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March 2014 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.

Ten Reasons for NH3 to Run Higher -- But Will It?

Mar 28, 2014

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This is a 'we report, you decide' moment. We raised the red flag on anhydrous late this week on rumors of supply constraints in Missouri which we confirmed from several sources on the ground. This comes after we called the cows in on NH3 on March 4, then again on Wednesday this week, just as a reminder. We had enough reason to fear an upside recovery long before supply trouble hit the southern plains.

Knowing what we know about markets like these, there are no guarantees of movement one way or the other, but so many factors are currently conspiring to elevate anhydrous pricing that the downside is significantly limited. I want to take this opportunity to detail it all. The pre-shortage (a shortage which has yet to impact our regional prices, by the way) forces working in favor of an anhydrous recovery is a long list.

Some have more pull in this market than others, but here goes...

  • Wholesale price increases -- Mosaic reported this week that wholesale Tampa ammonia prices jumped by $120.00 per ton. It is widely believed that deal was made for ammonia as production feedstock for phosphate operations, but if feedstock is $120.00 higher, ammonia for nitrogen fertilizer will eye that price as an indicator of demand strength, and may look to add $120.00 of its own to prices which are this week $220.00 below year ago pricing.
  • Planting uncertainty -- corn acreage is expected to be down slightly this year compared to the year before. USDA's March 31 reports will offer guidance, but the full story of spring has yet to be written. This sets up the market for a demand surprise because if there is one thing about corn growers, it is that they will grow corn on as much ground as they can. If planting intentions pegs are too low, supplies may run thin or bottleneck and will be difficult to replace quickly and cheaply.
  • Weather uncertainty -- this goes along with the above, and growers remember last spring when all seemed to be well with the world, and then rains and even May snow delayed fieldwork. That means farmers will likely be anxious to get fertilizer laid and crops sown ASAP.Picture2
  • Nitrogen margins -- we table this concept in our weekly 'NFiles' report and current nitrogen pricing is out of whack by a ways. We expect a 5 cent difference between the price of Nh3 and Urea when priced by the pound of N. This week, that margin stretches to 14 cents. UAN solutions are the same story -- 28% is 10 cents over, 32% is 9 cents outside of expected price spacing by the pound of N.
  • Rail transport -- fewer rail lines carry the potentially hazardous Nh3 due to increasing regulations and the liability involved with the passage of anhydrous ammonia. Supply concerns will have to be met by truck transport.
  • December corn -- December 14 corn futures (ZCZ14) have found some upside room to run opening today at $4.87 1/2. At trendline 160bu., that's $740.00 per acre expected new-crop revenue. Much better than when futures were threatening a $3.00 handle, and much more encouraging to growers penciling-in budgets. Picture3
  • ZCZ14/Nh3 spread -- if you believe corn futures are tied to fertilizer prices, as I do, this is a big one. Historically, the return on one acre of expected new-crop revenue and one ton of anhydrous ammonia are very close to equal. The ZCZ/Nh3 spread at the above $740.00 per acre is -80.46 on an expected 0.00. That suggests even December corn believes anhydrous is underpriced.
  • Ukraine tension -- political unrest in Ukraine could easily hamper export traffic out of the Black Sea region. Ukraine does not supply much nitrogen to the U.S. by percentage, but they do maintain adequate supplies for other markets. Strong supplies from Ukraine insulate U.S. pricing by balancing the global market.
  • Natural gas prices -- maybe you are in the natural gas camp when it comes to nitrogen prices. Last year at this time, anhydrous was priced at $882.00/ton regionally and the May 14 natural gas futures contract was trading around $3.80, with nearbys even lower. Today we have NH3 priced at $659.54 per ton and May 14 nattie at $4.57. In late February 2014 when May natgas spiked to $6.49 1/4, anhydrous ammonia prices did not respond, and remained low.

 

All of these were working together to influence anhydrous pricing higher but to no avail. Now add the potential of a supply crunch and transport difficulties that sound very much like what we dealt with on LP earlier in the winter, and if we cannot guarantee upside risk, we can say with near-certainty that the downside is exhausted for anhydrous. Prices may not spike, but prices have no reason to fall.

Pockets of strong Nh3 supply will be insulated from any spikes our southern brothers are experiencing early on. It is fully possible that the holes I fished for information were isolated pockets of price strength, but my sources felt enough pressure to send trucks to other states, spending money on a day's worth of diesel fuel and drivers. That is significant. Perhaps our message would be best phrased as an observation that the market cannot tolerate giving anymore to the downside given current market conditions.

Also, keep this in mind, if preplant prep work is cut short by weather, spring anhydrous applications will be shifted to sidedress, limiting Nh3 demand to the few who have the sidebar to apply sidedressed ammonia. That would cure any supply shortages in a hurry, and elevate UAN and liquid nitrogen prices. The news of the southern supply shortage may have come just in time for northern suppliers to fill inventories, but these troubles are related to pipeline capacity and that is a static piece of infrastructure. To bypass pipelines, suppliers will have to spend money on diesel and drivers to truck around to Midwest storage and production units, adding premium to NH3 pricing.

Information is the closest thing I have to a crystal ball and hindsight will tell us if I'm one of those 'the sky is falling' dudes on this. I can handle that uncertainty. Like I mentioned before, we have not yet seen the rumored supply squeeze impact regional averages in our survey, and upstream sources have been very hesitant to acknowledge the southern supply gap. But take stock of the above and measure your appetite for risk. We filled the rest of our anhydrous three weeks ago at a price below today's. If you have passed on booking anhydrous for spring, take what I've written into consideration and have a conversation with your preferred supplier.


 

Rhubarb Springs Eternal

Mar 21, 2014

 

This week marks the official first date of spring and Chip made mention on the radio show yesterday that this time of year, farmers start to get a little tingly -- anxious to get another crop off the ground. Fertilizer applications and even some corn planting is already underway in the deep south. A MarketRally listener tweeted yesterday that he had seen water flowing from tile outlets in Grundy County, Iowa.

That means the thaw is making its way into the northern third of the Midwest and while I do not measure my own harvest in bushels, I took a moment to inspect the garden at home and what I found there was better than the robin's return... rhubarb. Not much, just a couple brave shoots pressing upward through the soil. But enough to confirm that winter's grip is loosening.IMG 0767

The bitterly cold temperatures resulting from the encroachment of the polar vortex will likely delay spring fieldwork in areas with deep snowcover as frost still extends deep into the soil profile. Key to getting the crop off on the right foot will be early root development.

Last year, it was easy to see corn plants whose roots had reached deep enough to capture nitrogen stores that had been drawn deep by thirsty subsoil. The eastern belt is in much better shape on soil moisture than is the western belt, but it was spring rain that gave us trouble last year. With any luck, the cool, damp spring most forecasters predict will allow the soil to warm slowly enough to take advantage of the snowmelt and recharge the deep soil so that any rain that does come along remains available at the top of the soil strata.

On the western belt, early root growth will be especially important because of lingering severe drought. Roots will have a lot of work to do to find water and then transport it back to the plant. The deeper the roots the better start the crop will get. Picture1

Thus far, however, P&K demand has been forecast to be very low and more than a few farmers have told me they intend to skip P&K altogether this spring. That was when Dec corn was threatening a $3 handle, before Putin annexed Crimea, spurring grain futures higher. Today the Dec is at $4.80 and most feel the range established over this week may confine futures until the market figures out just what planting intentions are, and what impact the Crimean kerfuffle will have long term on grain prices.

Acreage in Ukraine is expected to be down due to political unrest and a lack of available farm credit. A cut to planted Ukrainian acres in addition to potential export difficulties are making U.S. corn more attractive to importers by the day and as December futures perk up, so do the possibilities for phosphate.

At $4.80, expected new-crop revenue at trendline 160 bu totals $728.00 per acre. Now we are getting somewhere. Depending on land costs and other production expenses, $700.00 is very near an average break even point for most operations. index

Strength in December corn futures and the spring tingles will likely be enough to change the minds of some, but consider the yield potential stored in early root development. I have noted before that this is probably not the year to skip P&K because crop prices are not expected to be in any better shape next year. But give this year's crop a chance to 'wow' you and bank that phosphate now. If crop prices are still low, maybe skip applications in the spring of 2015. The last thing you want to do is throw your yield away for fear of a bear market.

With the value of each bushel now more important than ever, make sure to set yourself up for strong yields and efficient uptake by growing deep roots under the crop. Read the full scoop on near-tern P&K prices in this week's P&KToday.

A refreshing breeze, sunshine withering ice jams and a satisfying muck around the edges of puddles all signal the spring thaw is underway. This growing season will test growers with a range of threats to the crop. The best preparation is to lay a strong foundation of roots for plants to stand on. Happy rhubarb to us all!


 

 

Crazytown and the Export Creeps

Mar 14, 2014

The United States has weighed in on the Russia-Ukraine conflict -- I think we can call it that now -- and has expressed its intent to explore using Strategic Petroleum Reserves (SPR) to influence the global price of crude oil lower and curtail Russia's national income. The hope is that WTI crude prices will scare Putin out of Crimea. This reeks of the kind of Jimmy Carteresque weaponized export policy that landed Ronald Reagan in office -- oh, for the days.

We have covered the fringes of this issue at length in various Inputs Monitor reports this week, and Chip and I talked about it earlier this week on Market Rally. I quoted Reagan from January 1981 who was then President elect when he said, "You have to determine whether we're having as much effect on the Soviet Union or if that's being offset by a worse effect on our own agricultural community."

In 1979, then president, Jimmy Carter canceled grain sales to the U.S.S.R. as a means of sanctioning the Soviets in response to their military actions in Afghanistan. In confirmation hearings for Secretary of Ag John Block, Block said, "I believe food is now the great weapon we have for keeping peace in the world. It will continue to be so for the next 20 years, as other countries become more dependent on American farm exports and become reluctant to upset us."

I don't even know where to start on that line of thought. At this point, when the Administration of 1980 refers to agriculture, in 2014, we can substitute that word with crude oil. With cuts in national defense spending and the National Guard, it would appear doves on Capitol Hill have little recourse but to spit seeds at Russia.

The decade that followed Carter's cancellations was a disaster for the American farmer as a direct result of Block's notion of using American crop exports as a weapon. In fact, his comment above sounds much more like Krustiev than it does George Washington.

It is the unintended consequences that concern us here. Backroom deals let grain seep out around the edges of the canceled grain sales, blunting the edge of Block and Carter's rhetoric. The result was a surplus of grain at a time when land values and inflation ran many farmers out of business.

I've still got the export 'creeps' from what happened over this winter with propane. Harvest demand was high, home heat demand was huge and LP exports topped all time highs. All of this combined to create a supply crunch that had regional governments suggesting citizens ration propane use, and raised retail prices above $5.00/gallon in some states. Great idea to export propane, but the record setting export pace diverted Midwestern supplies to export terminals down south and what was left was too few gallons for too many people. LP export policy had unintended consequences that put some folks in a real bind.

The biggest potential for unintended consequences here is probably unknown at this stage of the game. But American shale reserves have long sought a market, and a payday. It seems shortsighted to take this newfound resource potential and work so hard to lower the product's value. If American crude producers find their returns thinned by artificial international intrigue, there will be very little meat left on the bone and production will slow.

Let's go to crazy town here... Oil reserves drop because the 5 million barrel offering isn't enough to scare Putin, and the government mandates the sale of, let's say, another 30 million barrels. Producers are run out of business like so many farmers in the 1980's and gasoline hits $5.00/gallon, just like propane. All of this as Putin has no trouble finding friends in the global community. New leadership in Egypt is very friendly with Putin. Imagine a world with Putin in cahoots with the guardians of the Suez Canal.

Libyan oil production desperately needs Putin's kind of help ousting rebels from eastern oil terminals -- those rebels have cost Libyan crude oil production about 1 million barrels per day. My guess is that 20 Russian Special Forces soldiers could clear the pirates out of Libya in about ten minutes if so ordered.

And that leaves the Obama administration with an American public that cannot afford to use it's own oil or to produce it's own oil. Artificially driving down the price of American crude oil could potentially do more to harm American producers and the American public than it will do to dissuade Putin from reassembling his beloved Soviet Union.

Let's revisit the words of Ronald Reagan, who's thoughtful approach to this issue bodes a serious warning to those who would use our God-given resources in such a way. "You have to determine whether we're having as much effect on [Russia] or if that's being offset by a worse effect on our own [national economy]."

I hope this idea works, but Vladimir Putin does not appear to be at all ticklish, and Russia is not likely to back down this side of gunfire.


Market Rally To Go 'Live' Monday

Mar 07, 2014

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We are having way too much fun these days. I have been at my post here at the Inputs Monitor for going on two years. We have followed trends and retail price moves in farm fuels and fertilizer and have done our very best to help growers make sound decisions. The Monitor is off to a great start and there is much more for us to do. Starting in June, we will have two full years of pricing data and can begin to establish a running fuel and fertilizer price average. That's exciting.

There is a lot going on here at the Pro Farmer offices... these folks are always thinking, always looking for ways to level the information playing field for farmers, ranchers and Ag marketers.

Chip called me into his office several weeks ago and asked me to close the door. He offered me a seat and we chatted a little. "Davis," he said, "how would you like to be on the radio with me?" We do all kinds of radio and TV bits for AgDay and AgriTalk so I said, "Sure, what do you need?" Chip said, "This one's a little different... are you ready for this?"

untitledHe went on to explain that he had been hatching an idea to run a 1 hour daily radio show right here from Pro Farmer, and if they could get it running, would I like to be a part of it? Abbot to Chip's Costello -- Les Nesman to his Johnny Fever -- with him as always is Garth -- Tonto to Flory's Kemosabe. That's exciting.

Flash forward to today, and Chip's office, once a redneck's dream-den, now looks more like a high tech radio studio with all kinds of buttons, flashing lights and cord after cord. They even installed a cool 'On Air' sign outside Chip's office.

We are two weeks into rehearsals and our first live broadcast is coming up on Monday, March 10 at 2pm CT. Market Rally is the culmination of Chip's long career as a market watcher. The knowledge and associations Chip has gathered over the years give this show plenty of meat on the bone and everyone from farmers and ranchers to Wall Street traders will find insights they cannot find anywhere else on their radio dial.its waynes world 517x290

The show will include interviews with floor traders, farmers, Ag thinkers and economists and your phone calls. The goal is to provide perspective on what is moving the market from the tried and true Flory view. My role is pretty simple... read the news and try to keep Chip's blood pressure within reasonable limits when ethanol comes up. Side note -- We used to have a blender in the kitchen here at the office, but Chip threw it out the widow one day. I guess we should have called it a "non-octane related margarita maker" rather than a blender -- live and learn.

Abbott and Costello 9396This is a very exciting opportunity for me, but what is really exciting is the access farmers across the nation will have to Chip's insights on a daily basis. I will continue in my current position as the Editor of my beloved Inputs Monitor, but for one hour each weekday, my focus will turn to Market Rally and I hope you will tune in.

I will also pipe in at the end of each show with the tweets of the day, collected from listeners. On Twitter, send your tweets to MRRChip and watch the sparks fly. My dad always told me that whenever an opportunity presents itself to be the first to volunteer. As I slowly gain knowledge from Pro Farmer's experience and the wisdom of our members, I look forward to another chance to support the American farmer, and to pull my weight among the thinkers in my cohort.

ChipWebAt speaking engagements, I have opened my talks with an expression of what a thrill it is to be counted among the Pro Farmer crew and the challenge to add my best efforts to Market Rally is a privilege not lost on me. But all that aside, we are having a lot of fun these days getting ready to go 'live'. I hope you will join in the excitement Monday, March 10 and every weekday after that from 2 to 3 o'clock central time.

For a list of stations, visit www.agweb.com and click on the 'Radio' tab.


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