Farmer Fertilizer Focus - UAN

By: Josh Linville, Vice President- Fertilizer

Mon, 28 Feb 2022, 15:57

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UAN (28% / 32%)

Josh Linville

Director - Fertilizer

josh.linville@stonex.com

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

Our POV on the UAN market has not changed from last month:

From now thru planting, likely to see values remain flat to firm.

Once into the sidedress period, I have no stinking clue.

Last month, we pointed to several factors that we are watching:

There are a lot of factors that I am watching: production problems, good/bad start to NH3 application, duty case, long range weather forecasts

Any and all of those factors will help give us a better POV of what will happen during the later weeks of spring application.

What I do know is that the current S&D is tight on inventories. If our demand models are directionally correct, we will finish the spring season with the lowest number of tons seen in years. I am on pins and needles watching this thing because this could get out of hand....ok, more out of hand going forward.

From that vantage point, nothing has changed. However, I did make one comment that we do not try to forecast Black Swan events. Unfortunately, one has occurred.

Russia's full scale invasion of Ukraine has disrupted the global fertilizer market with UAN being no exception. In what has been a surprise from my POV, it seems almost the entire world has united in shutting down business with Russian companies. The reason that is dangerous (on the bull side) for UAN is Russia's importance. In the last couple years, Russian UAN exports have accounted for 25 - 31% of the global total. If we lose that or worse, lose natural gas flows to Europe, this entire market takes a step toward higher prices.

As always, anything is possible but today, I'm leaning toward prices holding to pushing higher thru spring.

What has happened in the last 30 days?

UAN manufacturers remain in control of discussions

Last month, we talked about the surprise the market received when the anti-dumping (U.S.) rate was announced at much higher levels than expected. Effectively, this means that North American manufacturers are in control of the price narrative for now. This case still needs final approval but that will not occur until this summer and if history is any indication, it will be a rubber stamp yes vote. That yes vote will mean that 80% of our normal imports are now shut out and with so few options around the world, North American manufacturers are in control.

To give you a sense of why this is the case, we have included the list of world producers of UAN.

North America accounts for almost half of the world's production
Trinidad/Russia are highlighted as they are not likely to come to the U.S.
West/central/east Europe not likely to export given the current Russia/Ukraine conflict

Take out those regions and you are left with North Africa/China/Rest of the world. That leaves only 500K remaining for exports.

This is why the manufacturer remains in control. There is simply nothing left around the world today to come here. North American producers are in control and they like higher prices.

Russia/Ukraine conflict strikes fear in buyers hearts

Isn't it funny how so many of us said that 2022 couldn't possibly be worse than 2021...

So the Russian invasion of Ukraine is happening in a big way. I'm not going to get into the politics of it because that isn't why you are signed up for this information. We look at it strictly from a fertilizer POV and there are 2 main things that scare me.

1. Russia's UAN export size - in the last couple years, Russian UAN exports have accounted for anywhere from 25 - 34% of the global total. One thing that has surprised me in regards to the invasion has been the united front the world has taken. Almost everyone has stepped up, spoken out about the invasion and have take ever increasing heavy steps toward cutting Russia from the world economy. I never imagined the world would agree on anything but here we are. While it is great that we are seeing the world punish them, we have to be aware that if Russia loses the ability to export, the world loses A LOT of UAN. If demand remains steady and supplies drop, Econ 101 says that prices go up.

2. Russia could cut off natural gas flows to Europe - I've had several push back on this idea saying "there is no way he would do it". I agree that it is not likely but we also didn't think he would really invade Ukraine. We have also seen Putin starting to ratchet nuke talks higher. Never say never. If he were to shut down the pipeline, take a look at the above list of production. Europe accounts for a lot of tons. If that pipeline shuts down, governments will allocate limited supplies to its people, not to the industrial complex.

Preplant NH3 success/failure will go a long ways for the UAN market

Today, we are continuing to use 1.75M as our forecasted total for spring NH3 application demand. That is down from our earlier 2M ton forecast and was dropped due to what we believe will be a lack of supplies in storage at the start.

There is still a route where we beat that number on the high side. Unfortunately, there are far more routes that have the U.S. coming in below either due to the high price of NH3 vs urea, weather or farmers waiting until the last minute to make their decisions.

For every ton that we fall short of the 1.75M number, it takes up to 2.4tons of UAN to make up the difference. It is more likely that it will be split with urea but this is more to get the point across. If the spring NH3 market fails when compared to forecast, that means there is a last minute increase in UAN demand. We are already forecasting UAN supplies to be lower than normal at the end of spring and we have effectively cut out imports...see where this is going?

Things can and will be changing VERY quickly this spring. Keep your head on a swivel.

Where are current values in relation to the past

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

Vs 30 days ago - unchanged
Vs 90 days ago - +2% or approximately $11 higher
Vs 6 months ago - +78% or approximately $246 higher
Vs 1 year ago - +167% or approximately $350 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

Our perceived expectation that N.A. will end with record low inventories at end of spring – every negotiation comes down to pressure. Whoever has "less" is more than likely to get their way. If our demand models (and others have hinted at the same) are directionally correct, that means we will end spring with one of the lowest ending inventories to date. That means manufacturers will use that to their advantage (i.e. keep prices high).
Any production hiccups between now and spring – North America can ill afford any production downtime in the coming weeks/months. Current inventories are too tight. If we were to lose a couple weeks like last February's artic blast, then it will make an already tight situation much worse.
Terrible spring NH3 application - today, we anticipate 1.75M tons of NH3 to get applied. However, mother nature can spoil those plans quickly. If we assume that each ton of NH3 that doesn't get applied goes to UAN (it would be split with urea), every ton below 1.75M ton would grow UAN by 2.4 tons. Those numbers can grow quickly.

Bearish Factors

U.S. anti-dumping duty rate against Russia/Trinidad gets upheld (Bearish for rest of the world) – if the U.S. effectively pushes out Trinidad/Russia imports of UAN, do those tons disappear? No, they start looking for new homes. Europe will likely be a new destination as their duty rate is lower than what was announced this week. Australia becomes a target. UAN is not as widely used around the world as urea. The few demand points will get a lot of attention going forward.
Urea imports much bigger than expected, urea prices fall and UAN demand is lost – today, the UAN premium to urea is effectively saying to demand "fine, go to urea. We do not have enough supply anyways.". This is a story that will be followed...to a point. If urea starts dropping further (not happening today) because imports are huge thru March (being rumored), UAN will eventually need to battle back for demand. It can lose some demand but still needs to worry about losing too much. Carrying too much inventory into summer is still a fear for the production side.
North American spring NH3 application surprises us on the high side – in our demand models, we are forecasting the spring NH3 application total to be approximately 1.75M tons. That number is down due to supply constraints if spring weather is "normal". If spring weather is "phenomenal", we could beat that number. For every extra tons of NH3 (82%) that gets applied, it theoretically could reduce up to 2.4 tons of UAN (32%) demand. Those numbers can grow quickly.

Where are the current uan/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 100 bushels to pay for 1 ton of UAN
Spend 60 bushels to pay for 1 ton of UAN

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 UAN 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

If you have not purchased your spring UAN needs out of fear of prices falling, at least make sure you are talking to your retailer/coop. I fully understand being worried about buying the high and then watching it crater. However, know that your retailer/coop has the exact same fear. There are a lot of places that are not purchasing extra in the hopes that you come thru their door. By having an ongoing conversation with your supplier, you are at least giving them tools to build a supply plan for when you are ready to buy.
Look at your spring UAN purchase needs from a preplant and sidedress POV. Preplant values are almost certainly going to remain high priced. Sidedress has a chance of backing off as sellers look to dump positions before the summer reset. If you make that decision to hold off on the sidedress purchases, read the above thought again!!
Prepare for UAN to be the premium N source that it was a few short years ago. With the counter vailing/anti-dumping duty case looking like it will hold and be approved this summer, we have to assume that imports will be tough to come by. That means we are beholden to North American produced product. This should push the urea/NH3 to UAN spreads back to the wider range it used to be.
Do not expect summer fill resets like we have seen in the past. In the past, your supplier had the opportunity to buy a large chunk of product during a "summer fill program". If this duty rate is upheld, it gives more power to the manufacturer. The manufacturer does not like summer fill programs. They would rather just set a daily price. This is going to muddy the waters even more...
Remember that UAN prices should drop as we move further thru spring. That is the normal trend of things. However, our demand models show the U.S. ending with the lowest inventory levels seen in years. That will be a win for producers who would like nothing more than to keep prices where they are today...or higher.

Fertilizers

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