Corn and Natural Gas on the Run -- Shouldn't Fertilizer Be Running Too?

April 8, 2013 07:00 AM

Since 2008, the price of fertilizer has been attached to the price of corn. Inputs costs rose dramatically, pacing corn's high profitability. I have said before that fertilizer overshot the market in 2008 and has been incrementally correcting ever since. We have observed December '13 corn moving lower and lower and lower lately. Some here in the office foresee a $4 handle on Dec corn before a rally, and if corn and fertilizer are truly coupled, we should see some downward response from nutrient. But the numbers have yet to play out that way.

Maybe nutrient is tied more to natural gas futures. Natural gas is also coupled with fertilizer pricing as the leading component of nitrogen and phosphoric nutrient. Natural gas futures have run in the opposite direction as corn -- likely for the same reasons -- and have recently set a fresh May contract high above $4. If natural gas and fertilizer are bound, then nutrient pricing should move higher in response.

The table below compares NH3, Urea and DAP with the price of Dec '13 corn and May '13 natural gas on a simple line chart which starts the first week of December 2012 and runs through today. I expected to see some movement from fert as both corn and natural gas futures have thrown fits. I first charted NH3 -- flat. Then Urea -- flat. I thought perhaps DAP would tell the tale, but alas -- flat. How can fertilizer's parents -- corn and nattie futures -- see so much movement while nutrient hardly flickers?heythisone

There are a few possible explanations. The first is the fact that by now, growers have made nutrient purchases and are idling in the machine shed waiting for the spring to open in full. This has stalled near-term retail fertilizer demand. Carryover may also be partially to blame, and while the numbers aren't out yet, we expect a notable reduction in pre-emerge nitrogen applications this spring. I look for some demand to return to nitrogen during the sidedress season, and UAN28 has shown a little life in that context.

The wider view is that fertilizer pricing is not influenced by day-to-day market fluctuations. When I said earlier that most nutrient has already been booked, that nutrient was bought and paid for by old-crop marketings. Old-crop corn dictates how much is in the grower's pocket to spend -- new-crop futures give the grower some idea of how much can be budgeted toward inputs based on expected new-crop revenue.

With that balance in mind, forget natural gas as a feedstock, forget the slide in corn futures and, for Pete's sake, forget last spring's ideal planting conditions. This is a weather market for corn, fertilizer and front-month nattie. Some positive weather news would help limit natural gas' upside on weaker demand and help keep the bottom from falling out of corn futures.

The trend suggests retail fertilizer pricing is at a seasonal low on weak demand right now. If corn can find a rally, we may see fertilizer pricing move higher through the summer. If natural gas can find a range below psychological $4, wider margins upstream may trickle down to the end user and lower fertilizer prices. With NH3 at $880/ton it feels like there ought to be a little downside room yet to give here, but this chart has N&P flatlining at present and until more of the Corn Belt can get iron in the field, look for the sleeping inputs giant to continue napping.

Currently -- this article originally appeared in your Inputs Monitor on April 8. We have updated the below prices for May '13 natural gas and December '13 corn to reflect prices as of 11amCT, Monday, April 15, 2013.

May 2013 Natural Gas opened today at $4.22 moving as high as $4.290 in early morning trade. Currently at $4.203.

December 2013 Corn futures have taken a beating over the past few weeks opening today at $5.50 and falling to a daytime low of $5.30 -- currently at $5.32.


*note -- fertilizer prices expressed on short tons. This analysis moved the decimal point to the right two places for charting purposes for both corn and natural gas futures pricing... example: $5.65 corn = 565.00.

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