Farmer Fertilizer Focus - Urea

By: Josh Linville, Vice President- Fertilizer

Wed, 01 Sept 2021, 18:44

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Urea

Josh Linville

Director - Fertilizer

josh.linville@stonex.com

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

Urea prices have been moving higher this week and it looks like that is just the start of it...

Globally, urea inventories look tight if our assumptions are correct. That assumes that production facilities will go down for repairs (many projects were delayed due to Covid) and that China will not be a major factor for exports (gov't told producers to slow/stop exports but will they listen). If those hold true and demand does not drop, the world looks supported thru the rest of 2021.

If the world holds/moves high, that means North American values need to rally as well. It doesn't matter if you are the biggest producer in the world or the smallest farmer in Kansas, what happens around the globe affects you.

What has happened in the last 30 days?

World values had been dropping but are now finding their footing

Since the last Indian purchase tender, world values were under pressure. With no nearby demand to support price ideas, producers continued to get hammered by traders trying to get cheap purchases. Their strategy is to put pressure on the market, buy low and then let the market rally. Buy low, sell high.

However, this week has changed. It started with an Egyptian producer selling October shipment product at $440. It was a low price, especially for a forward month. However, they have since been selling small blocks at ever increasing prices. This will likely be seen around the world as proof that there is demand and there is no reason for prices to continue to fall.

Prices can still fall, do not get me wrong, but this sends a very strong message.

Brazilian values remain under pressure

There is a tremendous amount of demand that will be stepping forward in Brazil. Most of the world realizes that and ended up shipping A LOT of urea inventories there in anticipation of buying. Well, some reports were that upwards of 1.2MMT had been sent.

The combination of those massive imports and a tailing world market made Brazilian buyers step away. That puts pressure on position holders to lower their price to find demand. Even with world values rising, Brazilian prices are under pressure, but not likely for long. If the world starts showing strength, likely that buyers will rush to secure their needs and prices will jump quickly.

India extremely likely to announce their purchase tender in the next week or two

I almost thought about delaying sending this out because I think it happens sooner than later. How this plays out will set the tone for the world market. That is especially true as we will know what China does. The world urea market is around 180MMT. China produces a third of that. If China stops exporting as they were asked to do by the government, supplies suddenly feel much tighter. If China exports a lot to India, watch out.

NOLA urea values have seen a lot of volatility and appear to holding high's

August saw a lot of volatility for NOLA values. We have seen pricing go from $440 => $400 => $430 => $415 => $460 today. This is a lot of price movement anytime of the year. It is especially big for August when things are typically quiet.

Now, it seems as though values will be a little more supported (no need for the big dips) with world showing strength.

Hurricane Ida came and went with limited effect

The hurricane is a huge deal for the people that were in the path. However, for nitrogen production facilities down there, it was a minor event. These facilities were built to last. So far, all reports are that there was little to no damage and that production downtime will be measure in days, not weeks. Even this morning, the Coast Guard was planning to resume Mississippi River navigation.

Where are current values in relation to the past

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

Vs 30 days ago - +7% or approximately $30 higher
Vs 90 days ago - +15% or approximately $60 higher
Vs 6 months ago - +26% or approximately $95 higher
Vs 1 year ago - +94% or approximately $221 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

Global trade balances thru the remainder of 2021 are tight – when I make this statement, I am assuming that production facilities around the world stick to their repair schedules (i.e. production goes down) and that China greatly reduces their exports. If that holds, the world is tight which puts producers in control of the market narrative. That generally means higher pricing.
Chinese government asked producers to slow/stop exports – further to the above point, the Chinese had a "talk" with N producers in country. Story was they were asking them to slow/stop exports and focus that material on domestic farmers. Global urea is a 180M ton market. China produces around 1/3rd of it. If they stop exporting, the world remains tight.
North American imports should rise to make up for production loss/production swing to UAN/etc. – it is highly likely that we will need to increase our imports vs normal years. We will lose urea production days to plant repairs. We lost production days to Hurricane Ida. We will lose further production to UAN. We will gain demand from UAN being a premium price. You get the picture...

Bearish Factors

NOLA urea currently a premium to Brazil which means imports may pick up too early – I know this seem counter to the last point of the bulls but hear me out. We need imports but if we start seeing them now, the market could drop values to stop the flow. No one wants to bring in too much, too early. If the "wrong" companies import (those without distribution), traders will know it and will start picking off product at ever decreasing values. This would happen until the excess imports are worked thru.
A solid fall NH3 run will "steal" demand away from urea – NH3 is a great value in relation to urea and UAN. If mother nature plays nice this fall, we could have another huge fall run. Put the N in the ground as NH3 and you no longer need as much urea as was originally planned.
High prices around the world may cause producers to further delay any production downtime that was planned – if you are a producer today, your profits are thru the roof. If you had repairs planned, you would lean toward rolling the dice, delaying those repairs and hoping that the plant remains operational. If that does happen, that means more supplies around the world.

ARE WE BETTER OR WORSE OFF THAN WHERE WE WERE?

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 85 bushels to pay for 1 ton of urea
Spend 50 bushels to pay for 1 ton of urea

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 urea 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

Urea will continue to be a premium to NH3 on a price per pound of actual N basis but should be a discount to UAN moving forward. At least until the UAN A-D/CV duty case expires.
Protect yourself: if you sell some grain or buy some fertilizer, offset it by locking in the other side. At these types of values, there is tremendous price risk. If you buy urea today and corn falls apart, that urea price is horrible in comparison. Same for the flip side. Reduce speculation.
Use today as a learning opportunity. I agree that higher grain prices are awesome, but they are not always the answer. A year ago, corn prices were still subdued (less than $4 I believe) but the corn/urea ratio was really good. Today, Dec '22 corn is $5 but urea has rallied from lower $200's to mid $400's. It is a worse relationship than before. Next time we see crazy low ratio opportunities, be prepared to strike regardless of flat price.

Fertilizers

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