Farmer Fertilizer Focus - Phosphates

By: Josh Linville, Vice President- Fertilizer

Fri, 01 Apr 2022, 00:13

PHOSPHATES

Josh Linville

Director - Fertilizer

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

There are a few things that continue to support pricing in the short term. Supplies are tight and demand isn't currently showing any signs of backing off. As long as demand dominates supply, prices should hold or push higher. We are also seeing seeing the cost of production go up around the world. Don't worry, producers are still doing just fine (please read in sarcasm!!!). Sulfur and NH3 values have skyrocketed and the cost to produce a ton of phosphate has gone up 200% since the summer of '20. Both of these are solid reasons for producers to keep their foot on the gas.

On the flip side, there is a lot of talk of demand destruction. Many farmers around the world are balking at current values. Even if they are not, many more are saying that they are struggling to obtain the financing needed to go with full rates. If we find out that demand has dropped significantly, then this can start weighing on values.

The long answer short is that is appears that phosphate values will continue to hold for the short term. Demand continues to be believed high. Supplies are tight. Cost of production has risen considerably. Russian and Chinese exports continue to largely be blocked. Until the narrative starts to change, there are a lot of factors supporting current prices.

Should you buy your fall '22/spring '23 phosphate needs?

Today, I wouldn't advise it.

There are a lot of things that are pushing prices up today. The Chinese government continues to restrict exports. The Russian invasion of Ukraine continues which means the world is closing their business doors to them. Spring demand for the northern hemisphere remains solid.

However, if you lock in your fall/spring needs today, you will be locking in a price that is almost as high as it has ever been 7 - 11 months in advance.

That is why I'm not a fan of pulling the trigger for fall '22/spring '23 needs. Look at how quickly things change in the fertilizer market. Sometimes it only takes weeks. Imagine what can change in 7 - 11 months. We could see the Chinese government drop the export ban and return 32% of the global exports. We could see Russia step away from the invasion or see Russia finds friends to sell to around the world. We could find out that spring demand was crap and inventories finished higher than normal.

I'm not writing this saying I am certain that prices will drop. I'm just not a fan of locking in almost record high values this far in advance. There are a lot of things that are supporting the market today. We could see this turn around very quickly.

What has happened in the last 30 days?

Chinese government phosphate export ban continues

When this ban was put into place, it was to be in effect thru June '22. Many believed that they would reverse that decision and allow exports sooner than June. The belief was that higher prices would change their minds. The problem with this approach was that cash flow was never the reason for it. The government put the ban into place because global inventories were incredibly tight and global values incredibly high. The reason I think we could see the ban extended is that both of those factors are worse today than they were last fall...

This means that as long as they are removed from the world, the world is losing 32% of the export total. It doesn't matter what market you are in. If you lose 1/3rd of the export trade, it is going to make things VERY tight.

If we luck out and if the government loosens the ban, I would not expect it to be business as usual. Given how the global phosphate market is in turmoil, I would expect them to govern exports moving forward. That means they go to company x and allow them to export 100K. They go to company y and allow them to export 150K.

At this point, any change in their export program would help prices decrease.

Russian exports continue to be largely blocked

The Russian invasion of Ukraine continues which means that approximately 12% of the global phosphate export total is removed.

We have seen the world largely come together as one and condemn Russia's actions both politically and economically. As long as most of the world remains unwilling to buying Russian produced product, those tons are removed which further tightens an already tightly supplied global market.

However, we are starting to see some countries stepping breaking ranks and being willing to buy from them...at a discount. India has been buying discounted Russian oil in Rubles. Brazil and Mexico have both shown a willingness to buy. If enough countries step forward to buy their tons, this will improve the global S&D. Russia being completely cut out from the world means supplies drop. Russia being able to only sell to a few countries might mean that those unwilling to do business will see higher prices but ultimately, global supplies improve which could mean lower prices overall.

This is something that will need to be watched very closely. Russia and China combine for approximately 44% of the global export total. That is a very big number of tons that could remain missing.

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.

U.S. phosphate demand continues to fight against Mosaic's CVD against Morocco

We have seen many organizations across the U.S. stepping up their fight against Mosaic's counter vailing duty case against Moroccan produced phosphate imports. We have seen retail organizations, farm organizations, corn organizations, etc. start being much more vocal about the case. Enough has been made of it that a few politicians in D.C. have started to take notice and make statements about it...not surprising during a mid-term year....

At this time, it is unsure what the effect could be. These cases are supposed to be determined by the facts with no political influence. For that, it doesn't not look likely that the case will be overturned.

However, a case could be made that food is a national security risk and without adequate phosphate supplies, there might not be enough food. For that, we have heard that some groups are asking for a 6 month stay of the duty. Even if this happens, I'm not sure we should get too excited.

Put yourself in the shoes of Moroccan producers. Mosaic and the ITC/DOC have shut you out. Now, with global prices sky high, demand huge and supplies tight, the U.S. is saying we are willing to take your product...for now. However, in 6 months time, the duty may be reenacted.

If I am Morocco, I wouldn't come here. If it looks like the duty will be put back into place, what is the point? I have plenty of demand around the world at just as good netbacks. I would be better off continuing to strengthen and grow those relationships since I do not expect them to be cut off after 6 months.

There is a lot of hope that we will see a short term reversal and if it happens, we very well may see prices down. However, I wouldn't get my hopes up that we see prices down to 2020 levels. The U.S. is already some of the cheaper phosphate in the world. Producers have options on where to ship product and there is no need to ship it to a place like the U.S. that has...issues.

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 - +15% or approximately $110 higher
Vs 90 days ago - +21% or approximately $145 higher
Vs 6 months ago - +26% or approximately $170 higher
Vs 1 year ago - +163% or approximately $515 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 – I believe this is the 4th month that this bullish factor has been used. Sorry, not sorry!!! The Chinese government blocking phosphate exports is a big deal. China accounts for roughly 32% (one third) of global phosphate nutrient exports. If you lose 1/3rd of any market, it is going to make a difference.
Russia continues to invade Ukraine and be cut from the world market – unfortunately, this is not an if situation. This is happening. Russia accounts for around 12% of global phosphate trade. While countries such as Brazil and India have shown a willingness to buy from them, it is not that easy and Russian exports have slowed considerably. Losing Russia's 12% is bad. Combining it with China's 32% is worse. That is really close to 50% of global exports being lost.
Big demand in the northern hemisphere will further tighten supplies globally – losing Russian and Chinese phosphate exports on itself was going to tighten supplies. If we find that demand was not lost this spring and we empty the system as expected, then a tight supply gets even worse. Remaining global producers will be looking to use that to their advantage.

Bearish Factors

China decides to start exporting – this is not an expected case. In fact, I currently believe that the government will either expand the ban timeframe or, when the ban expires, the gov't will closely watch and restrict exports. However, at this stage, any improvement in supply will likely be met with lower prices.
Spring demand disappoints – we are expecting a solid spring demand period which will cause available inventories to drop significantly. However, we are also aware that many farmers are struggling with high prices and are looking at phosphate for a way to save money. If demand drops much more than expected, that means that there are not nearly as many empty sheds across the country/world. This could cause producers to get a little more aggressive on their sales approach.
Grain prices start to plummet - it already seems that phosphate demand is teetering on the edge of dropping. That is with grain prices where they are. If we start to see grain prices tumble (possible if the world calms down), it will be that much harder for farmers to want to buy phosphate. This will lock up the market, causing producer inventories to grow. They can withstand that situation...for a while.

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

If you are still on the fence about what to do about your spring phosphate app rates, please think full picture. I know this will find many of you too late to make any changes but for those that still need to decide, think about the costs/benefits. If you reduce your phosphate application rate and it save you $5/acres but ultimately costs you 2 bushels of corn per acre, you have hurt your operation. This is not me trying to tell you what to do. I am merely asking you to think about your entire operation.
If you are looking forward (fall '22/spring '23) on your phosphate needs, keep a level head. Right now there is a lot of fear and emotion in the marketplace. Will there be enough? If I do not buy today, will I get it when I need it? It doesn't matter the layer of the market you are in, this is effecting you. Keep in mind that fall season is 7 months away. Spring season is 11 months away. That is A LOT of time. We have seen huge shifts in mere weeks. Imagine what can happen in over half a year. Do not let the current market push you to do something you are uncomfortable with.
BE CAREFUL. It's April and there is a lot of work ahead of us. That means we are likely to push harder than we probably should. I get wanting to push yourself to get one last thing done. I'm probably the last person that should be saying this but I'll say it anyways. If getting that one field done means a chance that you fall asleep at the wheel or worse, it isn't worth it. Your friends and family want you home safe.

Fertilizers

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