Sore Thumbs & Hard Noses
Oct 11, 2013
A lot of charts have come down the pike this week and the technicals indicate the low may be in place for nutrient. Most of these charts appeared at some point during my writing this week and I wanted to put all these big ideas in one place.
We have looked at what we call 'marginal parity' which is really just a college phrase meaning the price differences between nutrient products and December corn futures will move toward established price spacing.
We found that, when imposed over an expected new-crop revenue chart, anhydrous cuts directly through the middle of the charted corn price. This affirms the notion that nitrogen will follow corn prices. The chart at right shows this neatly and I have spent a fair amount of time staring at this in appreciation of how moves above anhydrous are always corrected with a corresponding move in the other direction. You can see clearly here the peaks and dips -- there is even a downtrending inverted head and shoulders pattern for you chart geeks -- and that anhydrous stayed its course through the ups and downs.
We then adjusted the price of one ton of retail potash as recorded by your Monitor to align with anhydrous pricing according to our marginal parity concept. The result was striking and what we found was that the spacing between expected new-crop revenue, one ton of actual retail anhydrous and our adjusted potash price have arrived at the spacing the three demonstrated in the last week of February 2013. That is the point at which anhydrous and expected new-crop first come together on the chart.
That strongly suggests that fertilizer pricing is where it wants to be. However, nutrient is currently priced below new-crop returns -- can you say buying opportunity? -- and we are left to wonder if corn will move lower, or if nutrient will move higher to reclaim some of its losses. The inaugural issue of our new weekly feature P&K Today talks more about this and the actual impact of the breakup of the Belorussian Potash Company on K pricing.
Speaking of potash, the chart at right shows simply the actual year-to-date price of potash compared to the same time last year. This represents a 17% year-over falloff and now that the rumors of continued declines have given way to the truth of the facts, this image makes a strong case that potash has given up all it intends to, and prices are set to at least level off, and quite possibly move slightly higher to capture expected new-crop revenue.
DAP got a little excited a few weeks ago prompting an Inputs Monitor advice alert to fill remaining phosphate for fall. If you timed this just right, you caught the dramatic dip that threw the DAP/MAP margin out of whack for a time. The chart at right shows how hard DAP is working to fall back in line with MAP. This chart suggests MAP can stay put and all DAP needs to do is level off at current levels.
This is rarely the case with phosphate, however. DAP and MAP have a tendency to chase each other. We have seen several weeks where retail DAP pricing moved sharply higher while MAP moved mildly lower, and then the next week finds both in corrective positions with MAP scrambling higher and DAP tacitly lower. But note the marginal parity on the downslope. This is roughly the margin we are looking for to signal the two will level off. This coming week could be the one.
Our next chart depicts all seven nutrients in our Index year-to-date and DAP sticks out like a sore thumb. All other products have fallen to roughly the same level and are very near the margins they exhibited in late February. DAP has a little correcting to do and UAN28% looks like it is at the tail end of a corrective bounce of its own. Beyond that, everybody seems to have settled in to a leveling off point.
Examining these margins is a lot like a basis play for grain marketing. When the spread is right, a buying opportunity is signaled. We believe the current retail valuations expressed here are strong evidence that the bleeding is over. I can't shake the notion at how convenient it was for Uralkali and Belaruskali to break up and ring the price decline bell in a climate of lagging U.S. corn futures and a failing rupee. What I mean is, if the Belorussian Potash Company had stayed afloat, potash would likely have fallen to present levels anyway.
It is urea that has led the price declines shedding 21% from the retail price year over as anhydrous moved 16% lower during the same period. DAP and MAP each dropped 14% year-over, and potash?... potash fell 17% -- roughly the same as everybody else. Many had said that phosphate was underpriced last year and that would account for the 3% difference between P&K.
This is a lesson to harden our noses. One of my advisors told me early on in my career to 'watch for headfakes'... gamesmanship among profiteers. I have wondered out loud on more than one occasion how much impact the BPC breakup actually had on nutrient pricing. Expected new-crop returns have captured a premium to NH3 and potash from a relational perspective and that may be the extent of the influence of the FSU drama. If that is the case, since Uralkali has stopped ringing bells heralding continued declines, we can expect upside action from nutrient in general to capture the difference between itself and expected revenue.
But another look at the NH3/expected revenue chart shows NH3 will allow a certain amount of crossover from corn futures, and will not chase the corn price on a move-by-move basis. There has been so much uncertainty injected into fertilizer pricing it is hard to keep it all straight. But the charts do not lie and we believe the market is exhausted from all the press. The most likely scenario is for nutrient to level off at current levels with the most volatility potential in DAP and 28% near-term.