Farmer Fertilizer Focus - Phosphates

By: Josh Linville, Vice President- Fertilizer

Sat, 26 Feb 2022, 02:31

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PHOSPHATES

Josh Linville

Director - Fertilizer

josh.linville@stonex.com

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

I'm going to continue breaking this into 2 pieces like last month:

Global phosphate market

No change here. Same explanation from last month. Sorry I do not have anything creative to add!

As long as India continues to buy like they have, it appears that prices will continue to hold. They are soaking up a lot of product at a very high price. However, once that demand goes away, we are likely to see values start dropping. I'm not seeing much that tells me that other demand points are willing to pay anything close to those values. Not to say that they will not, just not today.

Long answer short: lot more downside at current prices than there is upside but if you wait too long, you may not be able to get product in time for application. Weigh the pro's and con's.

North American phosphate market

I was right...and wrong, last month on my forecast.

Prices in North America did rise. However, I said I didn't think it would be anything major. I didn't think we would see Dec '22 corn floating in the $6 - $6.25/bushel range. I was dead wrong there...

The last DAP physical NOLA (New Orleans, Louisiana) barge that I saw trade was late last week at $865. We closed out January with a $693 physical barge trade. The months were different but the trend apparent, values had jumped huge. The narrative shifted from fear of having too much product and too little demand to the exact opposite.

We are now at the time of year for North America phosphate where it is too late to get more coming...if we could find more. That means we are largely on our own "island". What we have is what we have. Not only that, but the DAP paper futures market is reflecting a very small price reset this summer (upper $700's as of COB Friday). Lot of things lining up to hold pricing...

Long answer short: NOLA has moved in line with world values but it no longer matters. It is too late for extra product to arrive on time. We are on our island. If demand stays high with high grain prices, values should hold thru preplant. I struggle to see a continued bull rally but it is hard to see prices down.

What has happened in the last 30 days?

Chinese exports are still at a standstill following the Olympics

Many in the market speculated that China was stopping phosphate exports until the end of the Olympics. The idea was that they would shut down the industrial complex to clear the air similar to what they did in 2008. For a time, I was in that camp.

However, my POV has shifted. That is not to say that they could not turn a 180 by tomorrow. It's China. Always expect the unexpected. However, there are just no signs today that make me think that will happen.

A big part of the Chinese governments decision to shut down exports was to lower domestic pricing. If producers cannot export into the premium world market, then they are forced to sell at lower prices domestically. Global values are still extremely high. In fact, they are higher than anytime in history, excluding 2008. From that vantage point, it works in their favor to keep exports low in order to keep farmer prices low and inventories plentiful.

India continues to set the price for the world

I'm sorry I'm just repeating exactly what I said last month but this has not changed one bit. The only difference is that I believe India has secured 1.5MMT or more in the last several weeks. Their appetite is insane. Back in September/October, we talked about how much lower Indian inventory levels were vs previous years. We figured they would go on a buying tear, but this still has surprised us.

It seems that India has finally found a DAP value that allows them to find product to purchase and that value has been in the $920 - $930 USD delivered range. This is fantastic news for Indian farmers who have been nervous about perceived low inventory levels.

For the rest of the world, this means that phosphate producers are pointing to this price as their current price idea. If they do not want to buy at the same price, they will just ship more to India.

Eventually, India will secure what it needs and will start to disappear from discussions. This will likely lead to prices starting to soften but when that happens is anyone's guess.

North American values rally as spring draws near

Well, we bridged the gap with global phosphate values...and in a hurry!

As mentioned above, we have moved into that period of winter that always sneaks up on us when it is too late to call upon more imports. When you work thru the 30 days of vessel sail time, 2 - 4 weeks of river transit, transferring product to barge/terminal/rail, then truck or rail transit, by the time added product arrive it would be mid-May.

That means the market knows what we have is all we have. Supplies should remain largely unchanged.

On the flip side, grain values continue to rally. That means the market believes demand will grow as farmers who were on the edge of profitability move firmly into the profitable camp and look to maximize yields.

Equal supplies + growing demand = higher prices

Russia invades the Ukraine

The nightmare scenario has been unleashed. Russia is no longer toying around with the idea of entering Ukraine territory. As I write this, Russian military equipment and troops are closing in on Kiev.

While I do not want anyone thinking that I am not thinking about the human impact (it bothers me), this is a fertilizer newsletter so we need to look at it from a fertilizer POV.

How the world reacts/retaliates will be extremely important. If the world reacts from a tepid approach that does not shut Russia out from the world, not much will change. Russian product will continue to flow throughout the world and from a strict S&D POV, nothing changes.

However, if the sanctions are heavy handed or the world decides to take a physical approach, Russian exports will cease and the global S&D will tighten. During 2020, Russia exported approximately 3.5MMT of DAP/MAP which accounted for around 11% of the global export total. That in itself would not be a huge impact but when we couple it with China continuing their export ban, the world can feel much tighter much quicker.

Where are current values in relation to the past

For DAP, we use NOLA/New Orleans Louisiana as our base point as it is the easiest spot to track.

Vs 30 days ago - +25% or approximately $175 higher
Vs 90 days ago - +16% or approximately $120 higher
Vs 6 months ago - +41% or approximately $253 higher
Vs 1 year ago - +66% or approximately $343 higher

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

China continues to restrict exports – Sorry, what is this, the 3rd month in the row I've recycled this?!! China, when they are exporting, account for around 1/3rd of the global DAP/MAP export total. You cannot cut off 1/3rd of the global export trade and not have it tighten supplies/push prices higher. The government continues to hold to their original strategy of maintaining this approach thru June '22.
Russia pays the economic price for stepping a foot into Ukraine – I sure wish we were back to speculating on if they would, rather than what the response will be. Now that they have invaded, if we see the world respond heavily which cuts Russian exports from the world, we will lose several million tons a year or 11% of the world total. The globe is already "tight" phosphate. Any step to remove more product would only drive prices higher.
Huge spring run in North America empties inventories...again – what I am referring to is the fall '20/spring '21 cycle. That was a huge demand period which dropped inventory levels to extremely low levels. The pieces are in place to repeat that this spring. If we come out of spring at similarly low inventory levels, manufacturers will be in the drivers seat regarding price negotiations. They will know that not only are their storage facilities empty, so are most retailers and farmers. That gives them a lot of negotiation power and they like high prices.

Bearish Factors

China could start exporting tomorrow... – Again, my apologies for reusing last months material but this is still extremely relevant. There is nothing to signify this is going to happen. In fact, some conversations I have had indicate that they are actively shutting down the hope that it will happen in country. However, we know how quickly things can change. If (big if) the Chinese governments call off the export block, the world phosphate market will lean bearish immediately for fear of the supply that is coming.
Farmer demand revolts – similar to potash, farmers have the ability to lower or skip their phosphate application. It might result in lowered yield potential but with where current values are, they may be willing to take that shot to save some cash.
India demand goes away - Like the China talking point, this is the same as well. Right now, the India's constant buying at world high values continues to support the global phosphate market. What would happen if they went quiet? I would guess prices would start to fall as producers started to chase any demand that remained. For the moment, it does not appear that this is going to happen but we do not know and need to continue watching.

Where are the current phosphate/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 DAP
Spend 80 bushels to pay for 1 ton of DAP

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 DAP 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 Thoughts

For many farmers around the world, the temptation is going to be there to cut their application rates of phosphate in order to save money. Let me be crystal clear: I AM NOT HERE TO TELL YOU THAT IS RIGHT OR WRONG. If you cut your application rate by $5/acre, you will save that $5/acre. If that cut reduces your yield by 5 bushels of corn/acre, you have lost. With corn at $5.50/bushel, that far outweighs what you saved. What I will say/ask is that you look at the whole picture and make the best logical decision for you/your organization. Talk to your coop/retailer/etc. Talk to your agronomist. Get advice wherever you can. In the end, make the best decision for YOU.
If you decide you want to wait before buying your phosphate for application, PLEASE talk with your supplier. A lot of farmers are worried about buying and then seeing the price drop. I get that. I really do. You need to know that your retailer/coop is the exact same way. The temptation is there to not buy product until demand shows up. With logistics worse off than usual, if you show up last minute, it may take a while to get there and be a lot more expensive. This is not an attempt to scare you into buying. I am only saying you should be talking with your supplier so they know what to expect and can develop a game plan to do as well as they can.
If you are thinking about scaling back your phosphate application rates in hopes that values will fall substantially this summer, giving you a chance to lock in much lower values, the market is saying do not do it. As of Friday COB, nearby months had settled in the $825 - $850 range (NOLA). We have seen June activity and at the same time, June's settlement was $780. That tells me that the market is expecting world inventories to remain tight and North America to have a superb spring run which empties the system causing prices to hold. That can, of course, change but that is the story today.

Fertilizers

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