November '23 Farmer Fertilizer Focus - Urea

By: Josh Linville, Vice President- Fertilizer

Wed, 25 Oct 2023, 23:16

November '23 UREA

Josh Linville

Fertilizer - Vice President

Major Global Urea Export Location Price Graphs

The intention of the below graphs are not to use to say "my price should be X based on this graph". These prices are derived from an FOB price point average. The intent is to show major global price movement trends. Your values will likely have significant basis difference (similar to your local grain price being different than the traded market price).

This graph is labeled as MT in USD currency.

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

GLOBAL

India stepped into the global urea purchase portal and locked up 1.65MMT. That is "million metric ton" in case you were wondering. That is a lot of tonnage...yet the impact was almost non-existent. If a 1.65MMT purchase isn't enough to rally price ideas, what will?

For the remainder of 2023, it feels like values will be flat to soft as a lack of demand at current price levels will put pressure on sellers.

However, a word of caution. I do not think we are talking about a downside price scenario in the triple digits. While anything is possible, I struggle to see that outcome. Now, a triple digit upside potential IS in the cards if the Israel/Palestine/Middle East situation balloons out of control. So this makes for an interesting outlook:

What has the bigger price potential - upside/bullish

What has the higher likelihood of happening - downside/bearish

It only takes one travesty to change the entire outlook of a fertilizer.

NORTH AMERICA

On the global piece, I talk about how there appears to be limited downside when compared to the upside potential. On the North American side, NOLA urea is currently a $30'ish DISCOUNT to world replacement. That means even if the world starts to see prices dip, NOLA could stay steady and still be a discount. It doesn't mean there isn't downside potential.

Like the global side, it feels as though NOLA values have more likelihood of going lower (my estimate $30 lower than today) than higher, but the higher impact is significantly more than the lower.

The added fun for North American buyers is river logistics. NOLA values could fall...and you might never see the difference. Rivers are struggling which means barge freight is much higher than normal and could balloon even more. That puts more pressure on rail and truck which...you guessed it, means higher pricing.

Best I can tell you is watch the world for direction but always purchase from a home POV.

CME Futures Settlement Indications

While the fertilizer futures market is far from as liquid as its grain counterparts, it is still active and gives us an insight into what the market is thinking.

Please note that the values below can and will change daily. This is merely a look at where they are as of writing:

	NOLA Urea	Middle East Urea	CFR Brazil Urea
November	$358	$380	$395
December	$358	$380	$395
January	$363	-	$395
February	$363	-	-
March	$363	-	-

General Global Urea Information

What has happened in the last 30 days?

Israel/Palestine war's impact on global energy markets

I sure wish this wasn't a topic that I was going to cover on every single fertilizer. If I wasn't covering it, it would mean it was because it didn't happen...unfortunately we live in a world where it did.

So the main question folks have had following the attacks by Palestine was "how does this impact the urea market". Directly, it didn't. Neither country produces urea so there is no impact to the direct urea S&D. However, it was the indirect situation that we have been watching.

Following Palestine attacking Israel, global energy markets took off higher Monday morning. That was no different for natural gas markets. We have spent so many months discussing European production rates and Dutch TTF values. Well, Dutch TTF values rose. Winter months had been sliding on lowered demand and full inventories. Just before the attack, prices had been seen dipping into the $13MMbtu range and we were getting excited that even more production would be coming online/operating rates increasing on cheaper inputs. That excitement was dashed very quickly.

Today, the urea market has been fortunate that Dutch TTF values have become stagnant in the $17 - $18MMbtu range. That input value is not so high that we expect any production to turn off. However, we also do not expect any further production restarts. Effectively, it stalled the marketplace.

Going forward, this could change in an instant. There is the very real fear that we could see outside countries start attacking Israel which could plunge the region into a war. While we do not see this as a high likelihood event, we do see it as being a big impact event. Why? Take a look at the map below. If including North Africa and the Middle East, around half of all urea exports come from this small part of the world. 1 out of every 2 tons exported in the world comes from here. This is the big fear. This is the thing that could turn the global urea market on its head.

Before closing this out, let me reiterate that we DO NOT expect to lose all North African/Middle Eastern urea exports. It is just a scenario that we are watching. If Iran enters the mix, we will need to start watching all tonnage that goes thru the Persian Gulf before worrying about the rest of the region.

As always, events halfway around the world can and will impact your operation.

Another India urea purchase update!!

Yes, another month is coming and going with yet another piece on what India has done!!

As expected, India stepped in for another round of purchasing after falling short in their last tender. Going into this announcement, many had forecasted their needs to be "around" 1.5MMT. Things got interesting...and then very quiet at the conclusion!

When the offer information was shared, I was surprised by some of the details:

Right around 4MMT were offered - this was a big quantity of tons offered. Quickly, many in the market started to theorize that India could end up with 1.8 - 2.0MMT secured in this tender.
Price spreads were narrowed - in recent tenders, we have come to expect very wide price offers. Wide enough that it got tough to figure out where to do the "break out's" like is done below. This tender saw the price gap at only $35 and the east coast at $36. Again, this pushed the theory that India could/would get all they want and then some.

Just as the world got comfortable with the idea that they were going to lock up a lot of product, we found out that they "only" secured 1.15MMT in the first round of counterbids. It was surprising and the bull's tried to rally the market. In the end, it was premature. India counterbid all remaining offers and ended up at 1.65MMT. It was better than original expectations but less than revised/higher tonnage thoughts.

For those wondering, it does not appear that China is playing a large part as they have only been linked to around 4 - 5 vessels.

The global urea market has been VERY quiet following the conclusion. From my POV, I think folks are struggling with what happens next. This number of tons purchased should mean that India is content for much of 2023. There are still north of 2MMT that will be looking for homes and frankly, I struggle with any region really stepping up to buy before New Years (unless prices drop to attractive levels). For all the excitement and twists and turns of this tender, the result has been pretty mundane.

Given the last few years, that's a good thing!

What about China going forward?

If you have read the piece above, you already know that China played a very small part in the India purchase tender which is a surprise given that they secured so many tons. Will China be back to exporting? Are they gone for the short term?

This is merely my POV and plenty out there would likely argue, but I think China will be back in a bigger way in the coming months.

While they "disappointed" the market by not participating in the India tender, it seems as though it was more a government mandated situation than anything to do with S&D. Before offers were due, CIQ's (Chinese inspection and quarantine periods) were expanded to the point where it was going to be difficult/impossible for Chinese tons to ship in time to meet India's shipment period. However, we continue to hear that Chinese urea production rates remain very high. So why does that matter?

If production rates are very high and export are being halted, it means a lot of tons are staying domestic to fill Chinese warehouses. That works...for a while. What happens once those warehouses get full? Will they shut down production? It is a possibility...but I'm guessing it means production continues and exports have to ramp up to heavier rates per month.

By participating in the India tender, a chunk of tons could have been committed to a BRIC alliance member and a map drawn for what to do with produced tons for much of 2023. Instead, once they fill domestic warehouses, they may start exporting into a world that is taking a very lackadaisical approach to purchasing. That means buyers stay on the sidelines with the belief that imports will happen even with domestic pricing being cheaper than the world.

With all things China, we do not know what is going to happen. All we can do is theorize on what could happen and be prepared if it does.

North American inventories remain tight

If you go back a few months on the urea newsletters, you will find that we talked a bit about how tight ending inventories of urea (and phosphate, and potash) were at the end of the spring season. With the fertilizer year starting July 1, it meant that the new fertilizer year started at relatively low number of tons available.

Then, somewhat expected and some unexpected production issues started to reduce the available supply. We believed we would see some production downtime as nitrogen companies looked to make repairs after a long period of running as hard as they possibly could with input costs very low and urea values very high. Plants can be run at stressed levels for a while, but eventually repairs needed be made. Once some of the plants started to be worked on, other issues were found and what was schedule for a few weeks turned into many. Even plants that were not expected to go down had issues.

So now we have an issue where starting stockpiles were low and production suffered. What could make it worse? A lack of imports. We only have official information for July and August but that short period already shows being behind "average". July/August 2023 saw imports of 241KMT which is around 25% lower than last year and nearly 50% lower than the 3-year average.

This is a situation we do expect to improve. Production will find a way to turn on again. It always does. We also believe that imports will resume in the coming months. This is especially true if our belief that world demand goes quiet for the remainder of 2023.

This is not meant to try and scare anyone into buying right now. It is only meant to highlight some of the issues being felt on the supply side of the equation.

Where are current values in relation to the past

NOLA/New Orleans, Louisiana

Number 3 global importer in 2022

Price comparisons

Vs 30 days ago - -12% or approximately $50 lower

Vs 90 days ago - -18% or approximately $80 lower

Vs 6 months ago - -21% or approximately $95 lower

Vs 1 year ago - -34% or approximately $185 lower

U.S. Midwest Average

Vs 30 days ago - -4% or approximately $21 lower

Vs 90 days ago - -5% or approximately $24 lower

Vs 6 months ago - -5% or approximately $26 lower

Vs 1 year ago - -27% or approximately $169 lower

U.S. Southern Plains Average

Vs 30 days ago - -8% or approximately $40 lower

Vs 90 days ago - -4% or approximately $20 lower

Vs 6 months ago - -6% or approximately $30 lower

Vs 1 year ago - -27% or approximately $170 lower

U.S. Northern Plains Average

Vs 30 days ago - -4% or approximately $18 lower

Vs 90 days ago - -4% or approximately $21 lower

Vs 6 months ago - -8% or approximately $39 lower

Vs 1 year ago - -32% or approximately $211 lower

Middle East

Number 1 exporter (as a region, not as individual nations)

Vs 30 days ago - -3% or approximately $12 lower

Vs 90 days ago - -4% or approximately $17 lower

Vs 6 months ago - +17% or approximately $56 higher

Vs 1 year ago - -38% or approximately $237 lower

Egypt

Number 4 global exporter in 2022

Price comparisons

Vs 30 days ago - -8% or approximately $36 lower

Vs 90 days ago - -11% or approximately $50 lower

Vs 6 months ago - +9% or approximately $34 higher

Vs 1 year ago - -39% or approximately $251 lower

Black Sea

Number 1 global exporter in 2022

Price comparisons

Vs 30 days ago - -5% or approximately $20 lower

Vs 90 days ago - -8% or approximately $30 lower

Vs 6 months ago - +18% or approximately $53 higher

Vs 1 year ago - -37% or approximately $200 lower

China

Number 9 global exporter in 2022

Price comparisons

Vs 30 days ago - -4% or approximately $15 lower

Vs 90 days ago - -1% or approximately $3 lower

Vs 6 months ago - +17% or approximately $55 higher

Vs 1 year ago - -36% or approximately $215 lower

Brazil

Number 2 global importer in 2022

Price comparisons

Vs 30 days ago - +1% or approximately $3 higher

Vs 90 days ago - -2% or approximately $10 lower

Vs 6 months ago - +18% or approximately $60 higher

Vs 1 year ago --36% or approximately $223 lower

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

Global energy markets are on edge with Israel/Palestine war - today's world seems to be on the brink of World War 3. Any entrance of any other country outside of Israel/Palestine could create a daisy chain of events that we would struggle to slow or stop. As long as this fear is felt, global energy prices are going to remain elevated which is going to impact nitrogen as a whole.
Downside price potential seems limited before demand steps in - this is a weird one because I am still leaning bearish on the short term price outlook...but I am not expecting a ton of downside price risk. It sounds as though we are not far off from a significant part of the market stepping in to take a layer. If that happens, it will buoy price ideas quickly.
India couldn't hit their 1.5MMT goal in the first round of counter bids - whether I am surprised by this or not (I am, by the way) does not matter. They failed to secure their needed volume on the first round of counterbids. That is likely to embolden price ideas of the remaining offers.

Bearish Factors

After India wraps up purchases, who else in the world wants to buy? - if India is able to secure their needed tonnage, my immediate question becomes "who is the global leading buyer?". I could see buyers attempting to push product away by lowering their values. It could/would create a very quiet period where prices struggle to hold. Interest rates start chewing into price ideas. It would be a recipe for lower values.
N.A. river logistic issues/high interest costs are keeping buyers at bay - adding to the "who in the world wants to buy following India", I give you N.A. who is struggling to move product. Low water levels on the Lower Mississippi River means a much higher chance that product sits in a barge incurring interest and demurrage costs. Yet another reason to stay away, so to speak.
Chinese production rates remain high which means they either export now or export much more heavily later - on the recent India tender, it appears that China did not participate. That means a missed opportunity in selling a large block of tons in one move. At the same time that exports are not occurring, we continue to hear that production rates remain high. That comb would mean that if they remain disengaged from the export market, they will fill domestic storage rather quickly and then be forced to export at a denser pace than if they had started now.

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 Focal Points

Middle East region - the Middle East region continues to appear on the brink of a regionalized conflict...if not worse. If other countries start to enter the Israel/Palestine war, then a lot of global urea exports become a higher risk of being removed from the market. Consider this the current biggest "low probability/high impact" situation for the market.
Chinese exports - will they export or will they not? For the short term, that answer can sway the market. However, eventually they may not have a choice. If production rates within China remain high and exports are not allowed, it means that Chinese storage facilities will be filled very quickly...turning China into an even larger/more potent exporter in the near future.
European natural gas markets - there remains a much higher correlation between Dutch TTF values and global urea values. Today, Dutch TTF values have remained relatively stagnant. Not so high that anything is turning off but not so low that more production resumes. It remains in the middle ground...for now.
N.A. logistics/basis - the Lower Mississippi River continues to struggle with low water levels which is hampering barge traffic. It slows down transit. It lowers the number of barges per tow. It lowers the number of tons per barge. Effectively, it drives the cost to move product up the river significantly higher. Just because NOLA values fall does not mean inland values need to fall as well. Hopefully, the river situation improves...but hope is not a strategy...

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November '23 Farmer Fertilizer Focus - Urea

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