We have been watching the margins between nitrogen products to see if some form of technical, chart-based analysis yields hints into future price moves. We noted 28% as a harbinger of upside action when it crossed below potash on an indexed basis right before a dramatic change of direction. We have noted urea as a price leader despite anhydrous ammonia being a more popular nitrogen source for U.S. corn growers. But a careful examination of the relationship between anhydrous and indexed urea prices may also have a tale to tell.
The chart at right features our raw anhydrous ammonia bid per ton versus our indexed urea figure. As a reminder, when we refer to an “indexed figure”, we have calculated a factor by which we multiply our raw urea price so that urea and anhydrous are priced on a 1:1 basis.
We could dive much deeper into the implications of the relationship between anhydrous ammonia and urea, but the subtle minutiae can be overlooked for now as the overall tendency can be confirmed more quickly and succinctly by bigger moves in the spread. In past posts, we have touted urea as a nitrogen segment price leader, and we still believe that to be the case, but a deeper dive shows a much more complex set of factors, most notably, the spread between NH3 and indexed urea, which can contribute more clarity to our outlook.
Note that urea played its role as a price leader in fall 2013. During that time, urea sprang to a sharp premium to anhydrous ammonia. It took a few weeks, but eventually, NH3 followed urea higher. If we move our gaze further back in 2013, however, we note that the downtrend that led up to urea’s storm to the upside was preceded by an anhydrous bid at a premium to indexed urea. That chart setup was followed by a sharp downturn in nitrogen pricing. We note the same setup right before the summer 2015 price pressure with anhydrous extending above urea, then nitrogen prices falling.
In fact, from that time, nitrogen was in a near-constant downtrend. The seasonal price hump in spring 2016 was related to demand features, and since anhydrous was able to remain dominant over urea during the upside push, no technical damage was done on the chart, and the downtrend resumed after seasonal demand-based price strength was exhausted.
In the current nitrogen recovery, all four of our nitrogen products are pointed higher at about the same trajectory. This did not occur, however, until urea crossed over anhydrous ammonia, and retook the dominant price position. Once again, with urea at a premium to anhydrous ammonia, we see anhydrous follow urea higher along with the rest of the nitrogen segment.
We will dig deeper into this technical feature unique to the Inputs Monitor in later posts, but it does appear that, on an indexed basis, when urea is priced above NH3, the trend is for nitrogen to move higher. When NH3 is at a premium to urea, the trend is generally lower.
