Bargains to be had on urea, ammonia

Urea prices are $100 per tonne below those of recent years, reflecting low natural gas costs, weak demand and new production

Growers should seriously consider locking up their 2017 nitrogen fertilizer needs at today’s prices, says an analyst.

Urea and anhydrous ammonia prices are lower than they have been in a long while, said Derek Squair, president of Agri-Trend Marketing.

He has seen urea prices as low as $300 per tonne and anhydrous prices of 36 cents per pound.

“It’s very, very low versus the last four or five years especially,” said Squair.

Agrium spokesperson Richard Downey confirmed that prices are unusually attractive.

“North American nitrogen prices are currently at their lowest levels over the past 12 years,” he said in an e-mail.

“Prices globally have been under pressure as the spring season winds down in the Northern Hemisphere, and some new nitrogen capacity has been added.”

However, he warned that international urea prices are below the cost of production and have the potential to rise in the fall based on seasonal demand and the recent strengthening in global crop prices.

Fertilizer is the second biggest operating expense for Canadian farmers, accounting for 11.7 percent of their annual costs. It ranks higher than labour but lower than feed costs, according to Agriculture Canada.

Nitrogen fertilizer accounts for 74 percent of all the fertilizer used by Canadian farmers. Urea leads the way with a 35 percent share of the market.

Squair said rock bottom natural gas prices have spurred an increase in nitrogen fertilizer production to the point where supply is exceeding demand by a wide margin.

“There’s lots on the market, and they’re trying to blow out their inventories,” he said.

That is presenting a perfect opportunity for farmers to hedge next year’s fertilizer costs.

“What we’ve been recommending to our producers is sell old crop canola and new crop canola,” said Squair.

“Really, the new crop is the perfect hedge to inputs that are going into next year.”

The canola futures price for the November 2017 contract was $11.05 per bushel last week, which he considers a good value.

So if a farmer needs to buy $300,000 of nitrogen fertilizer for next year, he should sell $300,000 of next year’s canola crop and lock in terrific margins.

Squair said the $300 per tonne price is for lower quality urea fertilizer. The better quality 46-0-0 urea is selling for $380 to $400 per tonne, which is well below the $450 to $500 per tonne price of the past couple of years.

Norm Hall, president of the Agricultural Producers Association of Saskatchewan, was shocked to hear how far urea prices have plummeted.

“Whoa. Wow,” is how he responded to news of $400 per tonne urea.

“That’s a significant drop.”

Hall is pleased that nitrogen prices are finally better reflecting what has been happening to natural gas prices.

“The last two or three years, I’ve been buying around $520 (per tonne), and that’s in the winter and fall. You see spring prices in that $600 range,” he said.

Hall said most farmers won’t start looking at fertilizer prices until after harvest. And they often will put off buying the input until winter.

He said there might be a few farmers who “pull the string” and purchase next year’s needs this summer, but he believes most guys will just keep a close eye on prices and pounce when they see them start to climb.

Squair thinks prices may drop another $20 to $30 per tonne before rising in the fall, but many of his producers have already sold canola futures and bought their 2017 nitrogen fertilizer needs because they are happy with the margins.

Storing the product can be risky, especially in the humid summer months, so farmers are advised to take delivery in October or November.

Hall said most farmers apply their urea in the spring as they are putting in the crop. However, a lot of anhydrous is applied in the fall.

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