April Farmer Fertilizer Focus - Potash (Fast Version)

By: Josh Linville, Vice President- Fertilizer

Thu, 06 Apr 2023, 23:50

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April '23 POTASH

Josh Linville

Vice President - Fertilizer

josh.linville@stonex.com

NOLA potash price graph

Please remember that this is looking at the cost of one short ton of potash sitting in a barge at NOLA (New Orleans, Louisiana). Your cost is not going to be the same. This should be looked at more in regards to the price direction rather than the actual pricing.

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

Globally, we have been without our 3rd largest exporter for over a year...yet prices are a fraction of where they were.

Domestic North America, to say that spring has been a struggle would be an understatement and feels more and more like carryover tonnage into the late spring/summer will be high again.

Because of those:

It is hard to paint a picture where prices hold/push higher. It appears bearishness should remain short term though we think the price slide will slow.

We still need to be slightly concerned about Russian aggression/actions which could remove their tons from the world S&D...but still appears to be a very low probability. We still need to be concerned that producers will scale back their production to tighten the S&D...though recent moves to this have not turned prices flat/higher.

Without a solid spring run which would empty warehouses, we are likely to carry significant tonnage into the summer which will sit in the way of summer produced product. Manufacturers will continue making product daily which needs to find homes.

This all adds up to a POV that still leans lower.

Should you lock in spring '23 potash needs today?

We have already seen the effect on basis/price in the few areas that have ran hard. Inventories get wiped out, availability becomes scarce and prices move higher. Tulsa, OK has been a great example. As this spring continues to get more and more constrained, it means we will not have time to wait for replacement to show up. Due to that:

If you know you will be needing/applying it this spring, get it locked up so you know it is there waiting on you.

However, if you have any doubt that you might not get it applied, wait. I do not think that we will see potash half its current price this summer, but I certainly see this as being bearish in the short term.

General global potash information

What has happened in the last 30 days?

Global/domestic North American values remain under price pressure

This isn't much of a story as I have been discussing this since last April. Now that I look at the clock and realize it is after midnight, I guess that means I can say I've been talking about this for a year!!

There just hasn't been enough demand around the world to wipe out inventories. That is sorely needed to make this market "healthy". As long as we continue to carry significant amounts of tonnage, prices are going to struggle to push higher.

It is still crazy to me to think that all of this has happened with Belarus tonnage being cut from the world. Then again, it seems like we have normalized "crazy". Events that drove values to record high's are now common knowledge and part of the industry. I've used this story a few times this winter:

Imagine if we had the power of time travel. We use that power to go back in time 10 - 20 years ago and pick up a corn trader. Now, we bring that corn trader back to current day and show him the current marketplace (stocks to use). Would they have a reaction? Of course they would. They would freak out. They wouldn't understand why corn isn't $15/bushel and why no one is losing their mind. Similar to a frog in a pot of boiling water. If you throw the frog in boiling water, it jumps out. However, if you put the frog in a pan of cool water and slowly bring up the heat, it will stay there and get cooked.

The same can be said for potash. We have now normalized a much tighter global S&D. That could mean that we get surprised when there is a rush of demand eventually. Until that happens, the price continues to tell the story.

How will summer fill programs be approached?
I realize I am putting the cart before the horse. We just started April. Little early to start looking to summer.

I would agree but here we are!!

To put it bluntly, the fertilizer market confidence is shattered. Retailers have taken huge price hickies this winter and are more likely than ever to not purchase fill programs until the farmer steps forward. Farmers have now dealt with multiple years of extremely high values, are in the process of planting one of the highest cost crops of their careers and to top it off, potash values have been falling for a year with signs of it continuing.

Bulled up yet?!

Manufacturers and suppliers are going to have their work cut out for them. They will have steadily increasing positions and will want/need to offload them. Buyers are going to chuckle and say to go find the next sucker.

Now, this situation will create opportunity. How does a supplier/manufacturer eventually find demand? By dropping the price enough to make it a no brainer.

We could see a situation where the price dips low enough that buyers are forced to step forward. Once they see demand coming, watch for the stair step program.

I know you want 5,000 tons. I can only sell you 1,000 tons at $xxx.

Following week - I got another 1,000 tons, but it is going to cost $xxx + $10

Our natural inclination is going to be to shut down at the end of spring and not look at fertilizer again until the fall. DO NOT DO THAT. I'm going to be vocal and a little forward. When I see solid ratio values, I'm going to push and I'm going to push hard. In the end, it isn't my call on what you will/will not do. It is your farm so your decision.

But I would not be doing my job if I didn't.

Summer is going to be interesting. Be prepared and keep your head on a swivel.

Where are current values in relation to the past

NOLA/New Orleans Louisiana

Vs 30 days ago - -3% or approximately $10 lower
Vs 90 days ago - -18% or approximately $80 lower
Vs 6 months ago - -36% or approximately $205 lower
Vs 1 year ago - -56% or approximately $466 lower

U.S. Midwest Average (average of several points across the Midwest)

Vs 30 days ago - -2% or approximately $10 lower
Vs 90 days ago - -17% or approximately $90 lower
Vs 6 months ago - -38% or approximately $270 lower
Vs 1 year ago - -47% or approximately $385 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

Manufacturers slow/stop production to offset current market bears – this has already been seen in Canada with a producer making the decision/announcement that they were slowing production due to a lack of demand. So far, we haven't seen others do the same, but we could.
Global potash market continues to operate with the 3rd largest exporter - since Lithuania's decision to cut Belarus from the world, values have actually dropped significantly as demand stepped away either due to lower application rates or decision to skip. Eventually, soil potash levels will need to be replenished or yields will suffer. Could that mean a demand wave that runs straight into a market that is tighter than it currently feels?
If regions in North America get a chance to run hard, local prices could jump/basis widen – we are already seeing this in the Southern Plains/Tulsa, OK region for urea. While the overall market is bland, that specific region is seeing prices hold up/push higher due to heavy demand and lack of product. While it is getting late in spring, there is still time for a local push here and there.

Bearish Factors

If North America spring demand is poor, carryover to summer will be heavy – this is quickly becoming reality. Spring weather conditions have kept a lot of the marketplace out of the fields. If spring is a failure, warehouses will finish somewhat full. That leaves less space to fill this summer. That puts a heavy weight on manufacturers desperate to find homes for summer produced tonnage.
Even if we clear tonnages from storage, this market has no confidence – the last couple years of extremely high priced product has been exhausting. More, potash values have steadily slide since last March/April. We are starting to believe that late spring/early summer fill programs are going to struggle to find demand as buyers shun the idea.
Continue to watch for new production - if the coming months/years expectations are correct, we could see new production add enough supply to make potash an oversupplied market vs demand. While this may be some time away, this will continue to weigh on the current market as everyone in the supply chain opts to be a little more conservative on their buying.

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 focal points

Belarus export options...or lack of - Belarus was the 3rd largest export of potash in the world prior to Lithuania cutting them off. Today, they have slid very far down the list. We assume that will continue for the foreseeable future...but that could change. If infrastructure is built thru Russia quick than we think possible to allow them to export or if Lithuania reversed their decision, we could see these tons back very quickly.
Spring demand across the Northern Hemisphere - while I cannot yet say for the entire north half of the globe, the feedback across North America has been that demand is still down. Part is due to bad weather conditions keeping farmers out of fields. Another part is due to farmers still angry about high prices and looking for any route to cut cost on an already expensive crop to grow. While too soon to draw our line in the sand, it looks looks like demand will be down which means more downward pressure on prices.
New/increased production around the world - there are several projects in process/being discussed today. These processes take a lot of time from paper to production but eventually they will come. If everything comes online, potash could very quickly go back to being an oversupplied global market which means pressure on prices.

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