When I look at a market, one of the first things I try to do is figure out what is driving said market and that generally falls into one of two buckets.
It is either emotion, or fundamentals.
More times than not, these two line up to drive price ideas...but not always.
If enough of the market lines up on one side of the market due to an emotional POV, whether it is right or wrong, it moves the market. However, eventually the fundamental part of the market does win out.
Why do I bring this up this month? Because I think the emotion and the fundamentals of the markets are fighting each other.
On the emotional side of urea, folks are bullish and for good reason. It appears that India is about to announce their eagerly anticipated purchase tender. Long positions/manufacturers are getting excited at the prospect of the sale opportunity. Why do I see this as emotional and not fundamental? We already know that India is going to purchase. It is on everyone's radar. So if an event causes prices to rally even though nothing has changed from before, to me that is emotional. Even some fears about the Russia/Ukraine war escalating could be supporting price ideas but to date, we have not seen exports dip.
On the fundamental side of urea, I think the market is bearish. Current values are still well above prices this time last year...and the situation appears better supplied. Some folks are pointing out that European production is only 75% of normal, but that is where it was last year. Chinese exports are "only" going to be 2M tons this year...but that is a massive boost vs 2024's 262K tons exported. Right now, there are a couple production hiccups but nothing expected to be long term. Long story short, supplies feel better today than a year ago so that should weigh on price ideas.
For the nearby (let's call it the next month), I think values will be supported. India is very likely to announce their purchase tender which should further press price ideas higher. That commotion should be supportive for several weeks.
However, once past that period and assuming nothing major changes, I think the market starts into its dead summer demand period when the market realizes the S&D predicament. This is where I start seeing price ideas slide.
China's March export data points to few tons supplied
India makes urea purchase tender on-time and as expected!
At the conclusion of India's last urea purchase tender, the global urea market quickly circled the wagons with the expectation that they would announce another tender either late May or early June. It also believed they would target between 1.5 - 2M tons. We have a suspicion that the next tender would focus on western ports due to lack of awards in the last 3 tenders. Last, it expected a decent shipment window that stretched into the summer period where annual low's are typically set.
India's announcement checked the box for nearly everything!
- Tonnage goal of 1.5M tons
- Offers are to focus on west coast ports
- Shipment period thru July 31
The fact that the world had anticipated this exact event for the last couple months should mean that values do not react. It was already baked into the marketplace.
LOL! This is fertilizer. OF COURSE there was a reaction!
Global urea values have been firming slightly since India's announcement. Nothing huge, but certainly on the upward slope.
Now, the waiting game begins with the biggest question being how manufacturers/traders will approach this. On the one hand, it feels like industry parties are fighting to keep prices high. This is especially true when a country like India steps in for 1.5M tons. However, this shipment period stretches to the end of July. There should be plenty of tons available with offers having to consider their next sales options if they miss out on this opportunity.
No doubt this will be an interesting one.
Egyptian urea production struggles due to natural gas supplies
In what is becoming too common of a story, Egyptian nitrogen production has once again been slowed as natural gas flows struggle to keep pace with demand.
Typically, Egyptian natural gas flows struggle in the winter due to cooler temperatures causing demand to spike as the population works to heat their homes. For this to be happening in this time of year is not shocking, but it is odd.
Regardless the reason, it is happening. Egyptian nitrogen producers had to scale back production following government requests. Where does Egyptian urea exports fall in 2023?
- Russia - 7.8M
- Qatar - 5.2M
- Iran - 4.8M
- Egypt - 4.6M
- China - 4.2M
While far from the top spot tonnage wise, they are still a major exporter and a major part of the global urea complex. Production reductions still have effects on the world. Having this happen as India was preparing to announce their 1.5M ton purchase tender certainly doesn't help lower price ideas.
We are hopeful that this remains a very short term situation with limited impact on available supplies.
Chinese urea export program details continue to flow out...slowly
I guess the first statement on this section should be that we still do not know the most important part of China's urea export program: how many tons will be allowed.
In the last month, a lot of details about China's export program have been released. Inspection periods. Destination blocks (i.e. cannot go to India). Some timeframes. The governments ability to completely stop export flows if it believes too many tons are departing or more dangerous, domestic Chinese urea values are climbing too much.
However, we continue to wait for that ever important detail of tonnage allowances.
Most of the urea market continues to believe that 2M tons is the number. So how would that number be perceived?
I have heard from several folks who are disappointed and see it as a very small tonnage that should be price supportive around the world. Their POV is that China normally exports between 5 - 5.5M tons per year. 2M tons is almost an insult to that normal.
I see it differently. I see 2M tons as a vast improvement over last year.
- 2021 - 5.3M tons
- 2022 - 2.8M tons
- 2023 - 4.2M tons
- 2024 - 262K tons
So when viewed on years 2023 and earlier, the "2M tons is nowhere near enough" crowd is absolutely right in their POV. However, look at 2024. They exported almost nothing, yet global values were lower than they were today. From my vantage point, 2M tons is a vast improvement from last year which helps to boost global supplies. More global supplies should theoretically mean lower prices. It doesn't always mean that, but it certainly helps.
For now, we are going to have to continue to wait and see what the final announcement is. I'm still a believer that they will allow 2M tons to be exported but we will have to watch close. If those domestic values do start to climb, the program can be cancelled and suddenly 2M tons disappear.
That wouldn't be good for buyers...
Number 1 exporter (as a region, not as individual nations)
Egypt
Number 4 global exporter in 2022
Number 1 global exporter in 2022
Number 9 global exporter in 2022
- The typical "India purchase bull" event happens - there is absolutely nothing about the India urea purchase tender that was surprising. At the conclusion of the last tender, the market largely circled the wagons around a late May/early June return and estimations of tons to be secured were 1.5 - 2M tons. It was the most well known secret in the fertilizer market...yet prices still react. The market tends to bull up on urea prices when India tenders and we are watching for that once again...though we need to see for how long it lasts.
- China slashes export quotas - right now, the expectation is that the Chinese government will allow upwards of 2M tons of urea exports. However, we all know that they will hold the kill switch if they see exports happening too fast or worse, they see domestic values rising. If the world wakes up one morning to the news that China has said no more, we could see prices supported.
- Rains come and demand skyrockets - it has been a tough weather situation with farmers struggling with dry conditions. It make it really hard to buy and apply fertilizer on ground that may not grow a crop. That has caused a lot of farmers to drag their feet on purchases and for importers to slow or redirect imports. However, if the weather situation improves, we could see demand return in a very big way. Suddenly, supply availability could become an issue and prices would likely reflect that.
- India elation gives way to summer demand lull - I think any Indian elation will quickly give way to summer demand lull's which could/should weigh on price ideas. There are always reasons why a price will not fall as far as some (myself included) might think. However, the July/August is generally slow for demand, unsold positions get bigger, and manufacturers get aggressive on price to find liquidity. Things can change but no reason to believe normal cannot be expected.
- China exports 2M tons...or more - many folks have pointed to the 2M ton Chinese urea export number and said "that is significantly less than their normal 5 - 5.5M ton export". That is absolutely true, but they haven't been normal for a lot of years. If we look to 2024, their exports were only around 265K tons. If China proceeds and follows through on their 2M ton benchmark, that is a vast improvement over last year. Fuel to the fire would be if China exported 2M tons, domestic values didn't budge, and supplies were still more than plentiful. At that point, the government could surprise the world and say "go ahead and export another 1 - 2M tons". I would expect that would send values spiraling.
- It stays dry and demand stays low - as long as the conditions remain as they have been, there doesn't appear to be much hope that demand will return in a big way. If demand stays away, then stockpiles remain high in the retail/import areas. Those tons may sit for a long time with longer term price risk. Those tons will have interest costs. There would be a lot of reasons for position holders to get aggressive on any sales opportunities they might have.
We believe that only looking at the flat price of either grains or fertilizer can be misleading:
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Only selling grain can hurt you if fertilizer prices rise substantially
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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:
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Spend 135 bushels to pay for 1 ton of urea
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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 MAY LOOK DIFFERENT
This is a work in progress section! We plan on looking at the relationship between Aussie grains and global price points (and hopefully Aussie specific locations, though that data is hard to secure, very protected). Big reason why we are still in the "trial" stage of this newsletter!!!!
- Aussie weather - some of the global points listed below are larger in magnitude...to the world. Right now, what is in place and local to Australia means so much more. The approach to these supplies continues to weigh heavily on forward prices. If it rains and demand returns, we could see storage overran, inventories get tight, and values start to rise. If it stays dry, we would see stockpiles remain unchanged and those position holders start to get more aggressive on any sales opportunities. Mother nature holds all the cards.
- Biggest focal point remain Chinese export programs - China still keeps the number one watch point in my mind. It sounds like 2M tons will be their export goal for 2025. That is significantly higher than the 2024 total of 266K tons. However, it is significantly less than their normal export rate of 5+M tons. Will China adhere to the 2M ton goal? Will they reduce the number of tons allowed if domestic Chinese values start to rally? Is there a path where they allow 2M tons and then decide that more can be released? All of these scenarios change the scope of the market...and the price points.
- Second biggest focal point are other global production rates - Europe as a whole is the low hanging fruit here. Everything is relatively unchanged vs the same time last year. We still see their production at around 75% of normal. It hasn't improved...but it hasn't gotten worse. However, production hiccups in places like Egypt and Trinidad are reducing available supplies and helping keep a bit of strength in the nearby market for now. However, if production normalizes and demand starts to step back, this can change the outlook quickly.
- India purchase tender strength/fallout - India shouldn't matter. We have been expecting this announcement since their last tender fell short of their tonnage goal. There shouldn't be a urea player in the world that didn't know India was going to announce...but somehow it will still matter. How many tons will be offered? What will the price points be? Will India lock up 1.5M? If they fall short, will it be because the market refused a lower price or because India decided it didn't need it. All of these things will help shape the market as it stares into the demand abyss of July/August.
StoneX Ratio Calculation
The ratio calculation is derived from Bloomberg historical grains values as well as fertilizer values from StoneX, NPKFAS, and Argus.
The calculation is simply dividing the fertilizer price by each grain price.
All data was sourced from StoneX unless otherwise noted.
