India purchases of phosphate had slowed down over the last month which had me starting to consider a softer future. India needing to rebuild stockpiles was a big part of my bullish outlook. However, then we got Chinese October trade data which showed their phosphate exports lower than expected. We had been hearing rumors of softer exports but had not seen actual data backing the story...until that happened.
Globally, when we look at all the major export countries, nowhere really shows excess length that "needs" to be sold. On the buy side, there is demand coming. Whether it is enough to drive values even higher than they already remain to be seen but it should be enough to keep at least level.
It is still hard to see global values softer in the short term. If supplies are snug as we believe they are and spring demand is just around the corner, that should keep the bearish side at bay. However, prices are high, and it feels like the market is almost scared to try anymore but if demand starts to come in waves, make no doubt about it they will take advantage.
Russia/Ukraine war sees fresh escalations, impacts to Russian exports feared
In the last couple weeks, some major escalations have been observed in the Russia/Ukraine war.
First, Ukraine got approvals from western countries to start using U.S. made missiles against targets in Russia. Putin had always advised against this move, stating that this would be a major escalation in their eyes and would be responded with their own. It seems Putin was not making up stories. Their response was fast and fierce. A new missile not seen on the battleground before was used on Ukrainian soil and the statement made. The world quickly began to reconsider the end game.
Personally, I started to consider fertilizer if it continued.
Fortunately, we have seen no further escalations but given how close to the cliff this war operates, it is worth walking thru.
In the phosphate world, Russia is the 4th largest exporter of DAP/MAP. In 2023:
- Morocco @ 7.3M tons exported
- China@ 7.1M tons exported
- Saudi Arabia @ 4.9M tons exported
- Russia @ 4.8M tons exported
One keynote on this list to remember is China. They exported a large 7.1M tons in 2023...but that is still well short of their "normal" 10M tons per year that was seen prior to Covid. The phosphate world is already operating and being priced with the largest supplier scaling back. Losing Russia would be devastating.
However, the conversation also needs to consider different layers. What I mean is that by losing Russian supplies completely, almost 5M tons would be removed from the S&D. But what if it was only western countries that blocked their phosphate flows into their countries. Let's say all western aligned countries placed heavy import duties on them. What would happen then?
Simply put, I do not think Russia would have troubles finding homes. They have maintained solid supply relationships with major buyers like India (6.6M tons purchased 2023) and Brazil (5.4M tons purchased 2023). If they needed to, they would get aggressive with their price to force their way into these and other friendly countries. Effectively, they would drop their price low enough to force others out. On the flip side, those countries that placed duties on these supplies "should" see higher values in relation as they have cut an efficient product flow.
All said, unless western countries are able to completely block Russian exports, it shouldn't have the effect so many fear (losing their product completely). There are plenty of friendly buyers of Russia that they should be able to keep flows moving. However, never underestimate the emotional response of the market. Even if wrong, if enough people believe something, that becomes real in the market until the fundamentals prove otherwise. Basically, it is worth keeping an eye on this war. It hasn't gone away, and it could have a direct impact on the phosphate market.
What does this mean for Aussie farmers
Today, it means nothing. The escalations have stopped with Russia's use of their new ICBM style missile.
However, if it starts to escalate again and it turns into a situation where Russian exports start to slow or stop, then it means everything. Given how important Russian phosphate exports are to a global market with few major exporters, the reduction or loss of them would likely mean major price moves...unfortunately to the higher side.
This is one of those exceptionally low probability but high impact type of stories. Not likely to happen, but very important that we know the effects just in case it happens.
October trade data shows slower Chinese export pace, but sales made to Ethiopia
Historically, China was the largest provider of DAP/MAP to the world. However, all of that changed in the late 2021 and early 2022 period. For sense of their export flows:
- 2021 - 10M tons exported
- 2022 - 5.5M tons exported
- 2023 - 7M tons exported
- 2024 cumulative thru October - 5.4M tons exported
Those new to this newsletter may be asking what happened.
After setting historically low values for much of 2020, prices started to surge in 2021. Grain values were climbing rapidly which meant that global values of fertilizer were scrambling to keep up. Then, it seemed the whole world started to fall apart with Covid. Supply chains began to suffer. Production plants were struggling with workers either unable to be at work or if they could be, unable to be in close proximity to get jobs done. The markets suffered...and then overreactions started.
A bit of a freak out was made worse by governments in regard to fertilizer. Global values were skyrocketing to values not seen since the mega surge of 2008. Some governments started to either slow or stop exports of their fertilizers in an attempt to make sure their people had adequate supplies. That beget further overreactions by buyers who jumped on whatever price possible for fear of tomorrow bringing higher prices.
For the phosphate market, the worst was China's reaction. The government was watching the world. Inventories were extremely tight. Prices were extremely high. They decided to intervene. Knowing they were the world's largest exporter of phosphate, they decided to take care of their own. Export restrictions were put into place with the goal of making sure there was adequate supplies for Chinese farmers as well as lower domestic prices (if you cannot export, you are forced to fight other suppliers at home). Fortunately for China, this approach worked. Unfortunately, for the rest of the phosphate world, this approach worked.
Today, we continue to see the Chinese government playing a role in export flows. Fortunately, we saw 2023 recover from the worst of recent years. About 1.5M more tons were exported which was cause for celebration...unfortunately it was still 3M tons short. However, this last summer saw a lot of global optimism that the Chinese would start allowing full exports which would likely cause values to fall to somewhat normal levels. There were hints of that, with April/May/August/September seeing exports above 3-year averages. However, those were not enough to catch up and the cumulative total thru October is still 1.4M tons short of the 3-year average...of which is still 2.4M tons short of what "normal" export averages are.
In a nutshell, the world's largest producer is still holding back flows and keeping the world S&D much tighter than it would be otherwise. We keep watching/waiting for a day where things get back to normal but until China takes that step, the world is going to struggle.
What does this mean for Aussie farmers
This hurts. This hurts a lot.
China has historically been the largest providers of phosphate to the world so when they scale back, the global S&D gets impacted. That reduction in available supply is felt even more in the "east". That includes Australia.
Eastern regions/countries are forced to find new manufacturers to source their import needs. That means going to Saudi Arabia, Morocco, etc. Those origins not only carry higher logistical costs and more time to arrive, but it also now means they have more buyers to consider. When you have limited supply and a lot of willing buyers, you get a little more bullish on your price ideas.
It is never a good time to see Chinese exports slow, but it is exceptionally bad since Australian importers are just starting to make their purchases...
Phosphate values remain very high, demand continues solid (stealing from N.A. version)
One of the biggest phosphate points that we have been watching this summer/fall is the market's reaction to the high price. Current phosphate values are high vs historical values. Current phosphate values have a high cost of carry with current interest rates. Current phosphate values are some of the highest in relation to grain values (ratio value). There simply isn't a way that I can look at phosphate and say it is well priced.
Because of that, I spent a lot of this summer and early fall expecting to see some pretty heavy demand destruction cuts. Farmers are already struggling with farm economics. Inputs are high, grain values low, and there doesn't seem to be enough money to go around. When folks start talking about farming to make payments as the best-case scenario, that is not a good range of outcomes. It is easy to expect buyers to be more conservative when this happens. It provides a great time to review input spending and look to make cuts where possible. With a lot of ground able to carry phosphate over from one season to the next, phosphate stood at the front of the line for when cut decisions were made.
So far, this fall run has been wet. Very few areas have had a chance to get a solid run done...but there have been areas that have. What has surprised us is how positive these areas have been.
Folks have been saying thru harvest that yields were better than expected. That does not mean record yields for everyone, but even poor areas yielded better than they thought. That means more bushels to market. Grain prices did recover from some of the lowest values we had seen which meant that farmers selling grain at harvest were getting more dollars to spend. Then, the bigger than expected yield meant higher than expected nutrient removal...and that included phosphate.
By the time the farmer had to make application decisions, they took a harder look at phosphate. Sure, they were still livid at how high priced it was...but the old rule of thumb is that you need to grow your way out of bad times. If all nutrients are healthy in the soil but phosphate is left lacking, likely that 2025 max yield potential is taken off the table. Times are already tough, but that makes it harder.
Ultimately, if Mother Nature continues to stay wet, it may not matter. Farmers/retailers may not apply anything simply because they cannot get into the fields. That said, if windows open and application begins the early feedback is that demand will be much better than expected and we could draw down inventories much lower/faster than previously thought which would be supportive for price ideas.
Again, this is all a story that we should know a lot more about in next month's edition.
What does this mean for Aussie farmers
Why would I steal this piece from the N.A. version? Because this has actually been a global situation.
We truly believe a few months earlier that the incredibly high price of phosphate would cause demand to drop. Many farmers can increase/decrease their phosphate application rate based on current levels already in the soils. If the price is "good", they can increase their demand to build the soil levels. When the price is "bad", they can reduce the application rate and use some of the levels already in place.
So far, we have seen very few signs that demand is lower even with how high-priced phosphate is. Supplies are still snug globally with the loss of many Chinese exports. If demand is not going to change substantially, changes need to be made and that typically means steady to higher prices.
This does not mean things cannot change. We could see China completely reverse course and start exporting heavily but so far, no sign of that happening has been observed. This just means that no one has backed off.
Price comparisons
Vs 30 days ago - -2% or approximately $10 lower
Vs 90 days ago - 6% or approximately $30 higher
Vs 6 months ago - 8% or approximately $45 higher
Vs 1 year ago - 6% or approximately $35 higher
Morocco DAP price comparison
Number 1 global exporter in 2022
Price comparisons:
Vs 30 days ago - unchanged vs 30-days earlier
Vs 90 days ago - 2% or approximately $13 higher
Vs 6 months ago - 17% or approximately $88 higher
Vs 1 year ago - 3% or approximately $18 higher
Black Sea DAP price comparison
Number 3 exporter of DAP/MAP in 2022
Price comparisons:
Vs 30 days ago - unchanged vs 30-days earlier
Vs 90 days ago - unchanged vs 90-days earlier
Vs 6 months ago - 15% or approximately $78 higher
Vs 1 year ago - 5% or approximately $29 higher
China DAP price comparison
Number 2 global exporter in 2022
Price comparisons:
Vs 30 days ago - 1% or approximately $5 higher
Vs 90 days ago - 2% or approximately $10 higher
Vs 6 months ago - 18% or approximately $95 higher
Vs 1 year ago - 6% or approximately $33 higher
Saudi Arabia DAP price comparison
Number 4 global exporter in 2022
Price comparisons:
Vs 30 days ago - -4% or approximately $25 lower
Vs 90 days ago - 2% or approximately $15 higher
Vs 6 months ago - 15% or approximately $81 higher
Vs 1 year ago - 3% or approximately $18 higher
- Major escalations between Ukraine/Russia stop Russia exports – this is a very low probability situation. There will likely be escalations, but not to the extent that I am talking about here. What I am referring to is a complete stop to Russian exports. That would be a massive undertaking/event that would remove the 4th largest exporter. Low probability/high impact.
- Further cuts are made to Chinese exports – there had been rumors that the government was going to put a firm ceiling in the number of tons that could be exported from October until April. We never heard anything definitive which is why it is hard to believe any gossip/news about China until it comes from the central government. Still, with global values high, they could reduce exports and cause global supplies to shrink further.
- Global demand remains solid in the face of high phosphate values – if we had seen signs of global demand falling off due to the high price of phosphate, we would be a lot more excited about lower values coming. Unfortunately, we have not seen that so far.
- China returns to normal – if Chinese exports were to return to their 10M tons per year normal, not only would the global S&D improve but emotions would change as well. China is typically the boogeyman of the fertilizer world. When they are absent, values tend to rise easier. When they return, they tend to fall. This is more important in phosphate where they are the big man on campus.
- Grain values continue to fall – today, we do not think phosphate prices are too high to kill a lot of demand...but it also doesn't feel far away. Eventually, inputs become too high priced for the farmer and hard decisions need made. If grains continue to fall and these decisions are looked at, phosphate could be back on the chopping block
- Demand bucks the recent trend and starts to say "no" – right now, this does not look to be the case...but things change. As we start to move into 2025, we could start seeing buying patterns change. The price of phosphate is still historically high and global farmers are not exactly crushing it with farm economics. Some may have to start making hard decisions on what to cut for input values...and for many, phosphate stands at the front of the line.
We believe that only looking at the flat price of either grains or fertilizer can be misleading:
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Only selling grain can hurt you if fertilizer prices rise substantially
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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:
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Spend 4 ton of grain to pay for 1 ton of MAP
-
Spend 1.5 ton of grain to pay for 1 ton of MAP
When we compare the current ratio value against recent years, we start to see if we are high or low.
YOUR VALUES MAY LOOK DIFFERENT
- Chinese export programs - whichever direction the world's largest exporter goes typically drives global values. If China continues to restrict exports, or worse puts more restrictions in place, the world is likely to suffer from higher values. On the flip side, if they start exporting normally, prices could fall off quickly. China remains my biggest watch point.
- Continued Russia/Ukraine escalations - again, this is a low probability/high impact situation. It is not likely that we lose Russian exports. If anything, the west tries to stop flows to their countries but there are enough Russian friendly buyers to take everything they export that it shouldn't hurt the global S&D. The worst-case scenario is if Russian flows completely stopped. We already have Chinese exports down. The world is tight. It doesn't need help.
StoneX Ratio Calculation
The ratio calculation is derived from Bloomberg historical grains values as well as fertilizer values from StoneX, NPKFAS, and Argus.
The calculation is simply dividing the fertilizer price by each grain price.
All data was sourced from StoneX unless otherwise noted.
