Farmer Fertilizer Focus - Urea

By: Josh Linville, Vice President- Fertilizer

Sat, 01 Jan 2022, 22:03

UREA

Josh Linville

Director - Fertilizer

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

Remember last month when I talked about how we saw the global S&D as being tight/supportive of pricing but we were fearful of emotion which may not be so supportive of pricing? I'm still there.

For the world market, I continue to lean bullish thru Q1 before prices start sliding into Q2. The reason is I still think Q1 demand will support values with constant buying. India was rumored to be stepping into the market and prices automatically jumped. Then, like clockwork, North African producers started selling small blocks (5,000 - 10,00MT) of tons which was likely European buyers getting ahead of further increases. After a couple months, assuming the world finds "normal", prices should come off.

For North America, we likely see values hold/push higher thru at least preplant, with sidedress depending on a big list of factors (NH3 app / imports / production issues or lack of / crop mix) but ultimately, values will start to fall as spring comes to an end of producers/traders look to dump positions. The fact that UAN and NH3 prices refuse to budge lower tells me that urea cannot drop much without seeing a surge of demand like we have never seen.

What has happened in the last 30 days?

Russian fears continue

Unfortunately, this is the story that will not go away. As of this writing, Russia was still amassing what looked to be an invasion force on the border of Ukraine. That was followed by statements that other countries were placing more troops in "Eastern Europe" to be prepared. Since it isn't going away, we need to keep in mind what it means for the urea market.

In the last 3 years, Russian exports of urea have averages 7MMT or approximately 14% of the global export trade. To say they are an important player is an understatement.

If there is an invasion, there seems to be 3 options:

1. The world does nothing - I wouldn't think so but then I remember Crimea. The net effect to global urea is absolutely nothing.

2. The world sanctions Russia - this would be the most likely event. The free world does not want all out war with Russia. Partly because of the risk that it moves beyond conventional warfare. Partly because of the risk that other communist countries get pulled into the mix and we start WWIII. If a country places sanctions and they have been reliant on Russian imports, they should start experiencing higher prices. This is due to the fact that they must now find new production points to fill the gap and that usually means a higher logistical cost. Either way, Russian tons will likely find their way to the world market. Iran is one of the most heavily sanctioned countries in the world and their product still finds a way.

3. The world shuts Russia down - this is a low probability due to the effort to shut down all their ports as well as the risk of further war. However, if they are shut down, the world loses 7MMT of the 50'ish MMT that is traded each year. Prices around the globe would rise.

Like many, we continue to cross our fingers that this finds a peaceful conclusion. In case it does not, we need to be prepared for the ramifications.

China continues to shut down exports...still

No change to this storyline for the 2nd month!

The Chinese government continues to restrict urea exports and continues to hold to the story that they will do so until June '22. For reference, we had forecasted China as exporting 5.5MMT thru this fertilizer year. Unless there is a major about face, this number is not happening and leaves the global market much more tightly supplied than it anticipated.

As with everything China, we know that this can change quickly. If I were to wake up Monday to a report that they were allowing exports with no restrictions, I would not blink. However, until that day comes, we must assume that they will continue this program for the foreseeable future.

India surprises the world with an early purchase tender announcement

Another month, another instance of NOLA urea being far too low priced vs replacement.

I track the Arab Gulf urea replacement vs NOLA urea value on a weekly basis because half of U.S. imports come from the Arab Gulf. They are an important partner for our nitrogen flow. I always keep the graph below to make it easy to see if we are in-line/above/below replacement values.

While we have seen solid improvement in the last 30 days (due to AG prices dropping on the India purchase), we are still $70 undervalued as we move into Q1. Notice that when we get to March, NOLA urea seasonably moves to even money/premium to AG replacement. This is due to the market waiting until the last minute and deciding "now we need to get all our tons for spring season". We play with fire every single year...

If the global urea market holds on value, the NOLA market will have work to do and that means higher prices across North America...

U.S. imports surprise

On January 25th, the import information for November was released to the marketplace. Our expectations were that totals would be low. In October, NOLA moved to a sizeable discount vs the world which should have discouraged imports to come. We were also seeing/hearing multiple reports of tight product around the world. That combination made us comfortable that there was nothing to see in November.

Anytime I try to act like I know anything about a market, said market humbles the hell out of me. For context, November imports are typically around 300KMT and July thru November imports are in the 1.2 - 1.4MMT range. That is why it was such a shock that the November number was actually over 700KMT which put the YTD total at 2.4MMT.

This enormous shock to the market created....

NOLA price volatility like I have never seen

It was at this point that the market lost any sense of calmness.

The NOLA urea price that day dropped triple digits. My wife and I were spending the day in Epcot at Disney World on vacation. I spent that day on my phone trying to keep from running into people. The next day we were at Magic Kingdom. Once again, that day was spent on my phone as the market gained most of the previous day losses back. This violent back and forth has continued since.

I would need to go thru a lot of data to determine the actual number but since the highest price was set in mid-November, I believe the total volatility ($50 down + $50 up = $100 volatility) is over $600 with the net difference being $150 lower. If you think about it in terms of if you owned a barge (1,500 tons), the price movement alone accounts for just shy of $1M.

The past few weeks have been unprecedented. Those that have been in the market 40+ cannot think of a time that even comes close. I wish I had something brilliant to share with you and calm your nerves about it all. I truly do not. All I can say is to keep your head on a swivel going forward. It is going to be a bumpy road.

Where are current values in relation to the past

For urea, 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 $13 higher
Vs 90 days ago - +17% or approximately $110 higher
Vs 6 months ago - +78% or approximately $335 higher
Vs 1 year ago - +202% or approximately $512 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

India surprisingly bullish – with India announcing their purchase tender over the weekend (and rumored for the 2nd half of last week), now the waiting game begins. Our estimate for demand is in the 1.25 - 1.5MMT range. IF the number of tons offered is smaller than expected and IF their purchase quantity is above 1.5MMT and IF price levels are higher than expected, this could have a very bullish effect on the world.
Our N.A. ending spring inventory level is expected to be very low so any hiccups will be felt – even if there are no issues, there will not be much left in the market when spring is done. That means that if imports disappoint, demand for urea surges last minute or there are any production issues like last winter's artic blast, the market will react extremely quickly. We simply do not have extra product this season to help with issues.
North American values are WELL below replacement – as of last Thursday, NOLA urea values were a $80 discount to Arab Gulf replacement values. That is $50 - $80 cheaper than normal for this time of year. If the world holds steady or moves higher on the heels of the India purchase and N.A. decides it needs to call on imports, there is a lot of work to make up the difference.
Russia/Ukraine escalates - I continue to believe/hope that tensions will calm and it will resolve itself. Unfortunately, we do not work of hopes and dreams. If this escalates and the result is major sanctions against Russia, those countries will be left looking for new supply avenues if they normally bring product from there. Worse, if Russian exports are completely shut off, the world loses 14% of its export total.

Bearish Factors

Emotional trading continues to win the argument – January was a perfect example of what emotions can do to a marketplace. While softer prices were expected, what occurred thru much of last month was the result of fearful trading. Position holders scared to death of holding inventory too long and paying the price. Better to sell now at a small loss than hold for a huge loss. If enough jump on board, the market loses its way and it is tough to stop. This fear will continue thru most of spring.
If global production/exports improve– the current market is still reeling from all the issues that were felt in 2021. European production suffering due to excessively high natural gas prices. The loss of Chinese exports thru June '22. Multiple urea producing countries either taking steps to slow exports and in some cases put export caps in place. Eventually, the world will get back to normal and without these horror stories popping up almost daily, nerves will calm while supplies build.
If the India tender disappoints - there are plenty of ways that this tender could cause the market to come crashing down: the number of tons offered is well above expectations, the lowest price (which other offers must match to participate) is well below market, India buys much less than the 1.25 - 1.5MMT being discussed. Even worse than any in that list is the possibility that India scraps the tender. This doesn't happen often but it can happen. Just as easily as the rumor of an announcement and then the actual announcement boosted the market, disappointing news can cause it to fall apart.

Where are the current urea/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 135 bushels to pay for 1 ton of urea
Spend 55 bushels to pay for 1 ton of urea

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 urea 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

Last month I mentioned in this section how the battle between tight S&D fundamentals and emotional traders was going to be fascinating to watch. January did not disappoint!!! Unfortunately for my nerves/sleep patterns/etc., February is likely to be more of the same. Expect to see reports of big price swings in very short periods of time. The current global market has been helped by an early India tender purchase announcement but if this tender is disappointing, the games will begin again.
Keep in mind that NOLA trade should be seen more as directional than a one for one price movement for your market. In fact, NOLA should be viewed somewhat similarly as Chicago corn is for North American farmers. Just because Chicago corn prices go up does not mean the elevator does as well. There are plenty of factors between there and your operation. Same thing on the downside. NOLA urea trade is the easiest to track so gets all the attention. What is overlooked is the relative size to the market. What is more important is the production levels reaction. If NOLA drops and producers follow, that moves the market. If NOLA drops and producers hold their price, while frustrating to no end, the inland market doesn't move.

Fertilizers

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