Farmer Fertilizer Focus - Potash

By: Josh Linville, Vice President- Fertilizer

Sat, 26 Feb 2022, 01:01

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POTASH

Josh Linville

Director - Fertilizer

josh.linville@stonex.com

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

Well, the last couple months I have said that I thought potash price levels would remain steady. As sickening as it is to say, with the price only moving $20 over the last 3 months, that was relatively true. I still remember getting chewed out when I started in the industry in 2002 for not calling before the price moved $5...

Old person story time is over, what do I think going forward?

I am bullish.

The situation with Belarus and Russia have me spooked that we could lose upwards of 1/3rd of the global operating capacity.

The fact that corn prices (and other grains) continue to see prices rise have me fearful that demand is actually growing significantly and we are close enough to spring that it is too late to call on additional tons. Steady supply + growing demand = rising prices.

Toss into the mix that I'm more worried about logistics this spring than I have been in my 20 years, and you have a recipe for a bullish market.

I hope I'm wrong. I really hope I'm wrong.

What has happened in the last 30 days?

The Russian invasion has begun

The worst case scenario happened: Russia invaded the Ukraine and they are not messing around. This is a full scale invasion...and most of the world is very unhappy about it.

So far, the world reaction has been to use words rather than force. It seems like a lot of leaders are unwilling to step in and militarily back the Ukrainian armed forces. Fears of a larger conflict breaking out with a nuclear power is likely driving that approach.

Now we have to wait and see what happens.

Will Russia come to its senses, leave the Ukraine and the world act like nothing happened? I wouldn't say this is a big possibility but with the world as it is today, anything is possible and this would end up being a non-event for the potash market.

Will Russia take over the Ukraine and the majority of the world cut off Russian exports? This is a bigger possibility, but I question its affect on the global potash market. The reason I say that is that unless the sanctions are large enough and adhered to by the entire world, it doesn't change much of anything. Sure, it will disrupt "normal" trade routes around the world. If the U.S. puts on sanctions, it is likely that the tons that normally flow there will be cut off. But if other nations are willing to take that product and Russian exports flow out normally, the global supply remains unchanged. This scenario only results in the countries following the sanctions seeing higher prices domestically.

Will the world cut Russia completely off? Given the worlds reaction to the invasion so far, it doesn't seem like the chances of forcing their exports to completely stop are very good. If we are not willing to stop their troops, how can we expect to stop their shipments?

All, this is a very big deal. The Russian potash operating capacity is approximately 19% of the world total. That is a lot of tons. If in a worst case scenario we completely lose them, the S&D tightens very quickly. Yet in the same breath, I wouldn't be surprised to see their exports remain unchanged.

Yes, the fertilizer markets are that hard to forecast.

Lithuania cut Belarus off from the world/BPC claims force majeure

This situation was actually very surprising. Obviously Belarus hasn't been viewed as the most positive nation in the world given what they have done to their political opponents. Many nations around the world imposed fairly sizeable sanctions as punishment...Lithuania took it a step further!

A lot of Belarus's potash flowed thru Lithuania, to her ports, into vessels and out into open water. As punishment for its actions, Lithuania shut its border. That means that Belarus is now landlocked. Reports have circulated that Russia is working to build a port near St. Petersburg to assist in exporting for them but that takes time.

As a result of Lithuania's move, BPC (Belarusian Potash Company) was forced to claim force majeure on sales contracts as they had no way of loading the ships.

Those that wanted to punish Belarus for their actions cheered the move. However, the unintended consequence is losing a major world producer. As the info below shows, Belarus accounts for approximately 15% of the world's potash operating capacity total. When you combine losing Belarus with the possibility of losing Russia's 19%, you are now talking about 1/3rd of the world...

Never think that something halfway around the world doesn't matter to you.

India/China lock in their yearly potash needs

The fact that both nations locked in their needs is not surprising. This is a regular occurrence.

However, the fact that both locked in their needs near $600USD is surprising and an indication that they must believe that global values will largely hold going forward.

Both are relatively astute buyers. They know the markets. They largely know when to step in, when to step away, etc. If they agreed to these types of values, it means their POV going forward is one of relative bullishness.

Where are current values in relation to the past

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

Vs 30 days ago - +2% or approximately $14 higher
Vs 90 days ago - -3% or approximately $20 lower
Vs 6 months ago - +17% or approximately $95 higher
Vs 1 year ago - +106% or approximately $345 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

The world punishes Russia sharply – well...it happened. Now we have to wonder what the world reaction will be. In the worst case scenario, Russian potash exports will get shut down (extremely difficult but not impossible). In that scenario, the world loses almost 20% of its global operating capacity. That is a big chunk to lose.
Belarus gets cut off from the world - whether this happens by Lithuania continuing to shut off product flow thru their country and to open water or if it happens by heavy handed sanctions, losing Belarus potash will tighten the world supply. Belarus accounts for 15% of the global operating capacity...and it takes a while to turn on new production.
Demand grows with rising grain values when it is too late to bring in new supplies – for much of the northern hemisphere, spring is just around that corner. With that, it is simply getting too late to bring in additional supplies for the start of preplant application. This isn't to say that product will be short, but if demand continues to grow as grain prices rally, it could turn into a situation of who is willing to pay more to get their needs met.

Bearish Factors

Demand destruction like 2008 – this remains a big factor in my mind. While grain prices (specifically corn) are jumping to big numbers, the ratio is still well out of whack. Farmers are angry (rightfully so) and many I have spoke to have commented that they will be looking to make cuts. When a similar event played out in 2008, demand dropped 40%. The market feels very healthy today but if spring demand disappoints, you could see position holders puking tons sooner than later.
Russian invasion comes to a close with no real impact – this is a real possibility. We are seeing several nations around the world starting to step up and speak out about Russia's invasion of Ukraine. However, I have seen many articles pointing to how limited the sanctions appear. This war could drag on for months...or be done in days. When it concludes, if the world response is largely muted and Russian potash exports remain untouched, the potash world will breath a sigh of relief which should bring values down.
Announcements of new production - current potash prices are pretty freaking high...not that I need to tell you that! We also do not need to tell manufacturers that either. They know all too well. The longer values remain at these levels, the higher the chance that we see new mines/construction being announced. New production increases supply. If demand remains unchanged, values should start showing weakness.

Where are the current potash/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 potash
Spend 60 bushels to pay for 1 ton of potash

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 potash 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

I'm leaving these the same as last month because my POV hasn't changed. We are still in a very high priced environment. We are still in a high risk environment. We are still in a high emotional environment.
For a lot of acres that are riding the fence about what to plant in a couple months, the profitability is going to be tight. That means the temptations is going to be there to cut your potash application rates. I AM NOT HERE TO TELL YOU HOW TO APPLY. All I am going to say is to think logically about it. If you cut your app rate and it saves you $5/acre, that saving adds up. However, if cutting the rate lowers your corn yield (for example) by 5 bushels/acre, you lost. 5 bushels @ $5.50/bush = $25+. Talk to your agronomist. Take in all the factors. Make the best decision for you.
Do not wait until the last minute. I understand it is hard to pull the trigger with values where they are but I am here to tell you that I am more concerned with logistics today than I have ever been. River systems are dealing with low water levels. That means lighter barge loads and slower shipment times. Rail service has been dropping for the last year and is tough to rely on. It seems like we have fewer and fewer truckers every season. This is not an attempt to scare you into doing something right now. I only believe that if you are waiting to buy, you should be having MORE conversations with your retailers/coop/etc. about your plans. If you do not want to buy a couple hundred tons right now for fear of prices falling, thinking about your supplier who is buying thousands or tens of thousands of tons in the HOPE that you show up. Have more conversations on your needs/timing/etc. so they can make a plan of attack.
Get ready, spring is right around the corner and as it always does, it seems to have snuck up on us. For many areas, there is only 30 - 45 days before we start hitting the fields with dry preplant applications. Get some rest, drink a beer, spend time with the family because it is almost go time!!!

Fertilizers

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