Farmer Fertilizer Focus - Phosphates

By: Josh Linville, Vice President- Fertilizer

Fri, 01 Oct 2021, 21:30

Phosphates

Josh Linville

Director - Fertilizer

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

This time last month, I thought there was a chance that phosphate values could drop thru the winter and into next spring. The idea behind it was that fall demand would be poor due to demand destruction. That would result in inventories being very high leading into winter which leaves producers to build inventories as there is nowhere to go. That typically means prices drop. That was last month.

Now, it looks like phosphate prices are here to stay for a while. The Chinese government is going to domestic producers and telling them slow/stop exports. China accounts for about a third of global exports. Even if the fall is terrible, there are MORE than enough options around the world to sell to. In fact, we could see Florida material shipped to Australia. Australia is a taker of Chinese phosphates and their application season runs from February into May. That would be a perfect avenue for Mosaic to offload long positions.

What has happened in the last 30 days?

Hurricane Ida's impact was felt worse than expected

Had the North American marketplace been fairly full prior to the Hurricane, the loss of 300K tons of production wouldn't hurt so bad. Unfortunately, between a solid fall/spring application that dropped inventories and Mosaic's counter vailing duty keeping imports at bay, the loss of 300K tons of production is devastating.

Earlier this week, we heard that Mosaic was no longer selling MAP for the remainder of the year (DAP was still fine). They would honor commitments but anything beyond that, they were done. 30 days from fall application, that is bad news....

Logistics may struggle more than we think

I was told of a company in the NOLA region that had a fleet of 100 barges during the hurricane. When it was all over, 2 of the barges sank and 94 sustained minor/major damage. Only 4 remained unscathed. Start putting those percentages across all the companies down there and a tremendous amount of barges were lost short term.

We have also already been dealing with low water situations on the river systems. Mile 10 of the Arkansas River had to be shut down for dredging. While this only lasted a couple days, it represents a situation that may become more common.

Trucks are also reportedly extremely hard to find. The fertilizer/grain sector has done a great job of running truckers out of business or into other trucking lanes with far too low rates. Now we are paying the price.

It doesn't guarantee that logistics will be a nightmare this fall, but the chances are much higher than normal.

Chinese government is slowing/stopping exports

It seems the Chinese government is taking a bit of a protectionism stance in regards to fertilizer...especially phosphate. With global prices continuing to skyrocket, the government has been stepping in to alleviate that price stress on their farmers.

Officials have been going to producers and asking/telling them to slow and/or stop any exports to keep tons home for domestic farmers. In most other parts of the world, this advice would fall on deaf ears. However, in China, when they ask you to do something, you do it.

China accounts for approximately 32% of global exports or around 4.5MMT. If that much product is pulled from the marketplace, it is felt immediately.

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 - +6% or approximately $40 higher
Vs 90 days ago - +13% or approximately $100 higher
Vs 6 months ago - +27% or approximately $145 higher
Vs 1 year ago - +93% or approximately $333 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

China continues to restrict exports thru June '22 – this is a very big deal given the size of Chinese phosphate exports. If the government sticks to their guns, this will remove a tremendous amount of phosphate supplies from the global marketplace. Lower supplies = higher prices.
Too late for surprise imports to arrive – for those of us in North America, it is simply getting too late for any surprise shipments of phosphate to arrive. That means we have to live with what we have...and that isn't much.
Continue to expect 91M acres of corn – not only are supplies tight but the fall application demand continues to be expected huge. If we are truly going to raise 91M acres next year (debatable), that requires a lot of phosphate to grow the crop.

Bearish Factors

Sizeable demand destruction around the world for the next few months –high prices cure high prices either by new production or destroyed demand. It is hard to "find" new production so more likely that demand destruction would need to do the work. If enough of this happens around the world, supplies could start to outweigh demand which causes prices to sink.
Chinese government turns a 180 and allows huge exports – with everything that is going on, this is a BIG stretch but something we need to watch for. If there is a turn around and they start looking to maximize production/exports, the world could feel really flush rather quickly.
North America loses significant corn acres – without corn acres, demand goes away. Without demand, supplies grow and weigh on prices. Not overly likely but something to keep an eye out for.

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 70 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 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

Phosphate values are the 2nd highest price they have ever been (2008 were historical highs). It is easy to let emotion cloud your judgement but fight that temptation. That isn't to say that you should or should not cut your rates. I am simply saying to think thru your decisions.
If you are going to make changes to your phosphate application approach, talk to your supplier. With prices as high as they are, no one wants to deal with the price risk. That means suppliers will likely have LESS product available in season. If you tell them you do not need anything and then show up November 1st to buy, it very well may not be available.
A year ago, things like variable rate application seemed far to costly for some. With phosphate values near historic lows, many took the approach of throwing it out everywhere. Now, it might make sense to dust off those brochures and look to only put it where it is needed.

Fertilizers

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