Anhydrous at a Premium to Corn Returns: Is This a Downside Guarantee?

October 14, 2013 11:07 AM

Retail anhydrous ammonia moved slightly lower this week led by declines in Missouri and North Dakota. Corn revenue took a hit this week with the December contract opening today at $4.32 3/4. At trendline yield of 160 bu/acre, expected new-crop revenue tallies $692.40.

We compare the price of one acre of expected new-crop revenue to the price of one retail ton of anhydrous ammonia for our ZCZ/NH3 spread. Last week at this time, corn futures held a premium to anhydrous by a margin of a good 7 dollars.anhydrouspremiumzcz

This week, the tables have turned and anhydrous is now priced $11 above December corn futures. But this does not necessarily signal downward movement for NH3. The chart here shows how anhydrous is willing to let December corn move above and below the NH3/ton price without chasing each move.

That suggests that NH3 will likely stay put rather than move lower to chase corn revenue. Demand for fall anhydrous is steadily creeping higher, and NH3 would be foolish not to capture the current price.

Urea may be the spoiler as we observed declines to the tune of $5.47 in this week's retail Index and the weight of urea pricing may drag anhydrous lower. But since fall demand for urea is generally light at best in the central and northern Belt, we expect anhydrous to call the shots for nitrogen.

Even if urea does hold sway, the price slide for Chinese urea is on its last leg as sendout prices are fast approaching producer margins. The export window for summer urea will close in China on October 31. Ukraine is still having difficulty at 3 of 4 of its nitrogen facilities and wholesale ammonia is steady at best to slightly higher across the globe.

Should December corn fall to $4.00, we expect to see a downside response from anhydrous, depending on the timing. The application window grows more narrow by the day, and the time to pay the fiddler will soon be at hand. Fall demand will set the price floor for end users and probably mark the launch pad for price increases during the winter... if corn rallies.

Anhydrous bottomed ahead of schedule this year against a generally late crop. Spring anhydrous applications may be best booked early this winter before corn prices can gather some steam. But many believe corn will stay at the low end of its range through 2014 as strong yields added to strong supplies mitigate upside action.

As anhydrous overtakes the price of December corn, it is no guarantee that NH3 will try to dip below. In fact, anhydrous has shown itself to be a little on the lazy side when it comes to chasing corn futures. Producers are not likely to add to the already generous year-over declines, and as the Chinese urea fire sale comes to a close, anhydrous is positioned to stay at or near current levels until corn tells it to do otherwise.


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