Outlook 2014 -- Fertilizer & Fuel Plus Charts
Jan 10, 2014
Looking ahead to 2014 in fertilizer carries a measure of uncertainty, but that is not new. Identifying where the greatest amount of price risk lies will be an important part of the decision making process in 2014. We know corn prices are low and barring a major event impacting the global supply situation, the expectation is for corn prices to remain range-bound. The good news is that fertilizer prices followed corn to the current low and we can show you that declining commodity prices does not have to mean declining fertilizer rates.
P&K offer the most demand uncertainty. In my small circle of farm friends the consensus is to limit P&K spending. Chip Flory met last week with a group of Iowa growers and came back with a survey that noted they expect to spend about half this year on P&K compared to the prior year. Part of that is on the price break, but prices have not fallen year-over by half, indicating that the cutback is also influenced by declining expected returns.
Nitrogen demand is expected to be stable and early buyers may be able to front book carryover product from fall before suppliers restock. Fresh inventory carries with it fresh price flexibility, and fresh price risk. We would like to position ourselves ahead of the restock if we can.
Anhydrous -- NH3 carries a good amount of upside risk heading into the spring application season. Jack frost chased combines down the rows in northern territories and cut the window short in many areas. This will add to spring demand, but has also left a certain amount of carry in the market. We want that carry product if we can get it.
Wholesale ammonia has been very stable and production at export locations has been relatively smooth. With cash corn at $4.20 this week, 175lbs of nitrogen from anhydrous gives you the most bang for the buck, especially when coupled with in-season UAN applications.
We look for NH3 to follow corn prices almost to the letter. We do see some upside risk for spring and expect spring prices to incrementally firm above today's, on pace with restock on the local level.
Urea -- Chinese spare urea production capacity has ballooned to 20 MMT and the global oversupply will continue through spring. Expect to book urea on a downward path, and we are in no hurry to book here just yet. With stable ammonia and global stocks bulging, urea will continue to fall and will also help to limit UAN pricing. Urea pricing has been driven by that Chinese oversupply more so than by corn prices since the decline started in 2012.
Nearly half of the urea produced in China is from manufacturers owned by coal or gas companies. Energy integrated urea production is extremely competitive on the global scene, and that will continue to limit price strength for urea through spring.
We look for urea to trail for the knowable future. While the downtrend has slowed, we do not expect prices to climb. We may leave urea to hand-to-mouth purchases this spring. Hold for now.
UAN -- Of the nitrogen products we survey, UAN solutions (28% AND 32%) have fallen the least year-over, this week down only roughly 65 bucks to anhydrous' $230.00. That signals price risk ahead. We actually believe UAN may be at a floor. Wholesale markets have ticked higher, but a demand push here could be a month behind anhydrous. That may give us the time we need to capture some savings, but the more I think about it, the closer I am to pulling the trigger on a portion for spring/summer.
Limiting price strength in UAN will be stable urea and ammonia. If we can keep those two key feedstocks under control, prices should settle in right around year-ago, but that would leave $65.00 on the table, and spring/summer demand is expected to be above year-ago.
Watch for an upcoming Monitor ALERT on that soon.
We chronicled the sad tale of the Belorussian Potash Company (BPC) as it unfolded through the last half of 2013. The breakup of BPC -- provider of 43% of the World's potash -- had Uralkali and Belaruskali threatening each other's export revenues with market oversupply. In response, stock values in North American potash producers fell roughly 20%. Shareholder shakeups at Uralkali have satisfied Belaruskali's demands and the joint venture may restart in the coming weeks. But Russia and Belarus are already involved in Vladimir Putin's Customs Union and that may have already eliminated the need for BPC to reunite.
Potash may turn out to the the biggest casualty of declining crop prices and the expectation is for growers to lean on banked K for the coming year. Prices are expected to trail through January and bottom sometime in February, but this will be a demand driven market in the spring and while we will book a portion for spring this winter, we will look for a late spring dip to fill coverage.
Overhang in Saskatchewan is still in place, although it has been trimmed substantially. That will help limit prices and if manufacturers believe growers intend to cut back, price strength will be hard to come by. This may actually turn out to be another year to build K in the soil, banking for 2015.
Phosphate -- We see the least amount of upside risk in phosphate. Domestic production and sideways movement in wholesale feedstocks will insulate pricing in North America. Also limiting price strength is India's declining rupee which has delayed purchases and, like American growers, Indian growers are not expected to belly up for much P&K. That will pull the plug on global prices and may lead to domestic price cuts here at home.
Adding to the uncertainty surrounding P&K is the fact that accurate soil tests are hard to come by and may freeze growers in 'spray and pray' mode. As with potash, demand will hold sway here in the spring and price strength will be a measure of growers' confidence in a futures rally on the corn side.
Like urea, we expect to book phosphate on a downward path for spring. We will look for breaks this winter to fill portions, but prepare to book hand-to-mouth here as well in the spring.
Farm diesel -- Farm diesel is very near our go-zone right now. We observed a January price break last year and the same appears to be true in the present day. We have yet to see prices bottom and the ALERT from the other day was aimed mostly at Indiana growers where farm diesel carries a two dollar handle. However we believe the regional low is yet to come... but it won't be long and at the first sign of a reversal, we will cover at least half of spring needs.
Declining crude oil prices will help limit upside risk for ruby red, but distillate supplies are currently very low and export demand for distillate fuels is climbing. Add to that competition for farm diesel with home heating oil and a cold winter could snap prices higher with little warning.
If your appetite for risk allows you to book on the backside of a chart hook, now is a good time to cover up to 30% of spring needs. We expect that hook in the next few weeks, but the trouble with waiting is that by the time the chart hooks, it will be as an indication that prices have rolled higher. We like $3.40 for spring 2014 but that may be optimistic.
LP -- Much of the U.S. corn crop came in wet and demand for dryer fuel caused delivery problems that resulted in skyrocketing prices. The situation is not likely to improve in Minnesota where a pipeline that services 40% of that state is switched from propane transit to supply dilutant to Canadian tar sand operations.
That has more northern propane traveling via rail and truck and will add to the expense of the product. Officials in Minnesota are recommending increasing on-farm storage in, and it wouldn't be a bad idea for us all to increase our storage capacity so we can take better advantage of price breaks.
Year-on-year data points squarely to July as the seasonal low and we will hold out as long as we can for that day. Spring pricing is hard to pigeonhole and we expect wide variation in pricing across the Corn Belt. National supplies of LP are in pretty good shape, but like with farm diesel, LP for agricultural use competes with home heat.
For now, avoid purchasing LP and wait for the July break. But do not run out as deliveries have been delayed since harvest. If you have to purchase between now and July, avoid a full fill. Instead, fill what you will need to get through and no more.
Perspective -- We see high risk for price increases by spring in LP and UAN solutions and moderate risk for NH3 and potash. Phosphate and urea carry low risk of price strength and may be best booked hand-to-mouth for immediate use in the spring. Farm diesel is right about where we would like it to be and with the exception of Indiana, I'd like to see if some more air will come out of the price in the next week or two.
Declining commodity prices could lead to declines in P&K but nitrogen demand is expected unchanged from the prior year. As we look ahead to 2014, we keep the Dec. '14 contract on our radar and hope for the best. We will continue our strategy of booking portions along the way, and in the coming weeks and months look for ALERTS from your Inputs Monitor.