N. Security Council -- many suspect Obama didn't really want to enter the Syrian conflict anyway, and Putin's words conveniently put the last nail in the coffin.

Pride, Potash and Grace --

pointingputinThe course of the potash war has so far been a draw. Both sides claim the other has wronged them, but only Belarus has taken prisoners. With Vladimir Putin penning a new outlook on Russian diplomacy, he may seem a little less scary to Lukashenko, but as exports from Belarus to number one customer Russia are increasingly turned away, Lukashenko may have to decide between tyrannical pride and staying within Putin's good graces to salvage the economy of Belarus.

If stopping U.S. strikes against Syria seemed easy for Putin, freeing his potash CEO will require surgical precision, and utmost diplomatic skill. As Russian President Putin criticizes Obama's remarks about American exceptionalism, Putin himself emerges as exceptional among war hawks. He may have stopped escalation in Syria for now, but the real trick will be to win the potash war, and return Baumgertner to Russia without breaking Belarus.

 

Watch President Obama's speech on youtube...

Read President Putin's op-ed piece from the New York Times...


FDR Photo credit: Tony Fischer Photography / Foter / CC BY

Yalta Photo credit: The National Archives UK / Foter

Putin Photo credit: World Economic Forum / Foter / CC BY-NC-SA

December Corn vs Anhydrous Revisited

Sep 06, 2013

Think back with me to April 29, 2013. The forecast for much of the Corn Belt was for 6-10 days of rain. That turned into an unexpected blanket of snow and was followed by 6-10 more days of rain. The window for early planting was narrow, and the window for fertilizer applications was even more narrow.

We published an article that day examining the relationship between December corn and anhydrous. More specifically, the article compared expected new-crop corn revenue per acre to the price of one short ton of anhydrous ammonia.

At that time, Dec. corn was at $5.30. Figured at trendline 160 bu./acre yield, expected new-crop revenue added up to $808.00/acre. Yesterday, we issued an alert to aggressively book anhydrous for fall applications. I have outlined my reasoning for ringing the bell in the Monitor article 'Ammonia Prices Turn Around: Fill Fall Anhydrous Needs'. NH3parade

A new reader emailed me shortly after asking why I would advise to fill all needs on one day. My approach to risk management calls for growers to make purchases throughout the year of moderate portions of total need. By yesterday, we had advised three times through the summer to book portions, and some subscribers would have been at 60 percent filled for fall NH3.

Despite lagging corn futures -- some would argue 'because of' lagging corn futures -- the revenue gap between one short ton of anhydrous and one acre of expected new-crop revenue has thinned. Back in April when I wrote about this, the gap was at $66.30, a 7.5 percent margin with NH3 on top.

Today, Dec. corn prices are much lower, opening today at $4.61. To better reflect the relationship of the two, we have adjusted the yield figure downward from trendline 160 bu. to Pro Farmer's current corn yield estimate at 154.1 bu. Even with the reduction in yield, the gap has thinned dramatically since April.

With December corn at today's $4.61, a 154.1 bu./acre yield calcs out to $710.40/acre -- note... I have omitted basis from this calculation to keep it simple. With anhydrous at its current Midwest average of $737.36, the revenue gap between an acre of expected revenue and one short ton of anhydrous has fallen through the summer to $26.96, now at 3.6 percent.

 
April 29, 2013
September 6, 2013
1 Short Ton Anhydrous
$874.30
$737.36
Expected New-Crop Revenue/acre
$808.00
$710.40
NH3/ZCZ Gap
$66.30
$26.96
Margin
7.5%
3.6%

 

For you sticklers, I have run the numbers at trendline 160 bu yield. That figure adds just a few dimes to the total expected new-crop return at $737.60.

The point here is that the gap between anhydrous and December corn has swung dramatically in growers' favor. The expense imposed on corn returns is at its lowest levels so far this year. We have advised you number crunchers that fertilizer purchased in a down corn market can look real cheap at a corn price rally, and this year is shaping up to be one in which farmers can play the numbers for actual 'dollars-and-cents' returns.

As corn futures drag through the downside, fertilizer has followed, owing declines not only to the falloff in corn futures, but also oversupply, weakness in international currencies and FSU state-on-state drama. This comparison demonstrates how finding the right time to make purchases and basing those purchases on the relationships between corn and fertilizer pricing can help you target the right time to forward book nutrient. This is how we will profit in a down corn market.

After having slept on it, I stand by my decision to pull the trigger on fall anhydrous. As always, if you need more than you are comfortable booking right now, book a portion as a hedge against future spikes. With the revenue gap between expenses and returns at an annual low, the time to 'buy low' is in our sights. With any luck at all, a corn rally will give us a chance to turn that thin margin into fat profits.


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