Mecardo Analysis - Urea & Gas: A strong relationship
- By: "Farm Tender" News
- Cattle News
- Oct 09, 2018
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By Andrew Whitelaw | Source: USDA, Mecardo.
The industry spends a lot of time examining the output price of our crops and livestock, however, it is also important to examine the cost of the inputs that are required to produce our outputs. In this analysis we examine Urea.
Recently we examined fuel pricing in the article ‘The great fuel robbery of 2018’. In this article, we examine Urea and natural gas.
The production of industrial fertilizers is an extremely energy-intensive process, with natural gas being a major feedstock in manufacturing. Natural gas is used as the principal ingredient in nitrogen (Urea) fertilizers and is heavily used in phosphate (DAP) fertilizers.
Due to this reliance on natural gas to produce fertilizers we would expect a high degree of correlation between gas and fertilizer prices, which is apparent in Figure 1. This chart shows a close correlation between gas and Urea.
In Figure 2, the swap price for granular Urea in the USA gulf (NOLA) is displayed since the turn of the decade. In A$/mt terms, the price of Urea has risen rapidly in the since the decade low in July 2017, with a 116% rise in pricing levels in this period. This has been caused by a combination of an increase in Urea pricing in US$, gas increasing and the lower A$.
The swap price we have used is the price in the USA gulf converted to A$, it does not consider basis. In a similar fashion to price risk management in grain, basis must be considered, which in this case is the cost of importation and merchandising.
Key points
* Urea follows natural gas with a high degree of correlation.
* The decline in the Australian dollar will increase the price to import fertilizer.
* Urea swap pricing has increased by 116% since the decade low in July 2017
What does this mean?
The market has risen rapidly, and a combination of factors have resulted in the price of fertilizer increasing to the highest levels in four years.
As we move forward into 2019, it is likely that we will be in a much higher pricing than 2018 for both fuel and fertilizer.
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