The fundamentals for fertilizers and fuels are aligning. There are a few thoughts I would like to highlight as we move out of harvest and into the winter offseason.
Fertilizer prices do NOT follow corn prices:
I know this runs contrary to most farmers' beliefs. I will agree that there is a loose correlation, but the chart at right shows the relationship between expected new-crop corn revenue and our Nutrient Composite Index has been a mixed bag. You will note that fertilizer prices and corn prices were in lock step for the first half of 2014, but the two quickly diverged to post a wide spread around the harvest 2014 low. From there, it took roughly a year-and a half for corn prices and fertilizer prices to recouple, but that was amid a steep downtrend in fertilizer prices -- led mostly by nitrogen. Since the spring of 2016, fertilizer prices have been at a varying but wide discount to expected new-crop corn revenue.
I bring this up to help readers guard against complacency. I do not want you to look at corn prices and expect them to have a major role in fertilizer pricing. In fact, I would point out that if anhydrous ammonia were priced "in-line" with December 2019 futures, NH3 would average about $650 per short ton here in the Midwest. This week, NH3 is priced 30% above the same time last year, but still well below expected new-crop corn revenue at $520 regionally. In other words, do not get caught up looking at cash corn bids in the $3.50 area, thinking depressed corn prices will depress fertilizer prices.
Natural gas on a tear:
This week, a forecast for colder than expected November weather spurred a 15 cents upside gap in front-month natural gas futures (see chart at right). That rally has held throughout the week and will likely continue into next week and beyond. Natural gas is the number 1 feedstock common to fertilizer production and while savvy fertilizer producers will have their natgas hedged at lower levels, spot natural gas prices will thin production margins for manufacturers, forcing a rise in finished fertilizer product prices.
We referenced China's thirst for natural gas in a few articles in the recent past, and the resulting added demand on the world market will seep into overall natural gas pricing. China imports around 40% of its natural gas needs, and that number is projected to rise through 2020. Something else to watch along the lines of China's increasing natural gas needs is the ongoing, but little reported kerfuffle in the petroleum-rich South China sea.
China is also cutting back on urea production, while at the same time, exporting less urea in favor of bolstering grain and soy production domestically. This will also support higher nitrogen and phosphate prices in the coming months. The downtrend in fertilizer prices I mentioned above was due in large part to aggressive urea output and exports from China. It looks like those days may be over for the time being.
Fuel prices also subject to higher heating demand:
WTI crude oil futures have been trending sharply lower in the past few weeks. This week, December futures are poised to close today below $60 per barrel for the first time since April 19, 2018. That is a bearish signal for farm diesel prices, especially as the harvest demand push winds down. But as WTI crude futures have softened, heating oil has been less willing to fall, softening roughly half as much as WTI has in the last two weeks. If demand for home heat is supporting sharply higher natural gas prices, there is risk heating oil futures will follow.
The most likely scenario is that strength in natural gas will only go so far as to limit the downside for heating oil futures, but there is upside risk implied as well. We must also consider the seasonals in this and as demand for heating oil for home heat rises, demand from the ag sector is falling off sharply and those two fundamentals may net an even keel. Fortunately, we have noted a lag between heating oil futures prices and retail farm diesel prices. So if heating oil futures do take off to the upside in a sympathetic rally with natural gas, we will have a narrow window of "underpriced" farm diesel. We will want to take advantage of that window quickly if that technical setup arises.
We have generally noted a low in farm diesel prices around the first of the year -- give or take a week. Last year's post-harvest farm diesel low arrived in the second week of January, and prices rose slightly in the following week before trending sideways into early April.
Here again, I must advise against complacency when it comes to offseason farm diesel pricing. Lower crude prices will apply pressure to fuels prices, but #2 farm diesel is also subject to seasonal home heating demand, injecting some upside risk through cold snaps. It is not safe to assume that lower crude oil prices will guarantee lower diesel costs.
Fertilizer prices are climbing. But if the advent of cold weather and snow in key growing regions crimps application demand, there could be a slight nitrogen surplus which would weigh on prices until retailers can get those supplies booked, and order fresh supplies from wholesalers -- undoubtedly at a higher price. Get on the phone and check your local nitrogen prices. Consult the handy map on profarmer.com to check your average local bid and compare your findings. If you find prices on fertilizer below those numbers, I would advise booking your needs for spring.
On the fuels side, give the market some time to come down from harvest demand. While there is upside risk here too, I believe the market will give us opportunities to lock in diesel for spring fieldwork well below this week's $2.75 per gallon. There again, I would advise taking some time to shop around to find the best deal.
I would close by advising farmers solidify their marketing game. Relying on the cash market will be a dangerous game and while there is significant risk in playing the paper game, you may find an intentional, forward thinking price protection plan will give you a great deal of peace of mind, and help you widen profit margins as the cost of inputs become a greater burden on the production budget.