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Tuesday, November 28, 2006

Behold - a demonstration of pricing power...

The unnaturally warm weather this week has prompted me to haul out the tractors again and apply some fall NH3. My local fertilizer salesman asked me yesterday what I had heard NH3 prices were going to do this winter. While it's nice to be thought of as somebody who "knows stuff", I rarely get that benefit of the doubt around home.

And for good reason.

Anyway, the folks at the University of Illinois have an excellent piece on this very topic:

The story of the nitrogen you require for corn begins with natural gas, and its price is related to oil, as well as politics and a fragile production infrastructure. Ammonia, which is the primary source of nitrogen, is produced from natural gas, and because of a wide variation in the cost of natural gas around the world, ammonia prices will also vary widely. In the US, agricultural ammonia consumes only a sliver of the natural gas produced, and has to compete with many other industries. Since natural gas futures are traded, it is possible to watch futures prices and predict the cost of ammonia compared to prior seasons.

But as usual for Extension people, they use circumspect language and vague conclusions not unlike a political press secretary. I certainly understand their caution.

I have fewer constraints. Anhydrous ammonia, in my opinion is about to teach farmers a lesson in pricing power. While we can calculate the relationship between natural gas and NH3, and create linkages between the prices, I don't think that's going to be the market driver.

Ethanol is - via huge amounts of corn acres needing N. Couple that with relatively few fertilizer producers and retailers, and you have a perfect chance to price what the market will bear.

And with $3.50 corn the market will bear a lot. Farmers will have to buy N. We know it and N producers know it. Why on earth would they let Cargill's money dawdle in my checking account when it could be boosting their shareholder's value?

And really, what choice do I have?

So forget about natural gas prices and production costs for NH3. That apparently only works when NG prices are going up. NH3 going to go up until we stop buying it.

Why do you think I fired up my tractor Monday?

Labels: economics, production

¶ 7:09 PM

Comments:

John:
Thanks for sending folks to Farmgate. I think you were extending a compliment, but after several readings, I'm not sure.
Regards,
Stu (Farmgate blogger)

# posted by Stu Ellis : 1:04 PM

John:
Thanks for sending folks to Farmgate. I think you were extending a compliment, but after several readings, I'm not sure.
Regards,
Stu (Farmgate blogger)

# posted by Stu Ellis : 1:05 PM

Stu:

Certainly no offense was meant, but c'mon - university guys have been battered by chemical companies, market advisers, and farmers so often they use language that brackets possibilities and is laden with conditional modifiers.

As for me, I think we're going to get hosed on NH3 prices this winter.

# posted by John Phipps : 2:33 PM

John's World Tuesday, November 28, 2006 Behold - a demonstration of pricing power... The unnaturally warm weather this week has prompted me to haul out the tractors again and apply some fall NH3. My local fertilizer salesman asked me yesterday what I had heard NH3 prices were going to do this winter. While it's nice to be thought of as somebody who "knows stuff", I rarely get that benefit of the doubt around home. And for good reason. Anyway, the folks at the University of Illinois have an excellent piece on this very topic: The story of the nitrogen you require for corn begins with natural gas, and its price is related to oil, as well as politics and a fragile production infrastructure. Ammonia, which is the primary source of nitrogen, is produced from natural gas, and because of a wide variation in the cost of natural gas around the world, ammonia prices will also vary widely. In the US, agricultural ammonia consumes only a sliver of the natural gas produced, and has to compete with many other industries. Since natural gas futures are traded, it is possible to watch futures prices and predict the cost of ammonia compared to prior seasons. But as usual for Extension people, they use circumspect language and vague conclusions not unlike a political press secretary. I certainly understand their caution. I have fewer constraints. Anhydrous ammonia, in my opinion is about to teach farmers a lesson in pricing power. While we can calculate the relationship between natural gas and NH3, and create linkages between the prices, I don't think that's going to be the market driver. Ethanol is - via huge amounts of corn acres needing N. Couple that with relatively few fertilizer producers and retailers, and you have a perfect chance to price what the market will bear. And with $3.50 corn the market will bear a lot. Farmers will have to buy N. We know it and N producers know it. Why on earth would they let Cargill's money dawdle in my checking account when it could be boosting their shareholder's value? And really, what choice do I have? So forget about natural gas prices and production costs for NH3. That apparently only works when NG prices are going up. NH3 going to go up until we stop buying it. Why do you think I fired up my tractor Monday? Labels: economics, production ¶ 7:09 PM Comments: John: Thanks for sending folks to Farmgate. I think you were extending a compliment, but after several readings, I'm not sure. Regards, Stu (Farmgate blogger) # posted by Stu Ellis : 1:04 PM John: Thanks for sending folks to Farmgate. I think you were extending a compliment, but after several readings, I'm not sure. Regards, Stu (Farmgate blogger) # posted by Stu Ellis : 1:05 PM Stu: Certainly no offense was meant, but c'mon - university guys have been battered by chemical companies, market advisers, and farmers so often they use language that brackets possibilities and is laden with conditional modifiers. As for me, I think we're going to get hosed on NH3 prices this winter. # posted by John Phipps : 2:33 PM Post a Comment << Home US Farm Report host John Phipps surfs the Web so you don't have to... About Me Name: John Phipps Location: Chrisman, Illinois, United States Jan and I farm 1700 acres near Chrisman, IL. I have also written humor and commentary for Farm Journal and Top Producer for 13 years. Please visit my website (www.johnwphipps.com) to learn about my speaking services for your group's next meeting. View my complete profile ARCHIVES April 2006 / May 2006 / June 2006 / July 2006 / August 2006 / September 2006 / October 2006 / November 2006 / December 2006 / January 2007 / February 2007 / March 2007 / April 2007 / May 2007 / June 2007 / July 2007 / advertisement MORE FROM JOHN On the Coffee Table What's for Dinner
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