Farmer Fertilizer Focus - Potash

By: Josh Linville, Vice President- Fertilizer

Mon, 30 May 2022, 03:28

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POTASH

Josh Linville

Vice President - Fertilizer

josh.linville@stonex.com

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

If we were under normal circumstances, I would be sitting here typing away gleefully that the poor spring demand run has caused ending spring inventories to finish at a much higher number than most expected. We had figured demand down 10 - 15% but today, that doesn't "feel" like it touches the demand destruction.

If we were under normal circumstances, I would follow up that commentary and tell you how heavier than expected ending spring inventories are typically very bearish that market. With warehouses already full, producers would be feeling the pressure to make sure THEIR tons end up in your limited warehouse space. That pressure most times equates to lower values.

If we were under normal circumstances, I would end by saying that you should use this to your advantage by not buying anything until the market shifted or the price was a no brainer.

Not sure about you but nothing about today feels normal...

Unfortunately, all of the above is true but from my POV, it doesn't matter this round. The reason? Belarus exports are still cut from the world. We believe Russian product is finding its way around the world in some capacity. It may not be 100% of normal, but it certainly is not 0%.

Belarus as a country is landlocked and has always been dependent on Lithuania to ship their product thru their country and out their ports. With Lithuania still punishing them for their (Belarus) role in the Russian invasion of Ukraine, they are SOL. While we are hearing rumors that Russia is working on building a port outside St. Petersburg to give Belarus an export arm, that takes a while.

In recent years, Belarus has accounted for approximately 20% of global potash exports...all, that is a big number that cannot be ignored.

Was demand down in the spring? Yes, yes it was. Do producers such as those in Canada have to ship only to North America? Certainly not. They have options...lot's of them around the world. If there is no room across N.A., they have plenty of eager buyers lined up that used to get supplied from Belarus.

I struggle to see prices skyrocketing from where we are today. We are already high priced and the ratios vs grains are terribly high. However, it is hard to see much price downside today either without Belarus exports. Unless Lithuania is convinced to reverse their shut down, it is hard to see prices falling.

If there is a fertilizer product that I see holding its value from today...its potash.

Should you lock in fall '22/spring '23 potash needs today?

Long answer short - NOT YET

This is likely another case of you having just read the above, reading my "not yet" and thinking "Linville needs to get his stuff straight"!!! You would not be wrong but hear me out!

Potash is the one fertilizer product that I have faith that prices will hold or push slightly higher. That said, November is a full 5 months away. 5 months. That is a long time for a lot of different things to change.

The biggest thing that I'm watching that could pull the rug out of the market is Lithuania. Most of the world drew a really hard and firm line against both Russia and Belarus. However, once world powers started to realize they REALLY needed the fertilizer that was exports from both countries, that line got a lot more blurry.

I've been hearing stories/rumors that European nations are asking Lithuania to stand down on their shipment ban because they need the product. Imagine what would happen to price ideas if that happened.

Assuming nothing major like that happens, I think we need to get used to potash prices being as high as they are today. This is another one of those cases where I would love to be wrong!

What has happened in the last 30 days?

Russia continues to invade the Ukraine and Belarus seems to be helping

The single biggest driver for the global potash market today is the continued invasion of Ukraine by Russia who is being helped by Belarus. Both nations have found themselves in a position where they have very few friends around world.

For Russia, they still have access to their port systems which means that while their friend list might be few, it has some on it...especially when Russia is willing to sell fertilizer at cheaper prices. We have seen Russian sales of phosphate to India. We continue to hear multiple vessels that originated from Russia and are waiting to be unloaded in Brazil. While they certainly took a hit, they can still produce and export material.

Belarus is not so fortunate. Their material historically has flowed thru Lithuania and out their ports. In early February, Lithuania decided enough was enough and shut their borders to Belarus. This was devastating to the Belarusian potash complex who found itself without a means of exporting material. While it was devastating for Belarus, it was harmful for the global potash marketplace who suddenly found itself without 20% of its year export total (around 7M tons annually).

Now, all may not be lost as there are a couple stories playing out that may alleviate this issue:

Some are asking Lithuania to drop its ban - the world is realizing just how important Belarus is to the global potash picture. Sure, punishing Belarus is seen as a good thing but feeding your own people is a better thing. If we were to wake up tomorrow morning to find that shipments were back to normal, we would still have to deal with the time lost. The world lost a chunk of tons. However, the supply side of the market would be spooked at the entrance of new tons. They would look to sell their inventories at current high values as soon as possible. In fact, it wouldn't hurt to drop their price to make sure they sell first. Then their competition see's that action and repeats it and all of a sudden, we are in a bear market.
Russia is building a port for Belarus to use - I cannot say I'm an expert at any of this but as I've heard, Russia is in works to build a port to give Belarus an export option outside of St. Petersburg. I have absolutely no idea how true it is or even how long it would take to build. However, I have no doubt that they are looking at any opportunity they can to disconnect themselves from countries they see as adversaries and snuggle up to Russia.

Below is the numbers on global potash exports. This should give you an appreciation of why when things happen halfway around the world, they matter to you at home.

Otherwise, we wait for producers/suppliers to announce their fill programs

The global potash market has been fairly quiet from my POV. Not much new has happened.

However, I'm expecting that we will see something happen in the way of a summer fill program in the coming weeks. At least, if I were a producer, I certainly wouldn't wait any longer. There are too many things on my side of the equation:

Grain prices are still high. I do not expect them to fall but why risk it.
Belarus is still shut out of the world market. That could change tomorrow if the world asks Lithuania to do so.
Farmers are still cash flush. At least, that is the perception.

The longer you wait, the higher the chance something happens to change the market away from your favor. Why risk it and wait?

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 - -3% or approximately $25 lower
Vs 90 days ago - +18% or approximately $120 higher
Vs 6 months ago - +12% or approximately $85 higher
Vs 1 year ago - +112% or approximately $410 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

Belarus remains cut off from the world – Russia seems to be finding its way into the export game which is helping global supplies, but Belarus seems to be shut out still. Accounting for 20% of global exports or around 7M annually, that is a big hit that creates a tightly supplied marketplace.
Poor spring planting creating more corn acres in '23 - this has been a pretty tough spring. We are hearing a lot of concerns about corn acres not getting planted and even those that are planted not getting adequate fertilizer applications. If these stories become truth and we see a combined lower corn acreage and lower than trend line yield in the fall, 2023 will need a LOT of corn acres which will need a LOT of potash.
Farmer worries beat out fears of high prices and cause a demand surge – fear is probably the number one driving emotion in the ag sector today and as I see it, fear is the biggest driver of decisions. There are certainly issues around the world. If we suddenly see a tidal wave of demand because of fear of missing out or lack of availability, that surge will cause prices to rally.

Bearish Factors

Lithuania gives in – if this is due to outside countries pushing Lithuania to change their mind or just Lithuania giving in to economic pressure doesn't matter. If we wake up tomorrow to the news that Belarusian potash is flowing to ports, watch out.
Producers need to put on a summer fill sales book – I listed this last month and I still stand behind it. If I am a producer, I would be willing to give up some value/margin to make sure I have a solid sales book on. The last thing I want to have happen is that I get too proud of myself, demand shuts down, my storage facilities get full and I have to go back to the market begging for buyers.
Buyers just say no - look below at the grain/potash ratio charts. They are high. REALLY high vs last several years. I could certainly see farmers around the world say "I'm going to cut my potash application rate significantly" or "I'm waiting until the last minute, even if that means risking higher prices". Today's values make very little sense vs grain values and that could mean suppliers are shocked at the lack of demand.

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

Get ready - I think we will see potash programs being announced within the month. I have absolutely nothing definitive to back that POV. It is purely a gut call based on what I would do if I were a producer. Unfortunately, I do not think these values will be attractive and you are going to be left with one of the hardest decisions you have made in a while.
When prices are announced, make rational decisions - trust me, I really do not expect the values to be anything to be excited about. Frankly, I'm already dreading what I will tell my family to do. It will be a tough call but in the end, make the call that is right for you and your organization. If the price is insultingly high but you see it as a value that you can make money with, don't be scared to say yes. Likewise, if it doesn't work, don't be scared of never having an opportunity to buy potash again.
Remember there are 5 months until November - for a lot of you, there is a healthy fall application window. That window doesn't start for almost half a year. Things have changed fundamentally in a matter of weeks. Imagine what can happen in 5 months.

Fertilizers

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