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.
The 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.
Phosphate 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.
The 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.