August '23 Farmer Fertilizer Focus - Potash

By: Josh Linville, Vice President- Fertilizer

Mon, 31 Jul 2023, 16:19

August '23 POTASH

Josh Linville

Vice President - Fertilizer

NOLA potash price graph

Please remember that this is looking at the cost of one short ton of potash sitting in a barge at NOLA (New Orleans, Louisiana). Your cost is not going to be the same. This should be looked at more in regards to the price direction rather than the actual pricing.

What everyone wants to know first, what do we think will happen going forward

Global

It seems that global manufacturers are taking steps to lower current production and are pushing back expansion plans. Normally, this would be cause to be bullish on the outlook because of the tighter S&D. To a point, I would agree...but only to a point. If manufacturers were completely bullish coming values and demand, there is no way they would curtail today's production. They would be leaning into it...and that isn't happening.

A short term bump in price is certainly in the cards but the longer range outlook remains bearish.

North America

The summer fill programs that were recently released were solid. Frankly, right in the mix of our expectations.

Low ending inventories coming out of last spring, decent ratios and solid price vs historical values should mean we have found a price floor...

For the short term, the potash outlook is bullish but longer term it's hard to stay optimistic on values.

Remember, we could make the decision to wait on potash needs, see values fall $25 - $50 and be "right" on the call. However, if grain values plummet in that time, you can be right and still be wrong.

Isn't agriculture fun?!

Should you lock in spring '23 potash needs today?

Global

Global potash price ideas are down significantly and grain values are still decent. If willing to secure both sides of the equation, I'm all for locking up needs, getting it on the ground this fall and be ready to roll spring '24.

North America

Like global, I think prices are down/grain is up enough to justify leaning into fall application. That isn't to say that values could not drop this winter. The opposite really. I could see more weakness starting into 2024. However, I do not think the downside is so great that I would forgo fall application. Winter months could provide application windows...but it may not. Spring may be wide open and allow everything to be done...but it may not.

The downside price potential in potash, in my mind, is not so large that I would disrupt my normal application cycle. Prices are pretty solid today.

General global potash information

What has happened in the last 30 days?

Canadian exports struggle with port strikes

It goes without saying that Canada is a big enough producer of potash that it relies heavily on export flows to provide material for the world. Take a look above. Canada isn't only the biggest exporter in the world. It isn't even a close second.

That's why the world needs to take any export problems very seriously.

Before, there had been some hiccups with the ability to load vessels. Breakage at ports were occurring and reducing the ability to send product around the world. While worthy of attention, it wasn't concerning as repairs were expected and normal exports returning.

However, Canada had to deal with their own port strikes which was much more concerning. Facilities went on strike and completely shut down activity. The fear came in not knowing how long it would last.

Fortunately, all sides came together and put it aside. While there was a brief secondary strike, that was quickly struck down and work resumed.

All in all, this didn't have huge effects on the world but it does reflect how reliant we as an industry are on logistics. Sometimes, it doesn't take big events to completely disrupt the flow. It is a remind to always stay vigilant.

Production curtailments continue

With current potash values over half of what they were this time last year, manufacturers continue to take steps to try and tighten the S&D and help raise price ideas.

There are multiple mines across Canada that have either cut back production rates or remain completely offline. While that could eventually have a bullish effect on the potash market, any rally should be seen with a bit of skepticism. Imagine if we saw prices start skyrocketing. What happens? These mines that are either being slowed or stopped will likely return to full production very quickly...and values would take a hit.

It's a big reason why our mindset is what it is today. We are very cautiously bullish near term but it just doesn't seem like it can get away from us like we have seen the last couple years. There is simply too much production waiting to come online.

Global new mines and expansion continue to be delayed/cancelled

On the same thread of low price effects, a lot of new production and increased production announcements are now being changed.

Russia was seen as a ripe location for new mines to be developed. With prices where they were, it was full ahead. However, today, the market is much different. Values are much lower and the outlook remains inventory heavy. It also doesn't help that the future of Russia is in question. This isn't to say that I think Russia will no longer be around, but we certainly need to question what the government looks like. With the Ukrainian invasion failing by most accounts, there is a growing chorus that thinks Putin will be removed from power. Will that happen? If it does happen, will he be replaced by a Western friendly head which would mean Russia regaining its normal position? Will he be replaced by someone far stricter? That unknown outlook means that companies investing hundreds of millions or billions of dollars will rethink their approach.

Other mines outside of Russia who had originally planned to boost production rates are now slow rolling those announcements. They still have them on the books, but they are not rushing ahead as they were.

All in all, the potash market still feels well supplied going forward, even with these changes. The market remains undefeated. High prices cure high prices.

Summer fill programs released in N.A.

While I didn't love the timing of the release (Friday of Southwest Fertilizer Conference), I thought manufacturers did a solid job on their price.

Retailers across N.A. were offered summer fill tonnage at what we saw as solid values. In fact, the numbers came out right in the mix of our expectations.

Now, as mentioned before, we could certainly see near-term values move higher. We finished last spring very empty on product and demand should be high with solid current ratios. However, the world continues to appear well supplied so any upside should be limited.

Still, it is worth your time to talk to your retailer about what can be done at home.

Where are current values in relation to the past

NOLA/New Orleans Louisiana

Vs 30 days ago - -20% or approximately $80 lower
Vs 90 days ago - -20% or approximately $80 lower
Vs 6 months ago - -21% or approximately $85 lower
Vs 1 year ago - -56% or approximately $405 lower

U.S. Midwest Average (average of several points across the Midwest)

Vs 30 days ago - -9% or approximately $40 lower
Vs 90 days ago - -18% or approximately $81 lower
Vs 6 months ago - -18% or approximately $84 lower
Vs 1 year ago - -49% or approximately $368 lower

Bull/Bear Factors

Because no market is ever guaranteed to go higher/lower, we try to consider the factors that can sway values so that we are able to act when they occur rather than react.

Bullish Factors

Continued production cuts – it appears more than one manufacturer is happy to cut their production to lower inventories. The more this happens, the less supply available. The less supply available, the more prices can rally. With demand still expected large this fall, there will be a breaking point.
Solid demand with aggressive current pricing - speaking of demand still expected large this fall, the summer fill program values were solid. Maybe not as low as some had hoped for. Let's face it, it could be free and we would still be questioning who would pay to ship it to the farm! Still, the price was set low enough that demand this fall should be big and wipe out inventories...leaving manufacturers with another winning argument.
New/increased production being delayed or cancelled – when potash values were sky high the last couple years, it seemed that everyone was either increasing production or planning new mines. That certainly played a part in values dropping. Now, some of the new mines are being abandoned (Russia due to low price and possible political upheaval due to the invasion) and expansion plans being delayed. Suddenly, the outlook on potash doesn't look as oversupplied as it once did.

Bearish Factors

Grain values appear bearish – as I write this, Dec '24 corn is down nearly a dime and Dec '23 corn down 17-cents. That isn't going to set well with a lot of farm demand. Buyers who might have seen values as no brainer purchase values might start to step back and see how things play out.
Potash still "feels" well/over supplied – even with new mines being cancelled and expansion plans being pushed back, the potash market still feels as though it has sufficient material available. Sure, there may be logistical setbacks but from an S&D standpoint, it doesn't feel undersupplied.
Production being curtailed - yes, I listed this in the bull factors but hear me out. Production curtailments certainly play a part in reducing the current S&D. However, if manufacturers were so confident in the marketplace...wouldn't they be producing everything they possibly can? I get the near term effect on values, but it is not a big confidence booster in my mind.

Where are the current potash/grain ratio values today?

We believe that only looking at the flat price of either grains or fertilizer can be misleading:

Only selling grain can hurt you if fertilizer prices rise substantially
Only buying fertilizer can hurt you if grain prices fall

We look at the ratio "value" to get a better indication of where we are or how many bushels of X does it take to pay for 1 ton of fertilizer.

Would you rather:

Spend 120 bushels to pay for 1 ton of potash
Spend 60 bushels to pay for 1 ton of potash

When we compare the current ratio value against recent years, we start to see if we are high or low.

YOUR VALUES WILL LOOK DIFFERENT

This graph looks at the NOLA potash price vs the flat grain price. There are no logistics on either product. Your location will look different due to fertilizer logistical costs, grain basis, etc.

Josh Linville’s focal points

Belarus exports - I know I didn't talk about Belarus this month. That's because nothing has really changed. They have made some steps back into the world market but it is still far from normal. If something changes that, it will have an impact on global supplies but that is not the case today.
Continued announcements on curtailed production or cancelled new mines - when commodity prices are sky high, everyone with a checking account wants in on the action. However, values have settled significantly and the elation of the market has worn off. Now we start the fun job of trying to figure out who never intended to produce, how long will curtailments last, etc. This isn't the first time it has happened. It will not be the last.
Ratio values - even if we see some longer term downside risk, it doesn't mean it is a better deal. Take a look above. Several of the current potash/grain values are SOLID. We could see potash values dip a little but see grain values drop a lot. You can be right, but be wrong. It is why we preach the ratio approach. Takes a lot of risk off the table.

All data was sourced from StoneX unless otherwise noted.

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