The news is always the most bullish at the top. In the last month or two we have all heard the news about higher fertilizer prices. Let’s take a look at this market from both a technical and fundamental perspective now that world fertilizer prices are easing. You may not be aware, but it is possible to chart cash prices, just as well as futures prices.
A trend develops, as prices fluctuate and follow a sloping straight line path. When there is a period of rising prices, as illustrated in the DAP chart, the trend is determined by a line drawn across the lows of the reactions.
Once a trend begins in earnest, it has a very high tendency to persist. The longer the trendline remains intact, the more significant is the eventual penetration, as an indicator of trend change.
However, an initial price drop below the line of support is not enough to conclude that the trend has turned. At the very least, the market must close decisively below the line supporting the higher trend.
If prices only close below the line by a marginal amount, you could check the volume as a confirming factor. If volume expands sharply, as prices close below the line of support, you could assume that the trend has turned down.
Trendline construction develops because of unique behaviour. As a new uptrend begins to emerge, buy orders materialize just under the market. Some of this buying is satisfied on price declines. However, when the market stops going down other buyers jump in for fear of missing the move and this causes prices to move back up.
The balance of unfilled buying will continue to trail the market in hopes of catching a price reaction. Most of these buyers will gradually increase their bids as the market advances.
This type of price action occurred in the fertilizer market recently, as some farmers were locking in prices to secure availability. Time will tell, if the forewarning of higher prices and scarcity of supply was justified.
Of course, there will come a point during a bull move when the advance begins to accelerate sharply. Much of the patience of those waiting for a big break will have worn thin by this time, with the result that more buying is gradually thrown into the market at the prevailing price level. This often establishes a price peak in the market.
When the price finally does turn down for real, trendlines will be quickly broken. The buying dries up, as would-be buyers head to the sidelines in anticipation of lower prices.
As you can see from the accompanying chart, the trend for fertilizer prices is down for now. This includes not only phosphate, but ammonia and urea.
Fundamentally, world ammonia prices have dropped sharply in the last week of October. Buyers in India paid 57 per cent less than two weeks earlier. World urea prices also dropped 57 per cent through October. Urea supply worldwide is proving burdensome and there is no relief forthcoming on the buy side. Sulphur prices into India fell 90 per cent.
DAP buyers in Florida are paying 38 per cent less. The financial and credit crisis is playing a part in the lack of new buying. Carryover of high-priced inventory and plummeting crop prices are all contributing to extreme malaise in the DAP market. Further out, China is likely to return to the market offering significant additional export supply and probably at competitive prices.
We should see lower domestic fertilizer prices in the near to medium term based on the underlying factors stated herein.
Special thanks to DTN for supplying the accompanying chart, and to fertilizer columnist Ken Johnson for providing the fundamental information. Ag-Chieve added the “line of support” graphic for illustrative purposes.
— David Drozd is president and senior market analyst for Winnipeg-based Ag-Chieve Corporation. The opinions expressed are those of the writer and are solely intended to assist readers with a better understanding of technical analysis in the markets influencing agriculture. The information contained herein is deemed to be from sources that are reliable, but its accuracy cannot be guaranteed. Visit us online for more educational tools and ideas about grain marketing, or call toll-free 1-888-274-3138.