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.
- 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.
- 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.