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Nitrogen costs: Natural gas prices just the tip of the iceberg
OMAHA (DTN)--Many think nitrogen fertilizer prices are up an average of 20 percent over a year ago because of higher natural gas prices, but that's far from the whole story.
Though nitrogen fertilizers are made from natural gas, other factors have come into play during the past year that far outweigh the 35 percent run-up in natural gas futures prices.
One industry analyst said the same fundamental factors that have affected such commodities as crude oil and copper have sparked the price increase in nitrogen fertilizer prices. Record world demand has depleted supplies, so it boils down to simple economics - higher demand plus lower supplies equals higher prices. Demand has grown as third world countries use more product in an attempt to produce more crops. And, of course, more fertilizer is being used in China.
The industry analyst said application of nitrogen in the Winter Wheat Belt has been running at about average levels. There have been no noticeable declines that could be attributed to the higher cost.
Kansas City July 2005 Wheat futures are trading only 7 percent higher than the July 2004 contract was at this same time last year. Yield projections are running slightly higher than last year, increasing projected total revenues by 10 percent.
Producers will need to average nearly $4 a bushel to offset the 25 percent increase in the price of urea, the solid form of nitrogen, but only $3.65 to offset the increase in the cost of anhydrous ammonia, the gaseous form of nitrogen.
The affect on corn acres won't be known until next spring. If yield continues to improve at an average of 5 percent a year, the 2005-2006 crop could be projected to average 166 bushels an acre.
The December 2005 corn futures are trading 4 percent higher than the 2004 contract was at the same time last year. Taken together, this would increase gross revenues by 10 percent.
But to offset the 15 percent increase in the cost of anhydrous, a producer would only need to average cash sales of $2.14. To offset the 25 percent increase in urea costs, average sales of $2.33 would be needed.
These prices are not out of the question. Basis is averaging around 30 cents less than the December contract this harvest. Using that as an estimate, sales in the December 2005 corn contract equivalent to $2.63 would achieve these price objectives.
The probability of December corn trading above $2.63 before expiration is 50 percent. The December 2005 contract is trading near $2.45.
Another factor that will be watched closely is corn's price relationship with soybeans. Using a trendline yield of 42.5 bushels an acre, soybeans would generate about $120 an acre less in revenue than corn at national loan rates.
Urea prices may be nearing a top and prices might be lower in the spring, the industry analyst said. He also expected anhydrous ammonia prices to remain steady over the winter. Combine that with the probability of higher corn prices over the winter and early spring and the expectation of increased yield, give corn growers hope for increased returns for the 2005-2006 crop.
Date: 10/20/04
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