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NPK Insider

RSS By: Glen Buckley

NPK Fertilizer Advisory Services provides you with the information, analysis and recommendations that can help you decide when and at what price level to buy your fertilizer.

Drop in Natural Gas Prices Will Have No Impact on U.S. Nitrogen Prices

Feb 01, 2012

Natural gas prices, which have generally been trending lower since the beginning of 2010, continued to slide over the last few months, dropping from an average spot price at the beginning of FY 12 (July 1, 2011) of $4.50 per MMBtu’s to a spot price the first week of January of just below the $3.00 mark.



The key reason in the decline has been the continued growth in U.S. on-shore production. Due mostly to the shift in hydraulic fracturing in shale formations, U.S. monthly production has steadily increased from an average of 1.5 Tcf per month in 2006 to an average over the last few months of just over 2.0 Tcf.

The general consensus is that natural gas prices will trend somewhat higher through the end of 2012, but remain below the averages of the last few years. This is also backed up by the latest NYMEX numbers which show natural gas prices trading below $3.50 through most of the year and, then, moving up toward the $4.00 level at the end of the year.

So what does this mean for nitrogen fertilizer prices? Absolutely nothing. While nitrogen fertilizer prices historically followed natural gas prices, the link between the two started to become disconnected in 2007. The main reason – supply/demand. First, nitrogen fertilizers are a commodity product where price is set by supply and demand of ammonia. Through most of the 1980s, 1990s and up until the last 4-5 years, the U.S. and world nitrogen balances were mostly in a surplus position. As a result, prices were driven down to the point where the high cost producers were forced to shut down production. Since natural gas accounts for roughly 90 percent of cash production costs, nitrogen prices mirrored natural gas prices.



The balances started to shift in the middle of the last decade when increases in demand started to outpace additions to capacity. The net impact was an overall tightening in the world nitrogen balance with prices escalating well above industry production costs. The disconnect has certainly been evident over the last two years. As shown in the chart above, MW wholesale prices roughly doubled during the period while the Midwest delivered production costs remained flat to slightly lower. The disconnect is even more evident when looking at producer margins. While historical margins typically averaged in the $30-$60 range, margins climbed from roughly $100 per ton at the beginning of 2010 to an average of over $500 per ton during the second half of CY2011.

The other key factor for the disconnect is the fact that the U.S. is no longer the world’s swing supplier. As a result of the downward trend in U.S. natural gas prices and the sharp escalation in both Eastern and Western Europe prices, U.S. production costs are now well below the "floor" price of European producers.

The good news in all of this from a buyer’s perspective is that the world nitrogen supply/demand balance is expected to move back into more of a balanced position over the next couple of years as new off-shore capacity, combined with some additional expansions/restarts in the U.S., start to come on stream. This should help put some downward pressure on the nitrogen markets. We don’t, however, expect prices to "re-connect" with natural gas prices anytime soon.

Managing Fertilizer Risk

Nov 18, 2011

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The fertilizer market has been through some amazing volatility over the past few years. From the last "normal" level seen back in 2007 to the record peak in 2008 to the valley in 2009 and back to the current high prices, farmers have had to try and figure out what was going to happen next. We hope this blog will give you a better idea of what is driving these changes and what may be coming next. We plan to update this every month and hope to see you back here then.

As a general overview, both demand and prices this year are expected to remain above year-ago levels. Prices for most of the major products, however, appear to have already peaked and are forecast to trend somewhat lower heading into the spring season. We don’t see supply as an issue for any of the major NPK products.  Nonetheless, while we see prices trending lower, strong demand across the board should help keep a relatively high floor under the markets and prevent any major downturn in pricing and/or a repeat of what happened in 2008. 

Almost perfect weather at this time last year, combined with rising grain prices, resulted in one of the strongest fall fertilizer application seasons on record. Ammonia was particularly strong with demand up an estimated 40 percent from 2010, climbing to its highest level in almost two decades. Phosphate and potash demand were also up significantly from the prior year. 

While the fall was exceptionally good, the spring pre-plant application season turned out to be exceptionally poor. Wet weather across just about all of the major growing areas virtually shut down the early season application market. Following the boom-bust roller coaster, the pre-plant market was followed by one of the best nitrogen side-dress application seasons on record. Although no "hard" data is available on how much was actually applied, both producer and downstream inventories were virtually wiped out by the end of the fertilizer year.


The fertilizer market over the next year is going to depend to a large extent on the corn market. As shown in the above chart, corn accounts for almost half of total U.S. fertilizer demand. The combination of tight stocks and a projected record season average farm price for 2011 is expected to push 2012 corn acreage into the 93-94 million acre range. This should set the stage for a relatively strong fertilizer year with total demand forecast to increase 7.1% over last year and approach the recent peak in 2007 of 22.9 million.


Fertilizer Prices: Fertilizer prices typically follow a cyclical pattern where prices fall back at the end of the spring season as producer/suppliers liquidate carryover inventory and move production downstream and then begin to escalate as the market moves close to the application season. Not this year. In fact prices not only didn’t move lower, they actually moved higher with nitrogen climbing over the summer by another 30-40%.  The main reason – rising corn prices combined with an increasingly positive outlook for fertilizer demand.

So where do the markets go from here? In our opinion, the markets in general appear to be at, or close to their peaks with prices expected to trend lower heading into the spring season. Although the outlook for fertilizer demand continues to look positive, the drop in corn prices from this summer’s record has certainly taken some of the bullishness out of the fertilizer markets.


Recap: While we expect prices to trend lower, don’t expect to see any major downward shift similar to what happened in 2008-09. While supply is improving, strong demand this fall and next spring should keep the overall fertilizer balances in reasonably tight positions and, in turn, help keep a relatively high floor under the market.

Click here for more information and a free 30-day trial of the NPK Insider.


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