Farmer Fertilizer Focus - Phosphates

By: Josh Linville, Vice President- Fertilizer

Mon, 01 Aug 2022, 12:48

PHOSPHATES

Josh Linville

Vice President - Fertilizer

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

N.A. and global phosphate values have seen prices degrade in the last 30 days. Not violently lower but enough to help. Partly due to an overall lack of demand (buyers skeptical of buying too early at these high prices). Partly due the typical summer lull. Now, we are getting closer to a turning point it feels as we move into August. Somehow, flipping the calendar from July to August makes it feel as though we are quickly moving toward fall season for the Northern Hemisphere.

Global phosphate could continue to see slight weakness but with N.A. production costs high, a firm price floor is near. That means the market feels like it has more upside than downside price potential.

Never in my life did I think I would see today's values and actually say out loud that there seems to be more upside than downside price risk.

For me, now that we know what the Chinese government is allowing to export, my focus is shifting to N.A. production. Specifically, Mosaic production.

The reason for this: I think N.A. phosphate production is the highest costing phosphate in the world today. There are more details below but given current input costs for freight/sulfur/NH3/etc., we believe their cost of production to sit in the $550 - $600st USD (more likely on the higher side of that range). Current NOLA markets sit in the mid-$700's. Yes, that is still huge margins but in today's day and age, that isn't a big difference. Last week, we saw the urea markets moving triple digits so $150 margin could, in the right scenario, be gone in a matter of days.

What I am trying to say is that while I still see potential for price weakness, with that price floor in place, there is limited downside and plenty of upside potential...I feel dirty even saying that...!!!!

Should you buy your fall '22/spring '23 phosphate needs?

November is coming up fast. If you are a fall application farmer, are far away from production sites and the numbers work, time to start making a hard consideration to lock up fall needs.

THIS IS NOT A ONE SIZE FITS ALL ANSWER.

Let me repeat that

THIS IS NOT A ONE SIZE FITS ALL ANSWER.

For me, if I am a farmer having to make a decision, I am asking myself how the current phosphate price looks vs next years grain values.

My first reaction is going to be that these prices are too damn high
After a drink or three, I'll get over the shock
Then I need to figure out if I can make money at these values

I only look at these markets in the lens of fertilizer/grain. You do not have that luxury. You also have to consider rent/diesel/chemical/spraying/seed/equipment/etc. You need to take the entire organization into account. If you are looking at your operation and you feel like you can lock in a profit, then that gives you your answer for phosphate.

We also have to consider the ramifications of waiting. The fertilizer system is built to handle a fall/spring split. This is not to say that you cannot shift from one to the other. However, if the majority of the market does this, logistics are going to struggle. The further away you are from production, the more difficult this gets as more tons become reliant on just in time logistics. More times than not, just in time equates to higher priced and delayed shipping. Again, not saying it cannot be done but it is worth a conversation with your supplier.

These are not easy decision times and this is not one of those times that I can give a sweeping suggestion. If a hard recession happens, we could of course see phosphate prices down significantly. 2008 taught us that anything is possible. With the information at hand, it seems as though the downside is limited. Just make sure whatever you decide, it is what you decide.

What has happened in the last 30 days?

Phosphate/grain ratios are high and do not look to improve much

You will see the graph below but today's grain vs phosphate values are extremely high. Actually, let's take a look at where the current Chicago corn/NOLA DAP ratio resides vs all the years since 2008 (last time we had these types of values):

That dark red line is this year...the only time it has been worse than where we are today was in 2008. What this basically means is that you are spending more of your hard earned bushels to pay for a single ton of DAP.

As I mention repeatedly, this only takes into consideration the grain and fertilizer values. You have to consider your full operation.

China is allowing phosphate exports!!!....just not as much as we hoped for

We finally got an announcement from the Chinese government regarding phosphate exports! Unfortunately, it was the best case scenario for those of us hoping for lower global pricing.

As mentioned in previous month's editions, there was a wide range of expectations from expecting a full return to exports by July 1 to a full ban of exports thru June '23. For those expecting to see a full ban, this was bearish news. For those expecting a full return, this was bullish news. For us, this is in line with what we expected. The Chinese government was not likely to allow a full return to exports because that would push their domestic price higher (in line with international markets) and raise the possibility that enough tons were exported to the point where there was not enough product for their farmers. This approach not only ensured adequate product for domestic demand but it also allows Chinese producers to cash in.

Keep in mind that 3.6M is a very big number. However, when broken down, it isn't nearly as big as it seems. The 3.6M includes every form of phosphate, not just DAP/MAP which is what most of the world market is based on. That means products like NP/NPK/Calcium phosphate/SSP/etc. are all included in that number. Also, 3.6M is less than half of what China would "normally" export.

As the chart below shows, China is a major exporter to the world. In years past, they were the largest exporter in the world. In recent years, they have given that award to Morocco but are still playing as a major #2. As long as China restricts the flow, global inventories will remain snug.

U.S. phosphate is finding its way around the world

If you ever thought that you would see "mid-$700's NOLA DAP" and "cheap" in the same sentence without the use of "nowhere effing close to" in the middle, please raise your hand!!.

Well, as much as it pains me to say, NOLA phosphate values ARE cheap vs global pricing...and that is why we continue to hear of product departing U.S. shores for global destinations.

The graph is below but since those lines can look similar:

NOLA DAP - $760st which converts to $838mt (global tonnage)

Black Sea DAP - $858mt

Saudi Arabia DAP - $923mt

China DAP - $925mt

Morocco DAP - $973

This means that with N.A. buyers reluctant to step forward, producers have plenty of options on the global market.

We will not know the extent of the exports for a couple months as the U.S. government delays the reporting of import/export info by 60 days. Still, we have to assume tons are leaving our shores which will keep supplies tight which will keep prices up...

U.S. / N.A. phosphate cost of production remains very high

We thought we were finally seeing some reprieve as the sulfur market saw prices softer. As one of the big inputs for phosphate production, that meant a lower cost of production and the possibility of prices declining. That was more than offset by the August Tampa NH3 price rising $160 from July to settle at $1,100.

The numbers below are still taking into account the July input costs but the story is still the same. While the sulfur part of the bar will shrink, the NH3 part will widen with the net result still being near $600 production cost for one ton of DAP NOLA (New Orleans, Louisiana).

This is a major thing to watch as N.A. phosphate production remains one of, if not the, highest costs in the world. If we were to get into a situation where values started falling hard, N.A. would likely be first in line to have costs challenged. With phosphate companies not in the business of losing money, once we dip below their cost, they would likely curtail/stop production. Once enough production is cut, the supply side of the equation starts to get brutalized and eventually the S&D gets back in line...at a higher cost.

Today, the NOLA DAP market remains well above the cost of production but with double/triple digit price moves in a matter of days becoming the norm, this could be challenged much more quickly than anyone can anticipate.

What will fall demand look like?

This is the biggest question facing the supply side of the phosphate market today. What do they plan for? Do they put 100% of normal demand in place? Do they reduce that number? If they do reduce it, by how much? Will that demand still be there in the winter/spring? Can they take the risk of putting product in place for a farmer that may or may not show up to buy it?

I'm not saying this in an attempt to make you feel sorry for them. We are all adults and know our place/risk in the market. However, this fall is a really tough call.

As mentioned above, we are proceeding with the expectation that demand for the 2023 crop cycle will be 10 - 15% lower than normal. I'm not sure how much confidence I have in that range today as I can easily see it higher or lower just on grain market up or down. What is more difficult is figuring out WHEN the demand will take place. I think a lot of farmers will look at current phosphate and potash values and consider dragging their feet if they do not need to spend money this year. Why lock into some of the highest prices ever seen for the fall if you can wait and see what happens. Nothing says you cannot wait until winter or spring. Sure, you run a risk doing that but could the reward be sitting on the other side?

I, for one, would rather make sure I have soil levels built and ready for planting next spring as I we do not know what weather will do. Number one, I am fairly conservative. Number two, I am not a farmer so take what I think with a grain of salt.

Hopefully we will see a more definitive answer as we get closer to harvest but today, this will continue to be a difficult question and one that can absolutely sway the market going forward.

CF lost it's UAN counter vailing/anti-dumping duty case. Does that mean Mosaic counter vailing duty case is next on the blocks?

For the longer version, go read thru the UAN section. For here, just know that CF lost its case to place duties on Russian and Trinidad produced UAN imports. This was a major shock as it rarely happens and it was a major win for buyers hoping for lower pricing. After the festivities, the next looming question arose: is Mosaic's duty against Russian and Moroccan produced phosphate next?

This has become the rally cry for buyers across N.A. If the ITC saw fit to say no to duties on the UAN market, then they MUST think the same for phosphate.

I cannot speak well regarding the legal procedure of this. Many are pushing for the ITC to rereview the case in hopes of another vote. Others are pushing their Congress and Senate representatives to pressure the White House to use an executive order to do away with the duty. I think this is plausible as President Biden could use the approach that food production is at the top of the national security list. You have to be able to eat. If that is the case, fertilizer remains an extremely important part of the food production industry. So many nations around the world are taking steps to keep fertilizer home for their farmers while the U.S. is actively pushing imports away. Whether this happens or not remains to be seen.

Unfortunately, I'm afraid that if the duty is cancelled, the effects will not be as many hope for (some thinking price cuts in the hundreds of dollars).

My first reason is the cost of production for N.A. producers. As stated above, if the price dipped $200 from current values, production would shut down. The second reason is that U.S./N.A. values are some of the cheapest in the world. There is little reason for countries like Morocco and Russia to come here when there are other demand points around the world willing to pay more than we are. We could see tons come here in a revenge setting but the prices do not support it.

While I do not know how this will play out, I am fairly certain it will remain a talking point.

Where are current values in relation to the past

NOLA/New Orleans, Louisiana DAP price comparison

Vs 30 days ago - -3% or approximately $25 lower
Vs 90 days ago - -15% or approximately $136 lower
Vs 6 months ago - +10% or approximately $70 higher
Vs 1 year ago - +25% or approximately $154 higher

Morocco DAP price comparison

Vs 30 days ago - -6% or approximately $57 lower
Vs 90 days ago - -18% or approximately $207 lower
Vs 6 months ago - +8% or approximately $70 higher
Vs 1 year ago - +38% or approximately $270 higher

Black Sea DAP price comparison

Vs 30 days ago - +1% or approximately $10 higher
Vs 90 days ago - +1% or approximately $10 higher
Vs 6 months ago - -1% or approximately $6 lower
Vs 1 year ago -+31% or approximately $205 higher

China DAP price comparison

Vs 30 days ago - -4% or approximately $35 lower
Vs 90 days ago - -12% or approximately $125 lower
Vs 6 months ago - +5% or approximately $48 higher
Vs 1 year ago - +58% or approximately $340 higher

Saudi Arabia DAP price comparison

Vs 30 days ago - -3% or approximately $30 lower
Vs 90 days ago - -116% or approximately $164 lower
Vs 6 months ago - +3% or approximately $30 higher
Vs 1 year ago - +50% or approximately $308 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

U.S. cost of production very high – U.S. phosphate production, while much smaller than years ago, still plays a very important role in global phosphate production. Many believe that their cost of production is only $100 - $200. That simply is not the case. With sulfur prices high and NH3 values once again rising, we estimate that for 1 ton of DAP loaded barge NOLA, the cost today is approximately $600st USD. With the current market in the mid-$700's, producers are doing quite well. However, that cost of production sets a very firm price floor meaning today there is more upside than downside risk.
China only allowing 3.6M tons of all phosphate exports points to their keeping world supplies tight – let's put this into context. 3.6M tons is A LOT of tons. I am not trying to discount that. However, for China, this is relatively small. Worse, this accounts for all phosphate types: DAP/MAP/SSP/Calcium Phosphate/etc. We were thrilled to see anything released because it was a change from their fall thru June '22 approach. Unfortunately, this amount is relatively small and will play a part in keeping global phosphate supplies tight. I think you know which direction the market will push when supplies get tight...
Even if there is demand destruction, total world demand is still expected huge – you guys (the farmers) are not dumb. You are looking at the cost of phosphate and thinking "can I cut back my application rate without harming yield potential?". For many of you, the answer to that question is yes. Maybe not everyone but a lot can say yes to that question. That is why we are working with a loose 10 - 15% application rate cut. Unfortunately, today that does not appear to be enough of a cut to shift the market much lower. If supply tightness continues to outweigh demand cuts, prices are going to stay high/push higher.

Bearish Factors

A combination of lowered/delayed demand could weigh on price ideas – as mentioned above, we are working with a application rate cut of 10 - 15%. That range could be extremely conservative meaning the percentage much higher. It's August 1 so it is VERY difficult to assume anything much higher. Doesn't mean it cannot happen and if it does, now we are talking about a situation where demand cuts do outweigh supply tightness and start putting pressure on price ideas.
China could easily change and allow full exports once again – we were thrilled to see the Chinese government allowance of up to 3.6M tons of all phosphate products. It meant that the worst case scenarios of them banning any and all exports thru June of '23 were unfounded. More, it also means there is still a sliver of hope that if they feel there is adequate supplies for Chinese farmers, they could raise that limit which would push even more supply in to the global marketplace. I'm not sure how likely this scenario is to happen but it is certainly something we should keep an eye on.
Grain price destruction would cause position holders to run for the hills - this would be the ultimate bear situation. Not just for phosphates but for all fertilizers. Today, the fundamentals of grain are not pointing to that scenario. However, we also know that sometimes markets do not trade on fundamentals. There is a lot of talk in the markets about our current recession (2 quarters in a row of declining GDP means we are in a recession). If severe enough, we could see a lot of funds pull their money from the markets which would mean grain prices faltering. It already feels like a lot of farmers are operating on that tipping point. Pull the grain price rug and we could see the entire market crumble. Not like we haven't seen that in recent history (2008).

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.

Josh Linville’s Thoughts

Keep your entire operation in mind when buying for this crop year - yes, these are still some of the highest phosphate values that we have ever seen. When you look back thru history, we do not spend a lot of time at these types of values. Then again, same can be said for a lot of current grain values. I fully understand a lot of the anger in fertilizer prices being where they are. Each time grain prices go up, so do all inputs. Just remember that while you may be made at a single input like phosphate, the entire operation needs to be considered. If you cut phosphate and as a result, vastly lower your overall yield potential, you are money behind. That goes for any/all inputs. In today's day and age, it seems that maxing out yield is the path to greatest profit.
Make sure to keep talking to your supplier - at these values, you are nervous/scared to lock in the price and then see values plummet. If you are not at least a little worried about that scenario, are you even human?!!! Your retailer/coop/etc. is in the exact same boat...with a lot more tons. I'm not saying you need to share every intimate detail on what you are going to do. However, if we give them nothing, they may make the decision to not put a lot in place and go hand to mouth. If that happens, we will be having a whole new conversation in November....
Hedge, hedge, hedge - the worst mistake we can make is to buy current phosphate values and then watch the price plummet, right? Wrong. The worst mistake we can make is lock up current phosphate values, sell no forward grain and then watch the grain market fall apart. You are then stuck with insanely high priced fertilizer while selling crap grain values. I know there are delivery risks involved with selling forward which is why I never push to sell absolutely everything for the next year. However, some layers to protect what we have bought should be considered.

Fertilizers

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