A Crude Connection Between Grains and Geopolitics

There are some clear and certain ways the war in Ukraine is affecting grain prices, like the cutoff of wheat and corn shipments from Black Sea ports, the uncertainty about spring planting in that region or fertilizer availability in coming months, and the volatile activity in futures prices when traders holding short positions get squeezed or forced out by margin calls.

Then there are some less certain ways the situation is adding to the wild bullishness, like the rumor that the European Union might consider importing GMO corn from the U.S. and South America, or whatever else might be the rumor of the day.

And, finally, there are some indirect, circuitous paths for the crisis to affect grain prices for producers in the United States. There are European natural gas prices to consider and the loss of Russian fertilizer exports to the global market; in addition — more subtly — the shipping companies that now refuse to take bookings to or from Russia, relieving some of the pressure on the global supply chain and ocean freight prices. But the big one, of course, is oil.

President Joe Biden announced Tuesday the United States will ban imports of oil or natural gas from Russia. As DTN Senior Market Analyst Troy Vincent points out, Russian oil amounted to 7.9% of total U.S. oil imports last year, and “while U.S. refiners and blenders can get by sourcing this oil from elsewhere, it will come at a higher cost. The lack of Russian crude on the global market will likely mean lower refinery utilization in Europe, which portends lower availability of refined fuels for importing to the U.S. East and West coasts.”

So, it’s not necessarily that this country (or much of the rest of the world) will have to cut back on total fuel usage; consumers will just have pay more for all types of fuel — fuel oil, diesel fuel, gasoline, and, yes, ethanol, our climate-friendly, domestically produced alternative that now gets to demand higher prices alongside everything else.
Corn and crude oil prices are linked together for a number of reasons. Both markets are denominated in U.S. dollars and both are bought and sold together as part of the overall “commodity” sector to diversify investors’ portfolios or hedge against inflation. But most of all, they are linked because they are effectively substitutes. No, you can’t eat oil, but yes, you can use corn to make your car go. When one market spikes, the other also spikes, and when one lags, the other tends to lag, too. Sometimes corn can have a unique market movement without affecting the price of fuel much or the price of crude oil at all — for instance, think of the 2012 drought, during which oil prices stayed flat — but never the other way around. Any time fuel prices rise, corn ethanol prices and corn prices themselves participate in a similar rally.

Nearby WTI crude oil futures have already traded above $130 per barrel this week. But what if there’s more of a price spike yet to come? The all-time highest price tag ever traded for the front-month crude oil futures contract was $147.27 back in the summer of 2008. In today’s dollars, that would be equivalent to $180 per barrel. Similarly, the April 1980 spike in nominal crude oil prices to $39.50 per barrel would be equivalent to $137.10 in 2022 inflation-adjusted dollars. So, U.S. consumers have already experienced what it’s like to pay for fuel when energy values are this high.

Notably, those past spikes kicked off eras of demand destruction when people balked at the prices and drastically scaled back their consumption; but those were also troubling economic times for other reasons. During the financial crisis, consumers who lost their homes probably would have scaled back on energy consumption no matter what commodity prices did. Today is different. Right now, our economy is growing and the financial sector isn’t in the middle of a crisis. The Russian oil ban and higher energy prices are a somewhat isolated variable, setting up a natural experiment that has never been tried before. Don’t shoot the messenger, but this time, consumers may be perfectly able to keep paying for fuel at never-before-seen prices for a more extended period of time. History may not be a very reliable guide.

These same questions must be asked for corn, while its chart spikes higher alongside oil: What prices are consumers able to bear? And at what price level will demand be destroyed? History has offered a few demonstrations of corn prices above $9 per bushel in 2022-equivalent, inflation-adjusted terms: the mid-2008 spike, plus a series of peaks from 2011 through 2013 — none of which boded well for the profitability of corn end users, like livestock feeders and international food and energy customers.

In some sense, it feels like the die has been cast and the energy charts, including the chart for corn, are virtually destined to keep exploring these high price levels. Then the remaining question will be, given all the upcoming challenges of drought or input availability or wider war or whatever else is coming next, when will they come back down?

Elaine Kub, CFA, is the author of “Mastering the Grain Markets: How Profits Are Really Made” and can be reached at masteringthegrainmarkets@gmail.com or on Twitter @elainekub.

(c) Copyright 2022 DTN, LLC. All rights reserved.

The History and Future of High Fertilizer Prices

Alarming record-high fertilizer prices in December 2021 don’t seem quite so bad when compared apples-to-apples to 2012 highs, or the really grim times of the 1850’s Guano Age.

“Peruvian guano has become so desirable an article to the agricultural interest of the United States that it is the duty of the Government to employ all the means properly in its power for the purpose of causing that article to be imported into the country at a reasonable price. Nothing will be omitted on my part to accomplishing this desirable end.”
— President Millard Fillmore in his Dec. 2, 1850, State of the Union Address, promising to bring down the market price of bird poop.

 

In fact, President Fillmore devoted 100 words of his 1850 State of the Union address to the topic of bird droppings, over 1% of the entire speech, alongside talk of international canals and railroads that would advance global commerce. The topic of manure — any type of manure — was a very big deal in those days, and these days, too. Farmers today can sympathize with that high-consequences attention to the topic of fertilizer and devote at least that much scrutiny to record-high prices today.

Back in 1850, there was no such thing as synthetic nitrogen fertilizer, and if anyone ever wanted to get better than 20 bushels per acre of corn, farmers had to use whatever natural fertilizer they could find — farm animal manure, sure, but also kitchen waste, sawdust, dead animals, sludge from wetlands; you name it. In the “Guano Age,” a powerful global industry had sprung up to mine giant mountains of desirable bird poop off the coasts of Peruvian islands (and elsewhere), yet there still wasn’t enough supply to meet demand. Seabird guano reportedly hit a high of $76 per pound^ in 1850, or a quarter of the price of gold. (https://www.nationalgeographic.com/…)

That’s so expensive, it’s beyond comparing to today’s common agricultural fertilizers. Assume you can get 70 pounds of nitrogen per ton of seabird guano (3.5% nitrogen), similar to some poultry litter available today, and it shows anyone actually buying guano at $76 per pound was paying over $2,000 per pound of nitrogen. There’s no way this could have been a widespread market price paid by the average American farmer, but nevertheless, today’s anhydrous ammonia at $1,314 per ton (or $0.80 per pound of nitrogen) doesn’t seem so bad!

To be sure, the prices for nitrogen-based fertilizers are as high as they’ve ever been. The DTN Fertilizer Index, a weekly survey of over 300 retailer prices, showed dry urea averaging $873 per ton in the first week of December 2021. With 920 pounds of nitrogen provided to a crop from each ton of urea, that’s $0.95 per pound of nitrogen. With liquid UAN-32 fertilizer priced at $661 per ton and 640 pounds of nitrogen available from each ton, that’s $1.03 per pound of nitrogen — now the highest price for nitrogen since the Guano Age.

In year-over-year terms, dry urea prices are 143% higher than in early December 2020, but looking at a longer timescale, today’s urea prices are only 13% above their peak from the 2012 planting season. You can watch fertilizer prices rise week by week, like anhydrous, which has been rising by an average of 6% per week since October, in the DTN Retail Fertilizer Trends series by DTN Staff Reporter Russ Quinn: https://www.dtnpf.com/…

Nevertheless, it’s no wonder that many grain producers are looking for alternatives to high-priced synthetic fertilizers. Although I don’t have access to a nice, long-term data series of manure prices from cattle feed yards, for instance, let’s assume the value of cattle manure today is at about $70 per ton. If it makes 5 pounds of nitrogen available per ton of manure, that’s equivalent to paying $0.18 per pound of nitrogen (and getting all the other minerals and benefits of organic matter for free). This would be by far the cheapest source of nitrogen, if it’s available to you and logistically feasible to apply. But just like the guano of the 1850s, there’s only so much to go around.

Interestingly, phosphate-based fertilizers remain cheaper now than they were during the commodity boom of 2008 (an N-P-K mix of 10-34-0 in November of 2008 was priced at $1,250 per ton but is now only $756). Altogether then, fertilizer prices shouldn’t seem quite as panic-inducing, as a one-year anhydrous chart (up 208% year over year) might strike us at first glance. It’s not some new, overwhelming, unmeetable demand for the stuff that’s causing the rally — rather, it’s the global shortage of nitrogen itself that is the driving force behind rising fertilizer prices.

Ever since German chemist Fritz Haber and metallurgist Carl Bosch figured out the famed Haber-Bosch process (1909) to artificially fix atmospheric nitrogen into the usable nitrogen of ammonia under high temperatures and pressures, the world’s supply of nitrogen has more or less depended on the world’s supply of natural gas. In commercial fertilizer production, natural gas is used not only as the source for raw hydrogen in the chemical reaction, but also to provide the necessary heat. Today, U.S. natural gas prices have come down from their September peak, but in Europe there is still massive uncertainty about receiving natural gas supplies from Russia amid current geopolitical tensions and some fertilizer plants remain shut down until natural gas prices moderate. For at least the next several months, the global outlook for fertilizer availability will remain as tense as the Russia-Ukraine border.

Just as a new technology (synthetic fertilizer production through the Haber-Bosch process) ultimately relieved the shortage of guano in the 20th century and made a golden age of agriculture and human prosperity possible, is there perhaps a new technology on the horizon that will alter our dependence on natural gas to feed the world? Researchers at Australia’s Monash University have recently announced a breakthrough new method to produce “green” ammonia* with a different catalyst than the Haber-Bosch process, at room temperature, at efficiency rates that may someday be commercially viable. (https://lens.monash.edu/…)

In the meantime, until there’s abundant commercially produced green ammonia, if you’re unable to source the usual synthetic fertilizers necessary for spring planting at your local retailers, perhaps you’d like to consider something more old school, like this Mexican bat guano you can buy on the internet for $7.50 for a 1.25-lb bucket from a natural gardening outlet. (https://www.planetnatural.com/…)

That’s probably equivalent to $6.67 per pound of nitrogen, so maybe it’s better to stick with anhydrous. Anyway, even the bat guano is out of stock these days!

 

(c) Copyright 2021 DTN, LLC. All rights reserved. Originally published at: High Fertilizer Prices: The History and Future (dtnpf.com)

^Burnett, Christina Duffy. “The Edges of Empire and the Limits of Sovereignty: American Guano Islands.” American Quarterly 57, no. 3 (2005): 779–803. http://www.jstor.org/stable/40068316.

*B. Suryanto, K. Matuszek, J. Choi, R. Hodgetts, et al, Nitrogen reduction to ammonia at high efficiency and rates based on a phosphonium proton shuttle. Science, 372, 6547, (1187-1191), (11 June 2021). https://doi.org/10.1126/science.abg2371

Yes, Commodities (or at least their futures) can be worth less than nothing

At some point on the morning of Monday, April 20, I noticed that front-month crude oil futures were worth about $4 per barrel. “Shockingly low,” I thought. “Crude oil will surely be worth more than that eventually.”

Then I shrugged and went back to a different project, because I didn’t really care. It’s been a long time since I’ve had the stomach to dabble in crude oil speculation and the $7,500 margin calls that go along with it. I felt entirely confident that commodities — the physical stuff we use to make the world go ’round — are always worth something and can never be worth nothing. A barrel of crude oil or a bushel of corn contains usable energy, and even if the supply and demand is currently unfavorable, these commodities can be stored away until somebody does demand that energy.

Stored away. Now, there’s the sticking point.

When retail investors get started trading commodity futures, they’re usually spooked by the physical delivery mechanism of the contracts. “If I speculatively buy a 5,000-bushel corn contract,” a rich dentist in Florida might wonder, “and I don’t get out of the contract in time, is someone going to dump five truckloads of farm product here on my beautifully manicured lawn?” No, they’re always assured. Physical deliveries at the expiration of a futures contract must take place at a warehouse facility licensed by the futures exchange. For corn, these facilities are commercial elevators near Chicago, Illinois.

For the U.S. NYMEX light sweet crude oil futures, here’s the delivery procedure (in part) from the CME Group’s website: “Delivery shall be made free-on-board (FOB) at any pipeline or storage facility in Cushing, Oklahoma, with pipeline access to Enterprise, Cushing storage or Enbridge, Cushing storage … At buyer’s option, delivery shall be made by any of the following methods: (1) by interfacility transfer (“pumpover”) into a designated pipeline or storage facility with access to seller’s incoming pipeline or storage facility; (2) by in-line or (in-system) transfer, or book-out of title to the buyer; or (3) if the seller agrees to such transfer and if the facility used by the seller allows for such transfer, without physical movement of product, by in-tank transfer of title to the buyer.”

For the futures traders who found themselves still long in May crude oil futures on Monday (the day before the contract expired, and while there were no daily limits on how far the price could move), we can see that the worry wasn’t about receiving tanker trucks full of light sweet crude delivered to their home address in May. The worry was about how on earth they could be called upon to find oil storage and pay for oil storage, in Cushing, Oklahoma.

Here’s the trouble: the oil storage capacity in Cushing, Oklahoma, was already 72% full as of April 10 EIA data, with inventory rising about 10% each week for the past three weeks. The remaining 21 million barrels’ worth of Cushing storage capacity is likely already spoken for. Oil traders who found themselves facing delivery on expiring May futures contracts could maybe try to buy storage capacity from some existing industry lease-holder, but at what cost?

That’s why the price of the futures contracts was suddenly negative, a condition this world has never seen before, and which most commodity traders probably never considered could happen.

Maybe crude oil would eventually be worth $10 per barrel in June, but if the desperate physical owners had to pay $50 per barrel in storage fees to carry it through the next couple of months, that meant the value — at least during the peak panic of that futures squeeze — was equivalent to negative $40 per barrel.
In the first 30 minutes after the May crude oil contract turned negative, 6,750 contracts were traded at prices between -$1.43 and -$40.32. There’s no way to know the price levels where those traders entered those contracts, but it’s safe to say that a lot of speculative money was lost on Monday. Commercial oil industry participants presumably rolled out of their May contracts before this timeframe and already have their storage needs lined up for the month.

Storage problems will continue amid the profoundly bearish supply and simultaneously profoundly bearish demand scenario for oil. In the grain markets, the prices in later months tend to be higher than the prices for nearby months (called carry spreads or “contango” in energy lingo) to account for the cost of storing the grain. Oil markets typically display the opposite structure (backwardation), with July 2020 crude oil $0.25 per barrel cheaper than June 2020 crude oil, for instance. Since the sudden COVID-19 lockdown, recession occurred and the world’s pumped oil had to scramble to find long-term storage, and these oil spreads have exploded in the “wrong” direction to unprecedented levels. There is now a contango spread of more than $9 per barrel between the June and July futures contracts. The last time drastic contango was seen in the crude oil futures spreads was in January 2009, at a scale of only $2 to $4 per barrel.

What lessons should grain traders, and grain producers, take from this sudden wake-up call? First of all, don’t get caught with open futures hedges in the last days before a contract’s expiration, unless you’re a commercial operation that’s fully prepared to accept or deliver physical grain via warehouse receipt.

The second lesson, we might think, is to worry that maybe grain prices could go below $0 now, too. However, I’m not sure the real physical grain producers and grain traders should worry much about that. Physical spot crude oil prices haven’t turned negative — it was just (temporarily) the futures contracts that were in danger of receiving delivery at the Cushing-specific location. Physical spot grain prices would likely not turn negative in our world, no matter how bearish short-term supply and demand may get, because again — grains contain inherent value, as energy or as animal feed, and dry grain can be stored until such a time as it is eventually demanded. Even if all the grain storage facilities in America were plugged full, and monthly storage costs were unusually high, farmers can (and sometimes do) just pile grain on the ground. You can’t do that with oil. It wouldn’t be ideal for the grain industry to run out of storage and it would result in some losses, but thankfully it shouldn’t zero out the value of the commodity.

Elaine Kub is the author of “Mastering the Grain Markets: How Profits Are Really Made” and can be reached at masteringthegrainmarkets@gmail.com or on Twitter @elainekub.

© Copyright 2020 DTN/The Progressive Farmer. All rights reserved.

Energy markets spooked by “overpriced” corn

In an extremely challenging market environment for the ethanol industry — when driving demand has fallen 80% in certain regions of the United States and some ethanol customers have declared force majeure to back out of contracts — it’s perhaps not surprising that ethanol producers would, in turn, kick against the prices of their raw materials, especially corn. This was suggested by Green Plains CEO Todd Becker, speaking on Bloomberg TV on April 6, when he declared, “Corn prices are too high” in relationship to crude oil.

After analyzing the relative values of the energy content within a bushel of corn today or a barrel of oil today, I can agree that the price ratio of these two commodities is far out of whack. It’s also clearly unfavorable for ethanol producers, but that doesn’t automatically mean, in my opinion, that corn prices are “too high.” Rather, I think it’s fairly obvious that the proper way to express this mispricing is to point out that crude oil prices are just drastically low amid simultaneous demand and supply shocks.

First, consider that all these commodities contain energy. Usually when thinking about agricultural commodities used in animal feed or human consumption, we think about a calorie (a unit of energy required to raise one gram of water one degree Celsius). Corn has calories (about 100 per ounce), wheat flour has calories and hay has calories. However, the energy industry measures the heat-producing capacity of its commodities differently, in Btus (British thermal units). One Btu is the energy needed to heat one pound of water one degree Fahrenheit. If we express corn’s energy content in Btus instead of calories, we see that No. 2 yellow field corn at 14% moisture contains about 401,000 Btus per bushel. Therefore, a bushel of corn today, at $3.35, is pricing its inherent energy content at $0.008 per Btu. Meanwhile crude oil at $26 per barrel, with 5,705,000 Btus in each barrel, is currently worth only $0.0005 per Btu.

As a ratio, the energy in corn is currently priced at 1.8 times the price of the energy in crude oil. And yes, this price ratio is wildly off from its historically normal value. Looking at the corn-to-crude oil (in cents per Btu) ratio over the past 10 years, we see that corn’s Btus are typically a little cheaper than crude oil’s Btus. The ratio’s 10-year average has been 0.94-to-1. It has never before been this far weighted against corn, reaching a peak of 2.37-to-1 (corn Btus-to-crude oil Btus) last month when the crude oil chart bottomed out at $19.27 per barrel.

If we were trying to arbitrage just these two markets against each other based on just this one factor — the relative values of their energy content for use in refining fuel — we would expect the ratio to eventually snap back to “normal.” That would imply that when crude oil is $26 per barrel, as it is today, corn ought to be $1.72 per bushel or when corn is $3.35 per bushel, crude oil ought to be $50 per barrel.

The most realistic outcome is probably that crude oil and corn ought to persist in an unusual price relationship, for the time being. Crude oil really only has one use — to be used as fuel. Yes, there are byproducts from crude oil refining just as there are byproducts from ethanol production, but the energy in crude oil can really only be used in engines. When those engines suddenly go idle during the COVID-19 pandemic, and at the same time global crude oil supplying countries willfully overproduce the commodity, then the market price of that commodity obviously experiences a profound drop.

Corn, on the other hand, will always have some inherent value even if there was never another gallon of ethanol ever produced in the world. The energy in each kernel can be converted in the stomachs of cattle, hogs and poultry instead of in the engines of commuter cars, and that energy will always have some value unrelated to the price of crude oil. The two main global corn markets (the energy market and the feed market) are intertwined by DDG substitutes and the competition between each sector’s basis bids, but the feed market can and will continue to exist no matter what happens to ethanol.

Furthermore, corn isn’t a perishable commodity, such as milk or vegetables, which are currently experiencing such heartbreaking supply chain problems while the routes to willing consumers are shifted during the pandemic. Dry, stored grain like corn can maintain its value for another six months, or eighteen months, or however long it takes for demand patterns to return to normal. There are limits to how much can be stored and for how long before farmers need to convert the commodity into cash or before the next crop (however large it may be) requires the storage space. But for now, the corn market may find it possible to maintain some independence from the energy markets’ poor prospects.

© Copyright 2020 DTN/The Progressive Farmer. All rights reserved.