Farmer Fertilizer Focus - Phosphates

By: Josh Linville, Vice President- Fertilizer

Fri, 02 Jul 2021, 22:40

Phosphates

Josh Linville

Director - Fertilizer

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

Phosphate seems to have found a plateau for the moment. Prices are no longer screaming higher as they have been doing for so long. That doesn't mean we cannot be weary....

It seems as though small changes could make huge price differences:

China starts exporting more = prices lower quickly
2022 crop acreage mix expectations keep changing to call on more phosphate = prices rise quickly
N.A. continues to secure import flow guarantee's = prices fall
Morocco/Russia win their lawsuits and duty rates drop = prices fall

Where we go from right now is almost a coin flip in my eyes. If I had to choose a side, I would say we see more bullishness in values in the coming months.

What has happened in the last 30 days?

Market continues to grapple with competing lawsuits over the Counter Vailing Duty Rate

Mosaic's CVD case against Moroccan/Russian produced phosphate disrupted world trade routes to its core. Since that announcement date, the market has been struggling to find normalcy. While the result of the case meant that higher prices were here to stay for North America, at least it meant that we could start to normalize trade flows which would mean slightly lower prices. Now, we have to contend with new lawsuits: Mosaic suing that the rates were too low and Morocco/Russia suing that the rates are far too high. Unfortunately, this means uncertainty in the meantime which typically means higher prices.

U.S. import flows are starting to normalize

I realize this goes against what I just said above!! However, this is true. While we are still unsure about Russian and Moroccan import flows going forward, we are starting to find a new normal and the most visible part has been from Jordan of all places. Jordan has inked a deal with Koch to import 400,000 tons of phosphate to the U.S.. In the whole scheme of things, 400K is not that much (less than what "typically" gets imported in 2 months). However, th eoptics are huge as it represents smaller global players willing to step up and fill the void left. Couple this with increases in Saudi Arabian/Australian imports as well as a slow down in exports, and the market is staring to feel a little more stable.

Equal fears over demand destruction and lack of supplies

Emotions are all over the place with phosphate. On the one hand, the market fear s not having enough supplies to meet the demand for what is perceived as a really big fall/spring season coming. With the most recent USDA report, it is hard to argue that corn acreage will be less than lower 90M acre range. Demand for phosphate should be huge once again. Then again, when we look at current phosphate values vs grain values, not including 2008, this is the highest ratio value since 2006. There are fears that we will see farmers deciding to cut back on their application rates. As I said, emotions are running high....

Where are current values in relation to the past

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

Vs 30 days ago - +4% or approximately $20 higher
Vs 90 days ago - +15% or approximately $80 higher
Vs 6 months ago - +57% or approximately $225 higher
Vs 1 year ago - +117% or approximately $330 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

We find out that current values have not scared away any demand – I've spent a lot of time being worried that we have found the price point that destroys demand. Know who has the actual last word on that? Demand. If we start seeing that farmers do not care where the price of phosphate is, then there is still more upside.
2022 acre expectations continue to call on high phosphate application rates this fall/spring – big demand typically means higher prices.
We continue to see China remain out of the export market – without major Chinese exports, the world market continues to feel tightly supplied and is attempting to offset that by raising prices.

Bearish Factors

U.S. starts seeing more supply agreements similar to Jordan – as we see more agreements like the Jordanian supply agreement of 400K, supply questions begin to get answered, the market becomes more calm as it knows supplies are on their way and prices cool.
China starts to export once again – never say never! Does it look likely this will happen? No. Could they pull a 180 and completely surprise the global phosphate market? You better believe it.
Sticker shock from farmers this fall – the market is already preparing for the fall application season and is expecting solid demand. So what happens if the supplies are put into place and demand never comes? Prices start dropping to try and pull the demand forward so they are not hung with the inventories all winter.

ARE WE BETTER OR WORSE OFF THAN WHERE WE WERE?

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 130 bushels to pay for 1 ton of DAP
Spend 60 bushels to pay for 1 ton of DAP

When we compare the current ratio value against recent years, we start to see if we are high or low.

Pay more attention to the horizontal dotted line as it compares the current phosphate price against new crop values.

Very quickly, we start to see if we are high/level/low vs previous years.

YOUR VALUES WILL LOOK DIFFERENT

This graph looks at the NOLA DAP price vs the new crop 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

Phosphate values are very high. In fact, outside of 2008, current grain/phosphate ratios are some of the highest ever seen. DO NOT LET EMOTION RULE YOUR DECISIONS. I get being angry at where prices are vs where they were. However, that doesn't mean cutting it completely out this fall/spring. You have to make the best decision for your operation.
If you buy your phosphate, please sell the grain against it. Current grain/phosphate ratio values are extremely high but those are nothing compared to what it would look like if you bought the phosphate, didn't sell the grain and grain prices plummeted...
Use right now as a learning experience. Higher grain prices are not always the answer. All grains are higher priced than where they were a year ago. However, fertilizer price gains far outpaced grain gains putting you in a worse situation. Next time we have an opportunity to lock it in low, remember this time period.
When the ratio gets low, we should be ramping up application rates. Increase phosphate levels in the soil when it is "cheap" so that you can cut back on rates when it is "expensive".

Fertilizers

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