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Farmer Fertilizer Focus - Phosphates

By: Josh Linville, Vice President- Fertilizer

PHOSPHATES
 
Josh Linville
Director - Fertilizer
What everyone wants to know first, what do we think will happen going forward
Globally, phosphate values have taken a step lower in the last 30 days.  Demand, which had been near constant, has dried up and given the world a chance to breath.  That typically equates to prices dropping.
However, it still needs to contend with a market largely without Chinese and Russian exports.  The Chinese government phosphate export ban appears to still be in place.  Russia's invasion of Ukraine shows no signs of stopping anytime soon.  That means we are still living in a world that is losing around 45% of the global phosphate export market.  That does not mean that prices cannot drop.  It just means that the drop will not be as severe as many buyers are hoping for.
Globally, prices could see a little depreciation in the coming weeks/months, but do not expect that to equate into prices going into a free fall unless China/Russia come back on the scene.
For North America, it is amazing what a poor spring can do to a marketplace.  As is being seen weekly in the corn planting progress reports, it has been a very slow spring run.  Phosphate is no different.  Whether it be due to conditions being too wet, too dry, or simply due to demand destruction with farmers refusing to apply normal amounts, we are hearing the it was a disappointing spring run.
That would normally mean prices cratering and to a certain extent, that has happened with values under attack in the last 30 days.  Unfortunately for those hoping for prices to continue to be slashed, the world is having problems right now.  If N.A. producers realize there is not nearly as much storage to fill this summer, they can easily convert to exporting product to a world currently desperate for product.  This could be producers saving grace for keeping prices high.
Likely that we will see North American phosphate values steady to slightly bearish in the near term as the market comes to terms with the poor spring run.  However, a tightly supplied world market will likely help to keep prices from falling too far.
 
Should you buy your fall '22/spring '23 phosphate needs?
I am still not a fan of locking up fall/spring needs today
There are 183 days until November 1.  There are just over 300 days until March 1.  That is a long time that could see a lot of market movement.
I still struggle with jumping in and buying my fall/spring needs today.  We have seen HUGE price movements over the course of days/weeks.  Just imagine what could happen in 6 - 12 months.  
While not a guarantee, I still believe we will see Chinese export bans loosened sometime around June.  That will help alleviate supply fears.
I also cannot believe this Ukraine invasion will last forever.  I continue reading news articles pointing to Putin's unpopularity and failing health.  If he is removed from power and replaced with someone that condones what has happened, we could see Russia welcomed back to the market quickly.  Even without that, we could see countries like India/Brazil/Mexico refuse to follow sanctions and instead purchase "cheap" product to meet their demand.
There are no guarantee's in life but I just struggle with buying some of the highest prices I've ever seen in my life this far in advance of season...
What has happened in the last 30 days?
Chinese government phosphate export ban continues (copied from April newsletter)
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 (copied from April newsletter)
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.
World prices slip as demand wanes
It certainly isn't the massive price drop so many buyers were hoping for.  However, in today's market, we take our wins where we can!
In the past month, many of the major phosphate points around the world saw values down:
  • NOLA - down 10% ($1,000 => $896)
  • Morocco - down 6% ($1,255 => $1,180)
  • Saudi Arabia - down 3% ($1,126 => $1,087)

The world is quickly moving into a typical slow demand period which means that producers are more willing to get aggressive with their pricing to lock up sales.  However, many continue to believe that prices will largely hold unless/until we see major changes to the Chinese/Russian approaches.  Without those two exporters, the world is extremely tightly supplied. 

U.S. spring season disappoints
With prices near all-time record high's, there was always an anticipation of demand destruction.  Grain prices were rallying meant that profitability on the farm rose almost daily.  Even with that, we still expected demand to be down as farmers looked for ways to lower their costs per acre.
It is starting to appear that demand destruction was even bigger than anticipated with poor spring weather keeping those willing to apply out of the fields.  For those in the north and east, it was much wetter than normal and simply impossible to get tractors into the fields.  For those in the south and west, they could not buy a rain and it simply did not make any sense to throw more money at a crop with no chance of growing.
That has resulted in NOLA prices dropping by a bigger percentage than any other point around the world and could mean some issues this summer as manufacturers go looking for sheds to fill that do not already have product in them.
Normally, we would see this as an extremely bearish event but these are not normal times.  N.A. producers know that if the domestic market goes into the summer mostly full, they still have the export option and still do not need to fear imports with the counter vailing duty rate against Morocco and Russia still in place.
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 - -10% or approximately $104 lower
  • Vs 90 days ago - +30% or approximately $206 higher
  • Vs 6 months ago - +33% or approximately $223 higher
  • Vs 1 year ago - +61% or approximately $341 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 (copied from April) – I believe this is the 5th month that this bullish factor has been used!!!  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 (copied from April) – 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.
  • Rising grain values brings demand reluctantly forward sooner than normal – while farm demand has been reluctant with prices near all-time high's, grain values continue to rally.  If that grain rally continues, it is going to be harder for buyers to stay away.  We have all seen this story before.  Grain prices rally, fertilizer prices rally.  
Bearish Factors
  • China decides to start exporting (copied from April) – 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.
  • Washington D.C. does something to stop the duties – even if the duties were dropped today, from a fundamental POV, very little should change...but that does not mean it would not.  Traders would see this as a worrisome event and would likely take steps to offload their positions.  Most of the time, this equates to lower pricing.  Never underestimate emotion.
  • Grain prices start to plummet (copied from April- 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.
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Josh Linville’s Thoughts
  • Don't let the current hype cloud your judgement - right now, food shortages is making its rounds thru the major media circuit.  That means fertilizer markets are getting discussed all over the place.  We need to be aware of some of the risks that are out there (product tightness) but not let the hype make our decisions.  Now more than ever, it is important to make rational decisions when it comes time to buy our inputs.
  • Keep your head on a swivel - I'm tired and I know you all are tired as well.  It will be very easy once planting and spraying is done to completely disconnect from the markets.  Unfortunately, we need to be more vigilant now than ever.  There will be opportunities in the coming days/weeks/months.  Likely these opportunities will be short lived.  I wish I could tell you we could all stand down and relax for a bit in the coming months...I really wish I could.
  • If you buy your phosphate, sell some grain - the thing that scares me the most is that some are going to look at the fertilizer market, decide that they need to secure their fall '22/spring '23 needs and then watch grain markets tumble without having locked in that side of the equation.  There is tremendous risk in the current ag world.  As a farmer, you have the ability to lock in both the input and output side of the equation.  Take advantage of that.
  • Be careful - a lot of the world is dealing with a tough period.  Many of you in the northern hemisphere have been dealing with poor weather.  Those in the southern half have not been much better.  When the opportunity pops up to run, the temptation is going to be there to run 24/7 until done.  You will need to press hard but the ultimate goal is to make it to summer/Q3 healthy.  
 
 
 
  • Fertilizers

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