Farmer Fertilizer Focus - Potash

By: Josh Linville, Vice President- Fertilizer

Sun, 04 Dec 2022, 04:29

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December '22 POTASH

Josh Linville

Vice President - Fertilizer

josh.linville@stonex.com

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

Another month and not much new to share in the world of potash! However, if you have been holding off on purchasing your potash needs, at least the price has worked your direction. Another 30 days have gone by and potash values in the Gulf of Mexico have dropped $30 while the Midwest average has dropped $36 which is starting to beg the question: how much lower can it go? Well...

I continue to see a negative potash price trend in at least the near term...but it might depend on where you reside.

A common discussion point this month is North American logistics. The river situation continues to struggle which means less fertilizer is moving north each day. While Washington D.C. voted to keep a rail strike from happening, they may actually want to talk to a rail worker and find out how big a fan they are of the government telling them what to do. They may quickly find that the majority of rail workers call in sick at the exact same time. All this to say, North American logistics may get squeezed hard enough that even if we see major global point prices fall, logistical costs may rise enough to offset the drop or worse, may cause values to rally.

In the end, the fall application demand appears poor today. There is still time to "catch up" but it seems that a lot of farmers are either cutting their application rates or are stalling until springtime. Either way, poor demand should equate to lower prices. Inventories fail to be cleared out of storage, producers continue to produce and limited sales opportunities will be chased by all suppliers.

I will not be surprised to see a bit of a bump over the next several weeks. Lot of farmers have cash to spend at the end of the year (because no one wants to pay taxes!). We may/should see a surge in demand as farmers look to spend funds but after that, I think values will be under pressure until we hit the spring season.

Should you lock in fall '22/spring '23 potash needs today?

I continue to say hold on spring needs...but you better be talking to your supplier.

Hopefully you know me well enough by now to know that I am never here to tell you what to do or what not to do. That is your call.

What I mean by my spring call is this: with prices still looking negative for at least the short term, I think it is worth holding off as long as possible (while keeping a close eye on the markets). However, for those of you in North America, you NEED to be worried about logistics and supply. If we lose rail, I have absolutely no idea how to forecast how violently the market will react. All I know is it would mean inland prices would rally (I would if I were still a supplier, limited tons + coming spring demand + no resupply = my price win). I also do not see the river situation improving significantly in the short term. I hope that we see timely rains across the Midwest to give flow surges to help keep traffic moving. However, we need significant moisture in the north and most of that will be in the form of snow/ice until spring melt.

Not only do we need to be worried about logistics, but you AND your supplier are worried about prices. You and I know that your supplier is well aware of where potash prices have been going. Do you think that fills them confidence to fill their warehouses and wear that price risk?

While I would drag my feet on locking in spring needs, I would be discussing it with my supplier. Talk with them about your plans. That will give them some information/ammunition to build a supply plan themselves. Buying potash and seeing prices fall is bad. Holding off on buying potash and finding out in the spring that there is nothing less is MUCH worse.

What has happened in the last 30 days?

Lithuania STILL blocking Belarus shipments

At this point, I'm not sure how many months in a row I have left this story unchanged. However, it remains a significant storyline for global potash supplies. Until something changes, it remains a talking point. My apologies for not having updated Belarus export information. That information should be coming out in the next week. If there is anything of significance, I will send a mid-month update. Until that happens, I am assuming the their exports levels will remain very low.

For those new to this newsletter, the lack of Belarusian exports has been a major event for global potash markets. Back in February, the Lithuanian government imposed a blockade of any Belarusian products. The reason why this was so important and detrimental to Belarus potash is that Belarus is landlocked. In the past, most of their material either went south (Ukraine) or north (Lithuania) and out to the sea.

Belarus has helped Russia in its invasion of Ukraine. That means I have a better chance of calling the markets correctly than Belarus does of Ukraine allowing them to ship product thru their country!! It also seems there is little chance that Lithuania is going to reverse course and allow shipment in the short term. Product does not naturally flow east/west. To the west is Poland which is another country unhappy with Belarus's role in the invasion. To the east is Russia. There continue to be reports of infrastructure being developed to increase shipments...but that will take a lot of time.

For now, the potash world continues to lose one of its top 3 exporters.

Russia exports flowing, but slowed a bit in August/September

Like the Belarus story above, the Russia export story remains unchanged as well. We also do not yet have their October exports values. I will be interested to see the updated October values. Will they follow the recent trend of their exports falling vs the 5-year average? Will we see a rebound? If there is anything of substance, I will send a mid-month update once we know. Until then, here is the repeated story below!

The surprise of the 2022 potash market was Russian exports.

Following their invasion of Belarus, many (myself included) thought that exports of all fertilizers would dry up. I mean, Starbucks and McDonald's pulled out so it was going to be serious!

We quickly found out that exports were slightly lower than the 5-year average, for the most part they were normal. The addition of these tons back onto S&D's helped price ideas to fall.

However, the last couple months (August and September) for updated trade flow are showing that Russian exports are slowing. Now, we need to keep in mind that trade data is not always 100% accurate. Countries like Russia do not report their information so we are forced to back into their flows using destination data. That can cause discrepancies.

If we assume the chart below is right, this could be worrisome. A few hundred thousand tons in the world market does not seem like a big number but sometimes small changes is enough to change the course.

Fall 2022 demand appears lower

First things first, it is still too early to call the fall season a bust. As I write this, it is only December 3 which means there is still time for farmers to take steps forward.

...that just does not look like it is going to happen right now...

How good or bad the fall run has been depends on who you ask and where they reside. Those that cover the U.S. corn belt appear to have had a very solid fall run. That makes sense. That is some of the best ground in the world and also some of the most expensive. That means farmers have to max their yield year after year to make any money and that means steady potash applications.

However, once you get outside that region, the story gets a little more dire. Extremely low soil moisture. Poor farm economics in 2023. Solid soil potash levels. Farmers being mad at the high price and opting to wait. I could fill this newsletter with all the things that have been said but they all have one thing in common: their potash demand has been lower than normal.

If this continues to hold true, this will weigh on the market. Producers always look to each fall/spring season to wipe out inventory levels. That means that there is plenty of space for their tons to ship to. However, if the season is poor, that means that storage remains full and there are few holes to fill during the offseason. That lack of demand, combined with continued production, typically equates to price ideas falling. Producers/suppliers need to get aggressive to make sure they make the sale when demand steps forward.

Now, this does not always happen but usually does.

New capacity is coming...but when will it hit?

Again, leaving this story unchanged because it remains unchanged...but also remains pertinent.

Potash is the one fertilizer that we can point to an improving supply situation moving forward.

Canadian producers Mosaic and Nutrien have both stated that they were ramping up production. Nutrien in the form of added capacity at existing mines while Mosaic is restarting their mine in Colonsay.

There are a couple projects based in Russia that will add new production to the global S&D.

On top of those, we continue to believe that Belarus will eventually find its way back into the world marketplace. The popular rumors have continued to be that they will build infrastructure to ship product from their mines toward St. Petersburg where a new deep sea port will be build to load vessels.

While the timing of each of the above is sketchy, we have high hopes that all will happen. If/when they do, we could finally be looking at a global potash market that has more supply than it has demand...and you know what that means for price ideas!

Some grain/potash ratios are getting back into range

I will not take up a bunch of space reposting the ratio graphs from below. All the normal graphs are updated below as normal.

Just wanting to point out that some of the ratios are getting back in line with what we had considered "normal". They are far from being the lowest we have seen. Not saying that. However, they are starting to get to the level that we need to take a solid look. Corn is the one that stands out to me. Even with falling slightly recently, the ratio is starting to look somewhat attractive.

As always, do not let emotion make your decisions. Just because Dec '23 corn has fallen from $6.30 to $6 does not mean the situation is worse regarding potash.

Where are current values in relation to the past

NOLA/New Orleans Louisiana

Vs 30 days ago - -6% or approximately $30 lower
Vs 90 days ago - -18% or approximately $115 lower
Vs 6 months ago - -34% or approximately $263 lower
Vs 1 year ago - -26% or approximately $175 lower

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

Vs 30 days ago - -6% or approximately $36 lower
Vs 90 days ago - -16% or approximately $116 lower
Vs 6 months ago - -23% or approximately $183 lower
Vs 1 year ago - -16% or approximately $116 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 (all 3 unchanged from november)

Big demand expected even with lower application rate fears – In the U.S. alone, we are using 92 - 94M acres of corn for 2023. Application rate cuts will be met with higher overall demand which could turn the market higher.
Uncertain Russia/Belarus exports - Russia and Belarus take the 2nd and 3rd place as largest potash exporter in the world. Belarus is already cut off from the world following Lithuania's move in February to stop shipments. Russia shows no signs of backing off its invasion of Ukraine and could easily escalate the situation. There is a path forward where both countries are unable to export. That would tighten the global S&D.
Farmers have too much money – be truthful, raise your hand if you read that heading and thought "listen here you little SOB"!!! What I mean by this is it is hard to get your hands on new land, equipment, etc. This has been a good year and we know farmers do not like to pay taxes. With few options to spend their money before the start of the new year, we could see more farmers forced to buy potash.

Bearish Factors (all 3 unchanged from november)

Trend is a buyers friend today – potash prices have been dropping since late March/early April and as you can see from the price chart above, potash price cycles typically take a long time to complete. Right now, I'm not seeing much of a reason why we would break the current trend.
High price (vs historical values) could mean lower application rates – for farmers around the world, potash is an easy cut. 2023 will be one of the highest costing crops to raise. We could see farmers cut back potash application rates to save money due to not being able to get enough funding or just out of spite.
Fall applicators could decide to wait for spring - values have been and continue to fall. Lot of questions still as to what to plant next year. We could see more fall applicators drag their feet and not apply their potash until next spring. While that would cause a problem for spring logistics, it would weigh pretty heavily on fall price ideas.

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

Lithuania/Belarus - our expectation is that Lithuania will continue to block Belarus shipments for the foreseeable future. Even if Russia were to pull out from Ukraine, Belarus will still be viewed unfavorably without a regime change. That means we lose one of the most important exporters. However, things can change quickly.
Overall demand - not only overall demand but when does that demand come. That will be a big question going forward. Will overall application rates drop again? Will they rise if grain prices rally? Will farmers skip fall applications in lieu of spring in hopes that values continue to deteriorate? Demand will have the last word. It always does.
North American logistics - a rail strike remains possible. River logistics continue to struggle and likely will thru winter. This means that farmers across North America need to be concerned with supply availability. I know that the fertilizer market has screamed "supply fear" many times before...but we have never been this close to losing 2 of our 3 methods of fertilizer transportation...
Potash manufacturer reaction to falling prices - if potash values continue to fall and fall application demand is seen as very poor, we could see manufacturers slow their production rates. In theory, this makes no sense as producers are still profitable. However, in real life, slowing a little production could mean prices stabilizing or pushing higher which helps the remainder of their production complex. Not saying this will happen, but it is something we are watching now.

All data was sourced from StoneX unless otherwise noted.

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