NPK Outlook: Forget Fertilizer -- Book Some Fuel

August 16, 2013 10:53 AM

Not much has changed in the outlook for fall fertilizer in the past few weeks other than notable increases in fuels and declines for nutrient. Agronomists continue to stress the real potential of a wet harvest. Grain will need to run through the dryer in many areas and LP and natgas are priced favorably for booking.crop dusted 101

Fertilizer prices in general are limited by a number of factors at present including low corn pricing, strong inventories, and a resupply attitude to wait and let prices bleed. There is very little demand for NPK right now, and prices are sliding in response.

Globally, China and India are in the same holding pattern and the decline of the Indian Rupee is making phosphate a tough sell there. That has had the same impact as India and China's holdout on potash last year... inventories grow as demand lags.

Indications are that NPK bookings are best put off until September at the earliest. But if there is an early frost -- say Sept 1 -- corn prices could go on an upside tear and elevate NPK prices much like 2008. Keep an eye on the weather and on December corn -- today at $4.63. The upstream environment is leaning in farmers' favor

Nitrogen Outlook --

HOLD on Nitrogen

Anhydrous has fallen strongly in some states, according to Inputs Monitor data, with anhydrous shedding over $10/ton in regional averages. UAN solutions are down as well with 28% down $11 week-over and 32% down an inspired $18. Urea had the least to give this week falling only 6 bucks, but given the slippery slope urea has been on, any added decrease is welcome.

China is expected to continue the urea oversupply on favorable production margins thanks to falling coal prices there. Ukraine has announced increased natgas independence and we suspect this may spur a BPC-like production war long-term. Natural gas supplies in Trinidad and Tobago are said to be low on the long view, but current production is within standard margins, and while we expect some declines ahead for anhydrous, the floor is likely already in place in states that noted aggressive declines in the last two weeks.

Given current trends, and lagging December corn futures, we see little upside risk in nitrogen. As some states have fallen very sharply we may see some corrective rebounds of $5-$10/ton, but until corn futures give fertilizer a reason to run-up, we do not see a regionwide floor set for another two weeks yet.

Phosphate Outlook --

HOLD on Phosphate.

Given the shakeup in potash, phosphate is the new potash. Inventories in North America are very strong at present and the market sees very, very little demand from end-users. That has put the brakes on summer refill at suppliers and until some orders start coming in, phosphate is expected to continue to decline. India's Rupee will continue to ease demand in that market and China seems to be willing to standby and wait to see where the floor really is.

Lagging corn futures coupled with strong North American inventories and weak demand will let this market bleed as well. Current inventories are well above both year-over and the five-year average. If some sales are not made soon, producers will think about curtailing production to shave off the overhang. Mid-September looks like a sweet spot here, barring an early frost and a December corn rally.

Potash Outlook --

HOLD on Potash.

Industry watchers screamed, "The sky is falling!" when Uralkali broke from FSU partner Belaruskali. Officials at PotashCorp are quick to point out that one company does not set the international fertilizer price. It has been suggested that production increases in the FSU in an effort to capture market share will drive potash pricing 25% lower. China may be able to negotiate prices at that level, but North American producers say they will not chase that figure as Canpotex cannot compete with Uralkali's production margins. That does not mean, however, that potash will not give a certain amount of ground in the states.

As with phosphate, potash is currently oversupplied, above year-over and above the five-year average supply. Whatever happens between Uralkali and Chinese buyers, other market fundamentals point to lower pricing for potash before fall. Current pricing regionally fell last week by $5.00 and we expect mild declines before fall.

Perspective --

HOLD HOLD HOLD. The entire industry is in a holding pattern, waiting for NPK to find the floor. From Chinese buyers in Beijing to farmers outside Peoria, we all wait. Prices are expected to hit the floor sometime in Mid-September. If everything stays just as it is -- low corn prices and high fertilizer inventories -- farmers should look hard at their appetite for risk. All nutrient is down over the past two weeks. However, NPK pricing is better than the same time last year, and if your appetite for risk is small, consider hooking into a portion of fall needs at current prices.

If you have money burning a hole in your pocket, look to book natgas, LP and farm diesel immediately. Trends suggest fuels are headed higher and this is where the real price risk lies.

Check with your preferred supplier and if the risk makes you nauseous, go ahead and book some anhydrous in Iowa, South Dakota, Nebraska, Kansas and Ohio. These states may already have a floor in place. That is not to say prices in those and other areas will not fall, but booking portions along the way will help you manage the price risk.

So to be clear -- 'go time' on fuels, especially for grain dryers. Hold on N, Hold on P and Hold on K. Unless you find a deal you cannot refuse, let's give the market a little more time to muster one or two more downside moves before booking. Even if NPK prices pop, most are oversupplied and cheap enough compared to last year that you will still come out ahead.

 Photo credit: D. Michaelsen, Inputs Monitor

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