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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 Pricing Convergence: What is Expensive Fertilizer?

Jun 07, 2013

The driving force when fertilizer prices move is corn. In years past when fertilizer pricing has seemed low, the price of corn has had a $2 handle. With corn futures currently above $5.00, it is optimistic to expect fertilizer pricing reflective of $2.90 corn. But all forms of N are not the same, and pricing reflects that. At 170 lbs/acre/N, a 53 cent application of anhydrous costs $90.00/acre. That same acre/N application of urea at current pricing adds up to $105.40/acre.

But what if all nitrogen could cost the same? When broken down to pounds, it would make sense that a pound of nitrogen -- be it from anhydrous or 32% or prilled urea -- should cost the same. But the truth is, since all nitrogen products are not created the same way, production costs and feedstock skew prices and the best we can hope for -- like with crude -- is a favorable spread.

This week's Monitor Index registers an 18 cent per lb/N spread between the most expensive and least expensive forms of nitrogen. UAN28 is currently the top at 71 cents per lb/N and anhydrous is at the bottom at 53 cents. As urea and UAN solutions explore the downside, anhydrous has seen weeks of decline as well. But current anhydrous pricing, while favorable by the pound, may not have the room either to the upside or the downside to converge truly with urea based products.

Meanwhile, urea is expected by a growing numbers of industry watchers to continue declines. If a true convergence of N pricing is to take place, either declines in urea will need to end and correct hard to the upside, or anhydrous needs to make an run back above $1000/ton. The tables below play out three possible scenarios for nitrogen convergence.

The first simply demonstrates pricing from this week.

Scenario 1
Current Monitor Price/ton
Price/lb/N

Anhydrous

$869.07
$0.53
Urea
$563.51
$0.62
UAN28
$400.86
$0.71
UAN32
$438.54
$0.69

Scenario 2 has anhydrous correcting to couple with the current urea price of 62 cents per lb/N. With anhydrous at 62 cents per lb/N the per ton price swells to $1010.00. In 2008 when fertilizer prices skyrocketed, the yearly average price in Minnesota was $755/ton. The fact that anhydrous runs at such a premium to that year at its current price suggests anhydrous over $1000 is unlikely. Shipments of ammonia into Tampa on the wholesale board are currently running at $625/ton. That is $225.00 above year ago pricing hinting at limited upside potential for anhydrous on wide production margins.

UAN solutions would not have very far to fall to reach 62 cents per lb/N. UAN28 would only need to shed $55/ton -- UAN32, $43/ton to converge with straight urea pricing. That scenario is more plausible than anhydrous reaching $1010.00, but we expect demand to inject some strength into UAN pricing in the immediate future locally as some growers are scrambling to replace N lost to heavy rains. Regions that have no ponding should see limited price response, however, as these extra applications will not be needed regionwide.

Scenario 2
Anhydrous follows Urea
Price/lb/N

Anhydrous

$1010.00/ton
$0.62
Urea
$563.51/ton
$0.62
UAN28
$345.00
$0.62
UAN32
$395.00
$0.62

Scenario 3 has urea correcting to couple with the current price of anhydrous at 53 cents per lb/N. This scenario requires anhydrous to stay put at current pricing levels, and while anhydrous has been on the downward slope for several weeks, history says anhydrous is still too high. Again, ammonia prices have fallen in the wholesale racquet but remain far above year-ago, suggesting 53 cents may not be the bottom for anhydrous.

Should the price of urea catch the price of anhydrous per lb/N, that would price urea at $480/ton, UAN28 at $295.00 and UAN32 at $340.00. This is not an unlikely scenario given that UAN solutions are well above historical pricing, but the price of UAN has only fallen roughly $25 since last June. Urea, on the other hand has fallen nearly $220.00 during the same period.

Scenario 3
Urea follows Anhydrous
Price/lb/N

Anhydrous

$869.07
$0.53
Urea
$480.00
$0.53
UAN28
$295.00
$0.53
UAN32
$340.00
$0.53

It is interesting to note that in June 2012, Midwest anhydrous pricing was at $805.75/ton with urea at $781.89. In terms of pricing by the pound of N, anhydrous was at 49 cents with urea at 87 cents per lb/N. That was a 38 cent spread and the widest we have observed thus far. Currently, the anhydrous/urea spread stands at 11 cents with anhydrous at 53 cents and urea at 62. A narrowing of this spread may be what we can realistically expect, but continued oversupply from China and FSU is expected to fuel further declines in urea during the summer.

How low urea pricing will go is, of course, uncertain, but if industry expectations are correct, based on wholesale declines, urea may settle in around $420/ton at your preferred supplier. That is an optimistic projection of a $143.00/ton falloff from current pricing which would put pricing by the pound/N at 47 cents.

No matter what happens to fertilizer pricing, the price of corn futures will dictate how low nutrient can go. Production and natural gas pricing will have their sway, but the number one determining factor of fertilizer prices paid by growers is how much growers are willing to spend. That decision is best based on December corn futures because the lower corn goes, the more expensive fertilizer gets.


 

 

 

 

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