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Farmer Fertilizer Focus - UAN

By: Josh Linville, Vice President- Fertilizer

UAN (28% / 32%)
 
Josh Linville
Director - Fertilizer
What everyone wants to know first, what do we think will happen going forward
Well, unfortunately, my POV on the UAN market remains the same as it has:
From now thru planting, likely to see values remain flat to firm.
Once into the sidedress period, I have no stinking clue!!
For the next several weeks, this will be a market controlled by the producers who are obviously big fans of higher prices.  The spring NH3 preplant season is not starting off with the bang that we expected.  While it is still possible for it to have a solid year, we need to start concerning ourselves on what the effect will be.  That is higher demand on a UAN market that is already struggling with low inventory levels.
Once past preplant and into sidedress season, it is possible that prices start to drop slightly but I wouldn't count on it.  Our models are showing low inventory levels coming out of spring and that is with normal N splits.  If NH3 falls short, that inventory level gets even lower.  This, coupled with the very high chance that the duty case in the U.S. is approved this summer, should help prices stay high.
As always, anything is possible but today, I'm leaning toward prices holding to pushing higher thru spring.
should you buy your Spring '23 uan needs today?
NO
Spring 2023 is a full year away.  12 months.  These markets can change in a big hurry.
Today, we are dealing with the highest UAN price that any of us have ever seen.
Today, we are dealing with some of the worst corn/UAN ratios we have ever seen.
I understand wanting to look and consider buying it.  I really do.  There are a lot of things going on today that have me spooked but ultimately, we need to look at the big picture.
These markets can change very, very quickly.  If you lock it in today, you will be locking in record high prices and ratios a full year in advance.  
Better to keep your powder dry and wait for an opportunity.
What has happened in the last 30 days?
UAN manufacturers remain in control of discussions (unchanged from last month)
Last month, we talked about the surprise the market received when the anti-dumping (U.S.) rate was announced at much higher levels than expected.  Effectively, this means that North American manufacturers are in control of the price narrative for now.  This case still needs final approval but that will not occur until this summer and if history is any indication, it will be a rubber stamp yes vote.  That yes vote will mean that 80% of our normal imports are now shut out and with so few options around the world, North American manufacturers are in control.
To give you a sense of why this is the case, we have included the list of world producers of UAN.  
  • North America accounts for almost half of the world's production
  • Trinidad/Russia are highlighted as they are not likely to come to the U.S.
  • West/central/east Europe not likely to export given the current Russia/Ukraine conflict

Take out those regions and you are left with North Africa/China/Rest of the world.  That leaves only 500K remaining for exports. 

This is why the manufacturer remains in control.  There is simply nothing left around the world today to come here.  North American producers are in control and they like higher prices.

image 30286
Russia/Ukraine conflict strikes fear in buyers hearts (same as last month)
Isn't it funny how so many of us said that 2022 couldn't possibly be worse than 2021...
So the Russian invasion of Ukraine is happening in a big way.  I'm not going to get into the politics of it because that isn't why you are signed up for this information.  We look at it strictly from a fertilizer POV and there are 2 main things that scare me.
1.  Russia's UAN export size - in the last couple years, Russian UAN exports have accounted for anywhere from 25 - 34% of the global total.  One thing that has surprised me in regards to the invasion has been the united front the world has taken.  Almost everyone has stepped up, spoken out about the invasion and have take ever increasing heavy steps toward cutting Russia from the world economy.  I never imagined the world would agree on anything but here we are.  While it is great that we are seeing the world punish them, we have to be aware that if Russia loses the ability to export, the world loses A LOT of UAN.  If demand remains steady and supplies drop, Econ 101 says that prices go up.
2.  Russia could cut off natural gas flows to Europe - I've had several push back on this idea saying "there is no way he would do it".  I agree that it is not likely but we also didn't think he would really invade Ukraine.  We have also seen Putin starting to ratchet nuke talks higher.  Never say never.  If he were to shut down the pipeline, take a look at the above list of production.  Europe accounts for a lot of tons.  If that pipeline shuts down, governments will allocate limited supplies to its people, not to the industrial complex.
Preplant NH3 is not starting well
For every 1 ton of NH3 that does not get applied, it can take up to 2.5 tons of UAN to make up the difference.
1 ton of NH3 has 1,640 pounds of actual N
1 ton of 32% UAN has 640 pounds of actual N
1,640 / 640 equals 2.5
Our current estimates for spring NH3 is 1.75M and judging by the standing water I saw in fields on a flight to Ohio and back, I'm leaning toward the actual number being lower.  Bigger than expected demand on UAN will only make the S&D worse.
Where are current values in relation to the past
For UAN, we use NOLA/New Orleans Louisiana as our base point as it is the easiest spot to track.
  • Vs 30 days ago - +12% or approximately $65 higher
  • Vs 90 days ago - +11% or approximately $60 higher
  • Vs 6 months ago - +44% or approximately $190 higher
  • Vs 1 year ago - +115% or approximately $334 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
  • Russia continues to be shut out from the world economy – as long as Russia continues to invade Ukraine, much of the free world will not do business with Russian companies.  There appears to be no end in sight for this conflict.  With most of Russia's UAN exports going to NATO members, that means these exports will be lost for some time which will keep the global market tight.
  • Spring NH3 is not going well so far – it has been wet in the east and dry in the west.  Neither situation is conducive to putting on NH3.  UAN is expected to have lower than normal inventory levels at the end of spring and that is using normal N splits.  If NH3 fails to meet forecast, that means that UAN demand will jump.
  • The counter vailing/anti-dumping duty case is approved this summer - there is still some hope in the UAN market that the final decision on the duty case will be no.  Unfortunately, the history of these cases tell us otherwise.  If we get to the summer and the final vote is to approve the duties, Trinidad and Russian exports will not come to the U.S. which means U.S. producers remain in control.
Bearish Factors
  • Putin is removed from power and replaced with someone that the world is willing to do business with – although unlikely, it is possible.  Today, it feels like the world is upset with Putin, not with the rest of Russia.  If Putin is removed and Russia gives up the invasion, we could see the world quickly open its arms once again.  This would not only mean regaining Russian UAN exports but would also likely cause European natural gas prices to plummet.
  • Spring NH3 does better than expected – just because we didn't have an "early" start to spring doesn't mean we still cannot have a solid one.  I've always been amazed at how much the ag industry can get done in a short amount of time.  Right now, I'm leaning toward the U.S. not reaching our forecast but I wouldn't be surprised if we beat it either.  That would mean less UAN demand.
  • High price causes application rates to drop – don't get me wrong, I do not expect N application rates to drop 50%.  It isn't possible.  However, we could see those rates down 5 - 10% somewhat easy.  Remember that a small percentage of a big number is still a big number.  Those types of shifts can alter the S&D and cause prices to drop.
Where are the current uan/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 100 bushels to pay for 1 ton of UAN
  • Spend 60 bushels to pay for 1 ton of UAN
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 UAN 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.
image 33396
image 33397
image 33398
image-20220402225813-1
 
 
Josh Linville’s Thoughts
  • Talk to you supplier about what your needs will be for preplant and sidedress.  Spring NH3, while not complete and still able to have a solid run, is not starting well.  For every ton of NH3 that does not get applied, that can equate up to 2.4 tons of additional UAN demand.  If the spring NH3 market falls short of expectations, we could see UAN demand jump huge and we are already expecting a low number of tons left at the end of spring.  Please do not think that just because it has always been sitting there waiting on you when you show up that it will be the same this year.  I understand wanting to wait and see what happens with prices but give your supplier a fighting chance.
  • If you start to notice that your NH3 is not going in the ground like normal, then realize that all of your neighbors are probably similar.  If everyone in your area suffers, that means there will be a jump in UAN demand.  Act, not react.  If it looks like NH3 isn't happening, better lock up the next best thing NOW.
 
 
 
  • Fertilizers

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