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Fertilizer, natural gas prices sliding

Anhydrous ammonia prices have surged in recent weeks. But does that foreshadow an across-the-board jump in prices between now and next spring? As of right now, there are variables tugging on both sides of the equation, making for a cloudy crystal ball for anhydrous, diamonnium phosphate (DAP), and potash.

Since August, average anhydrous prices have increased by almost $40 a ton in Gary Schnitkey's state. But, the University of Illinois ag economist says that jump hasn't spilled into other fertilizer sectors yet. Though the price range has been wide (DAP has gone up by almost $100 a ton in the last year or so), the recent anhydrous spike has been decoupled from DAP and potash, both of which have, up to the last few months, followed closely.

"Anhydrous ammonia prices were $1,151 per ton in August 2008, declining to $428 in August 2009. From August 2009, anhydrous ammonia prices increased, reaching a plateau in 2011. In 2011 and 2012, average anhydrous ammonia prices in Illinois have varied in a band with a low of $774 per ton to a high of $867 per ton. The current $853 per-ton price is toward the high end of the 2011-2012 range," Schnitkey says. "DAP is currently in the low-$600 per-ton ranges, and potash is near $600 per ton. These ingredients have not varied in price much in recent months."

Potash and DAP are both about $200 a ton lower than anhydrous right now. The gap between DAP and anhydrous, especially, has widened immensely since about the middle of 2011.


(Graphic courtesy Gary Schnitkey, University of Illinois Extension)

Looking ahead, anhydrous prices will continue to track natural gas, which has been declining in recent weeks as supplies grow. An outlook for a possible milder-than-normal winter -- another factor that could bolster supplies by decreasing usage -- could add to the decline in that market.

On the other hand, demand specific to anhydrous, namely in the potential for a larger corn crop in 2013, could tip things in the other direction, pricewise. But ultimately, any such fluctuation isn't likely to dominate the market.

"Natural gas prices will be highly influenced by winter weather, with other supply, demand, and economic outlook factors also playing a role. Given this, anhydrous ammonia prices...are somewhat uncertain, with prices near $900 a ton possible and prices near $800 a ton possible as well," Schnitkey says. "Natural gas prices will influence anhydrous ammonia prices. Acres planted to corn will also influence ammonia prices. It is reasonable to expect relatively high corn plantings, leading to solid demand for anhydrous ammonia.

"At this point, though, evidence does not suggest that anhydrous ammonia prices will spike up as they did in 2008. Much higher anhydrous ammonia prices likely would require some world event to occur that is difficult to anticipate," he adds.

Looking further into the future, there's reason to be optimistic about lower fertilizer prices. That's because natural gas prices will likely stay lower for the foreseeable future on continued supply growth, Schnitkey says.

"Even given recent natural gas price increases, natural gas prices currently are lower than they were during much of the mid- to late-2000s. The introduction of fracking has led to large increases in reserves that can be economically produced, leading to expectations of continued lower natural gas prices into the foreseeable future," he says. "While long-term in nature, additional nitrogen fertilizer production would likely lead to the ability to more adequately meet nitrogen fertilizer needs, causing lower nitrogen prices."

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