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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.

Nitrogen Bottoms, P&K Pause and the LP Cow Gets Out

Oct 25, 2013

I made an appearance on today's AgDay talking with Chip Flory about fertilizer and fuel prices. Nitrogen, phosphate and potassium have shown us some strong signs of bottoming in the last week and chart data shows anhydrous bottomed in September, two weeks behind last year's floor. Rumors of potash wars in the Former Soviet Union (FSU) had the entire supply chain in standdown, waiting as long as possible before locking in tonnage prices.

But the real drivers of nutrient pricing in 2013 have been urea and, as always, December corn futures. Urea overshot declines by several percentage points year-over and despite the influence of potash turmoil in the FSU over stock prices in potash producing companies, nitrogen has paid the closest attention to urea. This makes urea the price leader and suggests that as goes urea, so goes nitrogen.

Fertilizer poses upside risk --

Urea hinted at bottoming as much as three weeks ago when your Monitor noted the first increases of the year. A few more gasps to the downside yielded an upside move across the board for nitrogen products. Urea, UAN28% & 32% and anhydrous ammonia all ticked notably higher in this week's Inputs Monitor Regional Index.

We have watched nitrogen pricing waffle around urea's downward trek with anhydrous bottoming awhile ago in response to December 13 corn futures. UAN28% & 32% both took turns falling and climbing from week to week beginning with the fall in the December corn price, trying to sort out its margins. This week, all nitrogen moved higher in concert, suggesting the perfect time to get in was actually a few weeks ago. But there is no shame in looking for a clear floor before pulling the trigger.

Urea looks an awful lot like it has hit bottom and with year-over declines so deep across the nutrient board, a dead cat bounce looms. However, if December 14 corn finds some strength -- today opening at $4.83 -- the dead cat bounce will look more like a move to follow futures. Uncertainty in both the corn market and in nutrient mark the path ahead, and we have advised hedging 20% of spring inputs costs against potential price increases.

Fuels -- cow 9 l

We touched on fuels just a little as well. The big story came today from the State of Iowa who's governor joined Minnesota and the Dakotas in extending the hours propane delivery truck drivers can spend at the grindstone in a given day. This is in response to transport delays for LP resulting in wait times up to two weeks for LP deliveries. Wisconsin expects a similar declaration today and the forecast for Michigan is wet and cool suggesting high demand for dryer fuel ahead for areas of the Corn Belt north of St. Louis.

Much of the corn pulled out of the field will need to spend some time in the bin and as dryers run around the clock to dry down this crop, LP demand has spiked dramatically and trucks are now being mobilized from other parts of the Cornbelt to service deliveries. The trouble is, that may make the problem spread to other areas of the Corn Belt.

We told AgDay, "On LP, if you are not covered on winter needs and especially LP needs for dryer fuel, you need to catch up now, that cow is already out of the barn. Prices are well above year-ago, running 15 cents above last year." With fresh news of delivery delays, not only is the cow out of the barn, the whole barn is now on fire. Get ahold of your LP supplier TODAY and if you can, have your guy come and top off LP tanks while he still can. An official from Minnesota's propane association told the Monitor yesterday he expects delays to last at least two weeks and that the increased overtime for drivers may push LP prices as much as 15 cents higher by next week. Hank Hill, where are you when we need you?

Farm diesel becomes a concern this time of year as well, but distillate supplies are very strong right now and farm diesel has almost fallen back into our 'go-zone' after weeks of upside movement. We would like to see another dime come off this price before we pull the trigger on a springtime hedge, but if you can get farm diesel with a $3.30ish handle, pull the trigger and get 20% covered on spring needs. Cooler weather will increase competition between #2 fuel oil for home heat and farm diesel, putting ruby red at risk for price hikes on shared distillate demand.

By the way, natural gas appears to be immune to LP's delivery constraints and natgas suppliers report no transport delays. Natgas may inflate as WTI pricing frees itself from the war premium. But North American supplies of natural gas are high and today's open price of $3.63 is above where we would normally advise a purchase.

As WTI continues to soften, natural gas will likely respond with upward movement to pivots around $3.91. If you are in a position to need natgas for fall, the future holds a fair amount of upside risk, and we would advise to book supplies for dryer needs right away if you are below 50% full.

Perspective --

Whatever you lack for fall, pull the trigger today. Nitrogen showed us this week it wants to bounce -- that includes urea, anhydrous and UAN solutions. P&K have all but run out of downside momentum and we expect an uptick there.

Our attention turns at harvest away from the December 13 corn futures contract to the Dec 14. Currently, Dec 14 corn holds a 42 cent premium to the Dec 13 contract and the switchover will have fertilizer well underpriced compared to Dec 14 corn returns. That is all the excuse fertilizer needs to run higher after a year of sharp declines and we believe nutrient will be priced as much as 10% higher by spring.

Look to hedge 20% of spring needs for nutrient at current levels. Lets wait and see if we can coax out another dime to the downside on farm diesel before we get crazy here, and for Pete's sake, growers in all states north of St. Louis get in touch with your preferred LP supplier today and top dryer fuels off quick. Click here for our LP alert...

Position Monitor --

Inputs Position Monitor
Farm Diesel
Natural gas
Fall 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Spring 0% 20% 20% 20% 0% 0% 20-40% 20% 0% 0%

Photo credit: Atli Harðarson / Foter / CC BY-ND


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