Farmer Fertilizer Focus - Phosphates

By: Josh Linville, Vice President- Fertilizer

Tue, 03 Aug 2021, 16:12

PHOSPHATES

Josh Linville

Director - Fertilizer

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

The phosphate market seems as though it is going to be flat for a little while. Demand that wanted to buy has already bought. Demand that thinks prices are too high continue to sit on the sidelines. Producers are relatively comfortable with their current sales book.

All that said, there is some cause for concern.

Since last summer, DAP prices at the gulf have gone from a low of $250 to current values at or above $600 (depending on the day). That is a massive price gain that could very well alter normal processes.

My biggest fear is that we will see demand destruction this fall either from inability to purchase, decisions to delay applications to spring, decisions to reduce application rates, etc. That doesn't even begin to touch on the regions that have been experiencing horrible drought, have not raised a crop and so have not drawn down phosphate levels in the soil. If the fall ends up disappointing, that means there will be bigger physical inventory carryover into the winter. That means that there will be fewer places to fill and could start to shift pressure back onto the producer which could weigh on prices.

Couple this with the fact that China, the worlds largest producer, has been exporting at higher rates in the 1st half of 2021. I'm not holding my breath that prices are going to completely fall out of bed in the short term but it does seem as though we have hit a bit of a price ceiling.

What has happened in the last 30 days?

Nothing. Really, nothing.

It has been really quiet in the past month for the phosphate market. The counter lawsuits against the counter vailing duty ruling continues to drag on with Mosaic arguing for higher rates and Morocco/Russia arguing for lower. As these lawsuits drag on, the winners are North American producers and lawyers. The loser are the farmers....

Aside from that, the market continues to try and figure out what fall demand will look like. From a pure numbers POV, fall demand should be big. Inventories were low coming out of spring. Imports continue to be an issue with the CVD case. We continue to expect 91M+ acres of corn in 2022.

However, demand may have other thoughts. Current grain/phosphate ratios are about as bad as they have been over the last couple decades. We could see demand drop or delay to spring just from sticker shock alone. That doesn't even dive into the situation with some regions experiencing horrible droughts.

Until some of these questions get answered or something changes drastically, it seems like the phosphate market is stuck where it is.

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 - relatively unchanged percentage or approximately $3 higher
Vs 90 days ago - +2% or approximately $15 higher
Vs 6 months ago - +50% or approximately $214 higher
Vs 1 year ago - +121% or approximately $353 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

Mosaic still controls the world from a U.S. POV – as long as the CVD stands, Mosaic is in control and that means the U.S. market will trade at a premium to the world as we pay the price for inefficient trade flows going forward.
We continue to expect big demand for the 2022 crop mix – as mentioned before, we continue to use 91M acres of corn for our 2022 demand models. We like to start conservative and build into it, meaning that number could easily push higher. If it is directionally correct, that should keep demand high and prices up.
Current lawsuits against the CVD may go Mosaic's way – if Mosaic is successful in their lawsuit against the duty rate, that will make it that much harder for tons to find their way here. That means we continue to struggle to find enough product to meet demand which is very supportive pricing.

Bearish Factors

China starting to ship big quantities again – when operating at full capacity, China is the worlds leading producer and is bigger than #2, #3, and #4 combined. A large chunk of the price runup that started last year had to do with their slowing/stopping exports last year. Now, 1st half '21 exports from there are back at high levels. Global supplies still feel tight but if they continue to churn out product, that may start to change.
High prices may see farmers delay and/or reduce applications – at these values/ratios/etc, I wouldn't blame you! Current values are high across the board. Even if farmers have more cash on hand than normal (debatable given how much everything else has gone up), that doesn't mean you want to give it away. If enough of the market drags their feet or drops their app rates, that could make ending fall inventories much higher than anticipated and start leaning on pricing.
Current lawsuits against the CVD may go Morocco's/Russia's way – if they win, it will reduce or remove the duty rate and open the U.S. as a destination. Efficient trades flows will reestablish themselves and should have the U.S. market price drop as a response.

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 130 bushels to pay for 1 ton of DAP
Spend 60 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

Do not let emotion get the best of you. It is pretty easy to get angry at current values and make a decision in the heat of that. Frankly, I wouldn't blame you. However, try to step back and consider the full picture. What happens if you break from your normal approach, whether that be application rates or when you apply. Is there any danger in taking a new approach? Whatever you decide is the exact right decision for your operation. You are the boss!
If you normally apply in the fall and you decide to wait until winter/spring to apply, make sure to have a conversation with your supplier. They have built their operation for typical fall/spring mixes. If enough of their market goes all spring, for example, they may not be set up and ready. At least by having the conversation with them, they can prepare as best as possible for that change.

Fertilizers

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