Apr 17, 2014
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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.

Fertilizer & Fuels Summer Outlook

Apr 11, 2014

A little anhydrous has been rolling in our neck of the woods in the last few days, but there is still a lot of ground to cover, especially the farther north one travels. My local coop is filling anhydrous tanks as fast as they can and as the spring application is underway, we look ahead to summer and what late spring prices will hold for northern growers.


We expect southern fertilizer purchases to give clues as to what is ahead as fertilizer demand moves northward and this week notes a $50 increase in Kansas anhydrous ammonia. At the same time, however, urea and UAN solutions are running out of upside steam. This week we observed fertilizer moving higher across the board, but fuels are coming our way, both LP and farm diesel moved lower on the week.

That comes on the heels of EIA's Short-Term Energy Outlook which predicts gasoline to peak in May at a national average of $3.66, and then fall through 2015 as led by declines in crude oil, which is also expected lower for that period. We look for farm diesel to act as it has in the past and follow crude oil. Trends suggest farm diesel will continue lower through the rest of the month and level off in May with the possibility of more downside action in midsummer. I'm targeting $3.35/gallon in May, but that feels a little high. We will fill farm diesel as we find opportunities.


Whether or not LP will fully retrace the winter spike remains to be seen, but this week the regional average falls below the $2.00 mark to $1.94. That gives us reason for optimism here. We booked 2013 propane in July at $1.25/gallon and will look for similar pricing levels at that time this year. As I said, we are very optimistic that the price action over the winter has done little permanent damage, and prices should fall back in line, indeed, they are already making good progress on that course.

Our suggestion is the same as that of the propane industry... be prepared for more of the same next winter. Forward book ample supplies for both agricultural use and home heat, and consider increasing your storage capacity. At this point, we look to July and will pull the trigger when the market indicates it has bottomed.

 As unkind as anhydrous ammonia was last year, the opposite is true this year and prices havePicture3 been very sticky at the low end of the two-year range. We have heard scattered reports of spot shortages due to transport constraints, and anhydrous trucks have been seen skidding into supply depots at all hours. Northern growers may get the short end of the stick here as NH3 is currently priced roughly $80.00/ton below what December corn futures would say.

We look for anhydrous to continue higher through the application season and some areas may find spot shortages, leading to price increases. Our suggestion is to front book now if you have not already to guard against price hikes. Our expectation is for anhydrous to top out at a regional average of somewhere around $760/ton. But that is an average of prices that vary as much as $175/ton between Kansas and Michigan.


UAN solutions will get the call if spring weather either prevents fieldwork or flushes N. If demand spikes at sidedress, prices will likely respond higher. National supplies are in reasonably good shape and, according to sources, there is plenty of N to be had. If spring weather cooperates, UAN demand will lag last year's, and strong supplies may lead to price breaks after a brief continuation of this week's upside move. In that event, we see UAN28% priced at $360/ton and UAN32% at $390 in June. But cantankerous weather could excite demand which could add another $50.00 in demand premium by then.

Urea will continue its global oversupply thanks to strong manufacturing out of China. Urea led the nitrogen recovery and prices continued higher this week. However, importers reported to your Monitor this week that urea cargoes were bought as quickly as they could bring them in suggesting strong spring demand. The upwardPicture4 trajectory has slowed considerably, and by the margins, urea is much more expensive than anhydrous. Either anhydrous needs to correct higher to realign the margins or urea has to fall considerably. The most likely scenario is a little of both.

Look for Chinese product to hold the global market in a strong supply situation, limiting prices through summer. Trends suggest urea will continue higher in the short term but may fall back below $500/ton after the spring season on plentiful supplies.

Phosphate demand was expected to come in low this year as expected new-crop revenue fell with December futures. We've got Dec. corn back around the $5.00 range and if that level appears sustainable to growers, demand for Phosphate will increase. However, in anticipation of low demand and in response to increased production in India, domestic production has slowed slightly and current North American inventories are low compared to lastPicture7 year and the five-year average. If growers decide to apply more P&K than early intentions suggested, the increased demand could bottleneck supplies in a rail system that is already having some real problems.

If that increases DAP/MAP prices too much, growers will pass or cut back as much as they can. Under current market conditions, trends suggest DAP/MAP will likely swing back above $600/ton. But if phosphate gets too bullish, it will price itself out of end-users' budgets.

Last but not least, potash. Potash and anhydrous have both stayed well below the dictates of expected new-crop revenue and while that injects some upside suspicion for NH3, this is potash being potash. Like phosphate, suppliers have been expecting a demand cut due to low corn prices, and that has helped limit prices. But North American inventories are very strong here and that will go a long ways toward limiting price. There is the question of rail constraints however, and since most of the potash used in the U.S. comes out of Canada, supplies may be slow to make it to retail locations.Picture6

An Indiana grower told the Monitor late last week that his supplier had told him he is having trouble getting potash from the local rail head. The extent of similar problems is unknown, but our expectation is for potash to trundle higher with limited upside potential. Strong inventories are expected to place prices below $500/ton regionally by harvest.

Strong upside potential for anhydrous and the possibility of UAN price spikes on late season demand are our red flags in this report. Phosphate is right up there and wholesale increases in ammonia feedstock could easily run P higher on the double-time. We are 100% filled on phosphate and ammonia for spring applications and are leaving 20% to gamble for price cuts in urea, UAN and potash. Fuels are headed lower and farm diesel should bottom in the next few weeks. We will top off a portion then, but summertime often brings another downside swing for ruby red, and we will look to book portions along the way.

Nutrient moved higher across the board this week and as applications are underway down south, and even close to home here in central Iowa, demand will play a greater role along with transport costs. If all goes according to plan, we will see mild increases through the remainder of the application season with the possibility for latecomers to catch prices on their way back down.


Mamas, Please Let Your Babies Grow Up to be Cowboys

Apr 04, 2014


Market Rally Radio featured Farm Journal's Greg Henderson on the show Wednesday and the conversation spurred quite the exchange on twitter. The comment that got everybody stirred up was wondering who is going to be the next generation of cattle producers, and what will it take to turn cropland back to pasture.3551047142 78e6d283b8 m

I grew up on a half section in Grundy County, Iowa and I remember as a boy, riding my pony through the maze of hayfields, hog pastures and wide waterways. We weren't cattle producers but my dad ran up to as many as 300 ewes each year with some of the earliest market ready weanling lambs available in this part of the state. Believe me, if there is one thing you can count on, it is that sheep will test your fences.

There were many times when we had to rescue sheep that had gotten their heads lodged in the fence, hoping for greener grass on the other side. On our first pheasant hunting trip in the back 40, grandad spent a lot of time helping me learn to safely climb fences while carrying a shotgun. Later, when I had my own acreage, I took great pride in the fences I built. 52" cattle panel with a line of barbed wire secured tightly to the top rung. Building horse fence is no picnic, but having safe, reliable confinement for livestock is essential.

327362194 4394137223 mBarbed wire was the fence of choice beginning in the late 1800's, but as more of the central U.S. was claimed and fenced, the practice became controversial. Ranchers in the Texas panhandle were quick to erect fences to keep grazers from other operations out, knowing that their grasslands could handle only so much grazing pressure. This angered free graze and cattle drive operations and soon, fences were being cut as a form of protest and to allow cattle to move from one place to another.

This was the wild west at a very volatile point and the range wars enticed vigilantes and violence to the American frontier. In 1884, in response to the fence cutting epidemic, Texas passed a law making it a felony to cut fences.

It is hard not to be nostalgic for the days when a days work was measured in how many fenceposts a man could set before lunch. Agriculture was less polarized between grain farmers and livestock producers and most farms had to keep the cows, pigs and horses out of the cornfields. That is not the case in the present day and in this climate of drought, pasture and rangeland are parched and unproductive, making it hard to feed cattle. Picture1

As economic forces drive more cattle ground toward row crops, rangeland will be converted to cropland, and the old fences that were such an issue to rangers at the turn of the century, pulled up. I have read books lamenting the fencing of the west, usually wondering how the author thought people were supposed to keep their sheep in.

The last few years have seen a runup in corn prices that made cows expensive to feed. The runup ran out on corn in the summer of 2013, but by then herd sizes had dipped and western pastures were parched by the heat and summer sun.

If the fences strung across the prairie marked a revolution in cattle production, the removal of those fences surely is a marker as well. More folks live in town now than ever before and as the divide between rural and urban life widens, the understanding and appreciation for what it takes to produce steaks and hamburgers is lost.

The field of farmers has shrunk, and the way forward for grain production has been forged by large scale operations and corporate farms, and it gets harder for the small scale operator each year. It is possible, probable even, that corporate farming will have to take the place of the family owned operation if young cattle producers continue to exit the business.

1120485301 41ce6af0aa m

For many, nostalgia is the only place the old ways survive today. The practice of rotating livestock through a series of feedlots and pastures on their way to market takes up a lot of space and soil, and current market conditions continue to push growers to maximize land use.

As pastures are tilled and converted to cropland, the nature of cattle production will change as well. Unless we go down the manure road, this has very little to do with fertilizer, but American agriculture is an integrated system of feedstock and kill weights. It is a system that has fed the world with a steady stream of hamburgers, pork chops and, yes, the occasional leg of lamb.10650325713 d83945b556 m

Waylon and Willie called it pretty close when they sang, "Lonestar belt buckles and old faded levis, And each night begins a new day. If you don't understand him, an' he don't die young, He'll prob'ly just ride away." Young cattlemen are 'riding away' and, as it is with all agriculture, the young need to learn the everyday tricks and skills that only a lifetime of animal husbandry can yield. My plea to you livestock producers from poultry to pork is to make succession planning an intentional part of your operation. Mamas, please let your babies grow up to be cowboys.

Boy rides cowdog photo credit: Powerhouse Museum Collection / Foter / No known copyright restrictions

Wire sunset photo credit: Steve took it / Foter / Creative Commons Attribution-NonCommercial-ShareAlike 2.0 Generic (CC BY-NC-SA 2.0)

Rancher with son photo credit: pixelsrzen / Foter / Creative Commons Attribution-NonCommercial-NoDerivs 2.0 Generic (CC BY-NC-ND 2.0)

Young cowboy photo credit: goingslo / Foter / Creative Commons Attribution 2.0 Generic (CC BY 2.0)

Ten Reasons for NH3 to Run Higher -- But Will It?

Mar 28, 2014


This is a 'we report, you decide' moment. We raised the red flag on anhydrous late this week on rumors of supply constraints in Missouri which we confirmed from several sources on the ground. This comes after we called the cows in on NH3 on March 4, then again on Wednesday this week, just as a reminder. We had enough reason to fear an upside recovery long before supply trouble hit the southern plains.

Knowing what we know about markets like these, there are no guarantees of movement one way or the other, but so many factors are currently conspiring to elevate anhydrous pricing that the downside is significantly limited. I want to take this opportunity to detail it all. The pre-shortage (a shortage which has yet to impact our regional prices, by the way) forces working in favor of an anhydrous recovery is a long list.

Some have more pull in this market than others, but here goes...

  • Wholesale price increases -- Mosaic reported this week that wholesale Tampa ammonia prices jumped by $120.00 per ton. It is widely believed that deal was made for ammonia as production feedstock for phosphate operations, but if feedstock is $120.00 higher, ammonia for nitrogen fertilizer will eye that price as an indicator of demand strength, and may look to add $120.00 of its own to prices which are this week $220.00 below year ago pricing.
  • Planting uncertainty -- corn acreage is expected to be down slightly this year compared to the year before. USDA's March 31 reports will offer guidance, but the full story of spring has yet to be written. This sets up the market for a demand surprise because if there is one thing about corn growers, it is that they will grow corn on as much ground as they can. If planting intentions pegs are too low, supplies may run thin or bottleneck and will be difficult to replace quickly and cheaply.
  • Weather uncertainty -- this goes along with the above, and growers remember last spring when all seemed to be well with the world, and then rains and even May snow delayed fieldwork. That means farmers will likely be anxious to get fertilizer laid and crops sown ASAP.Picture2
  • Nitrogen margins -- we table this concept in our weekly 'NFiles' report and current nitrogen pricing is out of whack by a ways. We expect a 5 cent difference between the price of Nh3 and Urea when priced by the pound of N. This week, that margin stretches to 14 cents. UAN solutions are the same story -- 28% is 10 cents over, 32% is 9 cents outside of expected price spacing by the pound of N.
  • Rail transport -- fewer rail lines carry the potentially hazardous Nh3 due to increasing regulations and the liability involved with the passage of anhydrous ammonia. Supply concerns will have to be met by truck transport.
  • December corn -- December 14 corn futures (ZCZ14) have found some upside room to run opening today at $4.87 1/2. At trendline 160bu., that's $740.00 per acre expected new-crop revenue. Much better than when futures were threatening a $3.00 handle, and much more encouraging to growers penciling-in budgets. Picture3
  • ZCZ14/Nh3 spread -- if you believe corn futures are tied to fertilizer prices, as I do, this is a big one. Historically, the return on one acre of expected new-crop revenue and one ton of anhydrous ammonia are very close to equal. The ZCZ/Nh3 spread at the above $740.00 per acre is -80.46 on an expected 0.00. That suggests even December corn believes anhydrous is underpriced.
  • Ukraine tension -- political unrest in Ukraine could easily hamper export traffic out of the Black Sea region. Ukraine does not supply much nitrogen to the U.S. by percentage, but they do maintain adequate supplies for other markets. Strong supplies from Ukraine insulate U.S. pricing by balancing the global market.
  • Natural gas prices -- maybe you are in the natural gas camp when it comes to nitrogen prices. Last year at this time, anhydrous was priced at $882.00/ton regionally and the May 14 natural gas futures contract was trading around $3.80, with nearbys even lower. Today we have NH3 priced at $659.54 per ton and May 14 nattie at $4.57. In late February 2014 when May natgas spiked to $6.49 1/4, anhydrous ammonia prices did not respond, and remained low.


All of these were working together to influence anhydrous pricing higher but to no avail. Now add the potential of a supply crunch and transport difficulties that sound very much like what we dealt with on LP earlier in the winter, and if we cannot guarantee upside risk, we can say with near-certainty that the downside is exhausted for anhydrous. Prices may not spike, but prices have no reason to fall.

Pockets of strong Nh3 supply will be insulated from any spikes our southern brothers are experiencing early on. It is fully possible that the holes I fished for information were isolated pockets of price strength, but my sources felt enough pressure to send trucks to other states, spending money on a day's worth of diesel fuel and drivers. That is significant. Perhaps our message would be best phrased as an observation that the market cannot tolerate giving anymore to the downside given current market conditions.

Also, keep this in mind, if preplant prep work is cut short by weather, spring anhydrous applications will be shifted to sidedress, limiting Nh3 demand to the few who have the sidebar to apply sidedressed ammonia. That would cure any supply shortages in a hurry, and elevate UAN and liquid nitrogen prices. The news of the southern supply shortage may have come just in time for northern suppliers to fill inventories, but these troubles are related to pipeline capacity and that is a static piece of infrastructure. To bypass pipelines, suppliers will have to spend money on diesel and drivers to truck around to Midwest storage and production units, adding premium to NH3 pricing.

Information is the closest thing I have to a crystal ball and hindsight will tell us if I'm one of those 'the sky is falling' dudes on this. I can handle that uncertainty. Like I mentioned before, we have not yet seen the rumored supply squeeze impact regional averages in our survey, and upstream sources have been very hesitant to acknowledge the southern supply gap. But take stock of the above and measure your appetite for risk. We filled the rest of our anhydrous three weeks ago at a price below today's. If you have passed on booking anhydrous for spring, take what I've written into consideration and have a conversation with your preferred supplier.


Rhubarb Springs Eternal

Mar 21, 2014


This week marks the official first date of spring and Chip made mention on the radio show yesterday that this time of year, farmers start to get a little tingly -- anxious to get another crop off the ground. Fertilizer applications and even some corn planting is already underway in the deep south. A MarketRally listener tweeted yesterday that he had seen water flowing from tile outlets in Grundy County, Iowa.

That means the thaw is making its way into the northern third of the Midwest and while I do not measure my own harvest in bushels, I took a moment to inspect the garden at home and what I found there was better than the robin's return... rhubarb. Not much, just a couple brave shoots pressing upward through the soil. But enough to confirm that winter's grip is loosening.IMG 0767

The bitterly cold temperatures resulting from the encroachment of the polar vortex will likely delay spring fieldwork in areas with deep snowcover as frost still extends deep into the soil profile. Key to getting the crop off on the right foot will be early root development.

Last year, it was easy to see corn plants whose roots had reached deep enough to capture nitrogen stores that had been drawn deep by thirsty subsoil. The eastern belt is in much better shape on soil moisture than is the western belt, but it was spring rain that gave us trouble last year. With any luck, the cool, damp spring most forecasters predict will allow the soil to warm slowly enough to take advantage of the snowmelt and recharge the deep soil so that any rain that does come along remains available at the top of the soil strata.

On the western belt, early root growth will be especially important because of lingering severe drought. Roots will have a lot of work to do to find water and then transport it back to the plant. The deeper the roots the better start the crop will get. Picture1

Thus far, however, P&K demand has been forecast to be very low and more than a few farmers have told me they intend to skip P&K altogether this spring. That was when Dec corn was threatening a $3 handle, before Putin annexed Crimea, spurring grain futures higher. Today the Dec is at $4.80 and most feel the range established over this week may confine futures until the market figures out just what planting intentions are, and what impact the Crimean kerfuffle will have long term on grain prices.

Acreage in Ukraine is expected to be down due to political unrest and a lack of available farm credit. A cut to planted Ukrainian acres in addition to potential export difficulties are making U.S. corn more attractive to importers by the day and as December futures perk up, so do the possibilities for phosphate.

At $4.80, expected new-crop revenue at trendline 160 bu totals $728.00 per acre. Now we are getting somewhere. Depending on land costs and other production expenses, $700.00 is very near an average break even point for most operations. index

Strength in December corn futures and the spring tingles will likely be enough to change the minds of some, but consider the yield potential stored in early root development. I have noted before that this is probably not the year to skip P&K because crop prices are not expected to be in any better shape next year. But give this year's crop a chance to 'wow' you and bank that phosphate now. If crop prices are still low, maybe skip applications in the spring of 2015. The last thing you want to do is throw your yield away for fear of a bear market.

With the value of each bushel now more important than ever, make sure to set yourself up for strong yields and efficient uptake by growing deep roots under the crop. Read the full scoop on near-tern P&K prices in this week's P&KToday.

A refreshing breeze, sunshine withering ice jams and a satisfying muck around the edges of puddles all signal the spring thaw is underway. This growing season will test growers with a range of threats to the crop. The best preparation is to lay a strong foundation of roots for plants to stand on. Happy rhubarb to us all!



Crazytown and the Export Creeps

Mar 14, 2014

The United States has weighed in on the Russia-Ukraine conflict -- I think we can call it that now -- and has expressed its intent to explore using Strategic Petroleum Reserves (SPR) to influence the global price of crude oil lower and curtail Russia's national income. The hope is that WTI crude prices will scare Putin out of Crimea. This reeks of the kind of Jimmy Carteresque weaponized export policy that landed Ronald Reagan in office -- oh, for the days.

We have covered the fringes of this issue at length in various Inputs Monitor reports this week, and Chip and I talked about it earlier this week on Market Rally. I quoted Reagan from January 1981 who was then President elect when he said, "You have to determine whether we're having as much effect on the Soviet Union or if that's being offset by a worse effect on our own agricultural community."

In 1979, then president, Jimmy Carter canceled grain sales to the U.S.S.R. as a means of sanctioning the Soviets in response to their military actions in Afghanistan. In confirmation hearings for Secretary of Ag John Block, Block said, "I believe food is now the great weapon we have for keeping peace in the world. It will continue to be so for the next 20 years, as other countries become more dependent on American farm exports and become reluctant to upset us."

I don't even know where to start on that line of thought. At this point, when the Administration of 1980 refers to agriculture, in 2014, we can substitute that word with crude oil. With cuts in national defense spending and the National Guard, it would appear doves on Capitol Hill have little recourse but to spit seeds at Russia.

The decade that followed Carter's cancellations was a disaster for the American farmer as a direct result of Block's notion of using American crop exports as a weapon. In fact, his comment above sounds much more like Krustiev than it does George Washington.

It is the unintended consequences that concern us here. Backroom deals let grain seep out around the edges of the canceled grain sales, blunting the edge of Block and Carter's rhetoric. The result was a surplus of grain at a time when land values and inflation ran many farmers out of business.

I've still got the export 'creeps' from what happened over this winter with propane. Harvest demand was high, home heat demand was huge and LP exports topped all time highs. All of this combined to create a supply crunch that had regional governments suggesting citizens ration propane use, and raised retail prices above $5.00/gallon in some states. Great idea to export propane, but the record setting export pace diverted Midwestern supplies to export terminals down south and what was left was too few gallons for too many people. LP export policy had unintended consequences that put some folks in a real bind.

The biggest potential for unintended consequences here is probably unknown at this stage of the game. But American shale reserves have long sought a market, and a payday. It seems shortsighted to take this newfound resource potential and work so hard to lower the product's value. If American crude producers find their returns thinned by artificial international intrigue, there will be very little meat left on the bone and production will slow.

Let's go to crazy town here... Oil reserves drop because the 5 million barrel offering isn't enough to scare Putin, and the government mandates the sale of, let's say, another 30 million barrels. Producers are run out of business like so many farmers in the 1980's and gasoline hits $5.00/gallon, just like propane. All of this as Putin has no trouble finding friends in the global community. New leadership in Egypt is very friendly with Putin. Imagine a world with Putin in cahoots with the guardians of the Suez Canal.

Libyan oil production desperately needs Putin's kind of help ousting rebels from eastern oil terminals -- those rebels have cost Libyan crude oil production about 1 million barrels per day. My guess is that 20 Russian Special Forces soldiers could clear the pirates out of Libya in about ten minutes if so ordered.

And that leaves the Obama administration with an American public that cannot afford to use it's own oil or to produce it's own oil. Artificially driving down the price of American crude oil could potentially do more to harm American producers and the American public than it will do to dissuade Putin from reassembling his beloved Soviet Union.

Let's revisit the words of Ronald Reagan, who's thoughtful approach to this issue bodes a serious warning to those who would use our God-given resources in such a way. "You have to determine whether we're having as much effect on [Russia] or if that's being offset by a worse effect on our own [national economy]."

I hope this idea works, but Vladimir Putin does not appear to be at all ticklish, and Russia is not likely to back down this side of gunfire.

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