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Inputs Insights

RSS By: Davis Michaelsen, Pro Farmer

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

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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