Fertilizer & Fuels Summer Outlook
Apr 11, 2014
A little anhydrous has been rolling in our neck of the woods in the last few days, but there is still a lot of ground to cover, especially the farther north one travels. My local coop is filling anhydrous tanks as fast as they can and as the spring application is underway, we look ahead to summer and what late spring prices will hold for northern growers.
We expect southern fertilizer purchases to give clues as to what is ahead as fertilizer demand moves northward and this week notes a $50 increase in Kansas anhydrous ammonia. At the same time, however, urea and UAN solutions are running out of upside steam. This week we observed fertilizer moving higher across the board, but fuels are coming our way, both LP and farm diesel moved lower on the week.
That comes on the heels of EIA's Short-Term Energy Outlook which predicts gasoline to peak in May at a national average of $3.66, and then fall through 2015 as led by declines in crude oil, which is also expected lower for that period. We look for farm diesel to act as it has in the past and follow crude oil. Trends suggest farm diesel will continue lower through the rest of the month and level off in May with the possibility of more downside action in midsummer. I'm targeting $3.35/gallon in May, but that feels a little high. We will fill farm diesel as we find opportunities.
Whether or not LP will fully retrace the winter spike remains to be seen, but this week the regional average falls below the $2.00 mark to $1.94. That gives us reason for optimism here. We booked 2013 propane in July at $1.25/gallon and will look for similar pricing levels at that time this year. As I said, we are very optimistic that the price action over the winter has done little permanent damage, and prices should fall back in line, indeed, they are already making good progress on that course.
Our suggestion is the same as that of the propane industry... be prepared for more of the same next winter. Forward book ample supplies for both agricultural use and home heat, and consider increasing your storage capacity. At this point, we look to July and will pull the trigger when the market indicates it has bottomed.
As unkind as anhydrous ammonia was last year, the opposite is true this year and prices have been very sticky at the low end of the two-year range. We have heard scattered reports of spot shortages due to transport constraints, and anhydrous trucks have been seen skidding into supply depots at all hours. Northern growers may get the short end of the stick here as NH3 is currently priced roughly $80.00/ton below what December corn futures would say.
We look for anhydrous to continue higher through the application season and some areas may find spot shortages, leading to price increases. Our suggestion is to front book now if you have not already to guard against price hikes. Our expectation is for anhydrous to top out at a regional average of somewhere around $760/ton. But that is an average of prices that vary as much as $175/ton between Kansas and Michigan.
UAN solutions will get the call if spring weather either prevents fieldwork or flushes N. If demand spikes at sidedress, prices will likely respond higher. National supplies are in reasonably good shape and, according to sources, there is plenty of N to be had. If spring weather cooperates, UAN demand will lag last year's, and strong supplies may lead to price breaks after a brief continuation of this week's upside move. In that event, we see UAN28% priced at $360/ton and UAN32% at $390 in June. But cantankerous weather could excite demand which could add another $50.00 in demand premium by then.
Urea will continue its global oversupply thanks to strong manufacturing out of China. Urea led the nitrogen recovery and prices continued higher this week. However, importers reported to your Monitor this week that urea cargoes were bought as quickly as they could bring them in suggesting strong spring demand. The upward trajectory has slowed considerably, and by the margins, urea is much more expensive than anhydrous. Either anhydrous needs to correct higher to realign the margins or urea has to fall considerably. The most likely scenario is a little of both.
Look for Chinese product to hold the global market in a strong supply situation, limiting prices through summer. Trends suggest urea will continue higher in the short term but may fall back below $500/ton after the spring season on plentiful supplies.
Phosphate demand was expected to come in low this year as expected new-crop revenue fell with December futures. We've got Dec. corn back around the $5.00 range and if that level appears sustainable to growers, demand for Phosphate will increase. However, in anticipation of low demand and in response to increased production in India, domestic production has slowed slightly and current North American inventories are low compared to last year and the five-year average. If growers decide to apply more P&K than early intentions suggested, the increased demand could bottleneck supplies in a rail system that is already having some real problems.
If that increases DAP/MAP prices too much, growers will pass or cut back as much as they can. Under current market conditions, trends suggest DAP/MAP will likely swing back above $600/ton. But if phosphate gets too bullish, it will price itself out of end-users' budgets.
Last but not least, potash. Potash and anhydrous have both stayed well below the dictates of expected new-crop revenue and while that injects some upside suspicion for NH3, this is potash being potash. Like phosphate, suppliers have been expecting a demand cut due to low corn prices, and that has helped limit prices. But North American inventories are very strong here and that will go a long ways toward limiting price. There is the question of rail constraints however, and since most of the potash used in the U.S. comes out of Canada, supplies may be slow to make it to retail locations.
An Indiana grower told the Monitor late last week that his supplier had told him he is having trouble getting potash from the local rail head. The extent of similar problems is unknown, but our expectation is for potash to trundle higher with limited upside potential. Strong inventories are expected to place prices below $500/ton regionally by harvest.
Strong upside potential for anhydrous and the possibility of UAN price spikes on late season demand are our red flags in this report. Phosphate is right up there and wholesale increases in ammonia feedstock could easily run P higher on the double-time. We are 100% filled on phosphate and ammonia for spring applications and are leaving 20% to gamble for price cuts in urea, UAN and potash. Fuels are headed lower and farm diesel should bottom in the next few weeks. We will top off a portion then, but summertime often brings another downside swing for ruby red, and we will look to book portions along the way.
Nutrient moved higher across the board this week and as applications are underway down south, and even close to home here in central Iowa, demand will play a greater role along with transport costs. If all goes according to plan, we will see mild increases through the remainder of the application season with the possibility for latecomers to catch prices on their way back down.