Farmer Fertilizer Focus - Phosphates

By: Josh Linville, Vice President- Fertilizer

Mon, 03 Oct 2022, 20:59

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October '22 PHOSPHATES

Josh Linville

Vice President - Fertilizer

josh.linville@stonex.com

Major global phosphate export location price graphs

As mentioned last month, this is a new addition to the newsletter.

I will have 2 graphs: one that lists historical pricing in short tons and one in metric tons so that everyone can read it in a form they prefer. All prices are listed in USD. All prices are FOB or priced at their origin.

I will say this now and will say it going forward to eternity: these are the flat price graphs for each individual location. Your price where you are is going to be different. There are logistics. There is the cost of storage/interest/insurance/etc. These graphs should not be taken as "it shows the price at $700, why isn't my price $700". These graphs should be used to give an appreciation for price movements thru 2022.

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

Fall application season is almost here for the northern hemisphere which means fall demand is almost here. Just a matter of what that looks like.

We could see a price bump with fall demand/hurricane aftermath but the global trend continues to be definitively negative. I'm trying to think of all the "trend" sayings I've been told over the years:

The trend is your friend.

Try to stand in the way of the trend and get ran over.

Don't try to set the bottom of the trend. Let another madman do that.

That's all I'm coming up with for now but until the market proves that we have found a bottom, it is hard to argue with the direction going forward.

Should you buy your fall '22/spring '23 phosphate needs?

If you are going to put phosphate on the fields this fall regardless of what happens and you have any worry about product availability, I wouldn't wait much longer.

If you are a spring applicator, might be worth holding out and seeing what happens short term.

Like I've mentioned before and on other products this month, there are no guarantee's that if you show up, check in hand, to your local retailer/supplier on November 1st proclaiming that you are ready to buy that the product will be waiting there. Retailers are just as scared of the price slide as you are. Many of them lived thru the 2008 debacle where they put product in place...and then watched prices fall out of bed. Tremendous losses occurred. People were fired. Companies were lost.

Because of that history, the market feels much more conservative in its buying this time around. If you are going to apply this fall but want to wait on purchasing, at least have a conversation with your supplier.

If you are a spring person, do not pass on a good thing. If you can buy fertilizer/sell grain and secure a profit, hard to pass that up in these volatile times. That said, I understand holding out a bit longer. Just make sure to keep a VERY close eye on replacement values. You have seen how quickly things can change.

What has happened in the last 30 days?

Hurricane Ian

This has been, by far, the leading story from the last month.

As many of you already know, Hurricane Ian caused devastation that we are still trying to comprehend. I lived in a community called Bellaire Beach for a time and for a day or two, it looked like it would be wiped off the map. Fortunately for those in the Tampa region, the path moved south. Unfortunately for those in the Ft. Meyer region, the path moved south...and wiped the coastline from the face of the earth.

Just so I am clear and no one takes my comments out of context, this hurricane was horrific. People lost their lives. People lost their homes. The human aspect of this storm will be talked about for years to come.

From a fertilizer/phosphate POV, we dodged a bullet. A lot of phosphate production sits just outside of the Tampa region. Had this storm come ashore as originally expected and hit Mosaic's operations head on, production losses would have been huge. Wind damage could have destroyed many of their buildings (even though these buildings were likely built to withstand hurricanes, maybe not category 4's). Excessive rainfall could have flooded tailing piles/mines/etc. Storm surge could have destroyed their ability to load ships/vessels.

Today, we have heard that current predictions put their production losses "up to 250,000 tons". While 250K is a little higher than we originally expected with the push south, it still is not tremendous when compared to the feared demand losses this fall.

Many in the agricultural world will never fully comprehend the bullet that was dodged last week.

North American cost of production drops in Q4

Since the middle of this calendar year, the cost to product a single ton of DAP loaded NOLA barge has been dropping. The first cuts that we saw were from the Tampa NH3 marketplace. Coming out of spring, the global NH3 market cooled and allowed values to drop. Being one of the major cost inputs to produce phosphate, this has been a contributing factor to prices seeing softness.

Now, we have Tampa NH3 prices rallying slightly...but Q4 sulfur prices should be cut by a large margin. If sulfur prices are agreed to as we expect, this will help lower the cost of a single ton down to $450.

Does this mean prices are going to drop all the way to this level? Absolutely not. Markets do not typically work on a cost plus model. Imagine if you had to sell your grains that way. What this means is if we see a really poor fall application run, grain prices tumble, Chinese exports fully return, etc., the price floor has just dropped.

If prices were to drop to $450 or lower, producers would stop production. Why product material at a loss? That loss of supply would help balance the S&D which becomes the price floor.

Again, this does not mean we are going this low. But it does give insight to how low prices can go short term in a worst (or maybe best depending on your POV) scenario.

What will fall demand look like?

Yes, I talked about this last month. I'm going to talk about it again this month. Very high possibility I talk about it next month!!!!!

Fall demand is a raging question today. What will application rates look like? Higher/lower? Will fall appliers remain in the fall or wait for spring? Are we going to plant 93M acres of corn next spring with all the demand that goes with it?

Fall is going to be a game changer for which direction the market moves going into winter. Unfortunately, we will be in winter by the time we know.

Still no change on the U.S counter vailing duty against Russia/Morocco

Last month, I made this statement:

In past editions, I have mentioned that even if the CVD was reversed, it would likely make little difference as NOLA values were some of the cheapest in the world. Now, with global prices dropping and demand sluggish, it might make a difference.

This not only still holds true, it is becoming more true. Take a look at the price graphs at the start of this newsletter. Notice that the red NOLA line continues to slowly move toward the top of all the lines? That means NOLA is quickly becoming one of the highest cost points in the world.

If the counter vailing duty rate was no longer in effect, it is likely that we would see more imports coming this way. That influx of supply would likely cause prices to fall. Econ 101.

For those hopeful that a reversal is coming, it seems that market chatter has all but dissipated. That doesn't mean the chances are zero. It just doesn't look promising.

Brazil is ahead on purchases

There is always a lot of talk about Brazil and how much product they need. It makes sense given that they are one of the biggest purchaser/importer of phosphate in the world.

Seems like it other fertilizer products, Brazil has been happy to keep a relationship with Russia when it comes to phosphate. As you can see from the charts below, Brazil's imports of DAP and MAP are well ahead of schedule. While we expect to see their demand higher this year, their additional imports have more than exceeded that jump.

Brazil will need to purchase more in the coming months but it may not be as pressing as several expect. This could lead to further price declines globally. Bull markets need to be fed everyday or risk starving. If Brazil demand isn't there as expected, that is less feed...or some analogy like that. I hope you get my point!!!!

Where are current values in relation to the past

NOLA/New Orleans, Louisiana DAP price comparison

Vs 30 days ago - -5% or approximately $35 lower
Vs 90 days ago - -8% or approximately $65 lower
Vs 6 months ago - -28% or approximately $280 lower
Vs 1 year ago - +4% or approximately $30 higher

Morocco DAP price comparison

Vs 30 days ago - -14% or approximately $127 lower
Vs 90 days ago - -22% or approximately $222 lower
Vs 6 months ago - -36% or approximately $447 lower
Vs 1 year ago - +22% or approximately $145 higher

Black Sea DAP price comparison

Vs 30 days ago - -20% or approximately $170 lower
Vs 90 days ago - -21% or approximately $178 lower
Vs 6 months ago - -23% or approximately $199 lower
Vs 1 year ago -+3% or approximately $21 higher

India DAP price comparison

Vs 30 days ago - -16% or approximately $138 lower
Vs 90 days ago - -20% or approximately $185 lower
Vs 6 months ago - -21% or approximately $189 lower
Vs 1 year ago - +9% or approximately $58 higher

China DAP price comparison

Vs 30 days ago - -14% or approximately $122 lower
Vs 90 days ago - -24% or approximately $232 lower
Vs 6 months ago - -33% or approximately $357 lower
Vs 1 year ago - +14% or approximately $91 higher

Saudi Arabia DAP price comparison

Vs 30 days ago - -16% or approximately $140 lower
Vs 90 days ago - -23% or approximately $220 lower
Vs 6 months ago - -33% or approximately $357 lower
Vs 1 year ago - +14% or approximately $91 higher

Brazil DAP price comparison

Vs 30 days ago - -13% or approximately $105 lower
Vs 90 days ago - -30% or approximately $305 lower
Vs 6 months ago - -46% or approximately $595 lower
Vs 1 year ago - -3% or approximately $18 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

Chinese exports come to an abrupt stop – a couple months ago, the Chinese government surprised a few in the phosphate market by allowing exports to resume, albeit on a much smaller/tighter program than typical. The addition of any tons to global supply has helped values drop. Never lose sight of the fact that just as quickly as they allowed exports to resume, they can make exports stop again. This is something we are actually watching closely as we get closer to the new calendar year.
Fall demand better than expected – there is a lot of skepticism regarding fall/yearly phosphate application demand. Will corn acres be up or down. Will phosphate application rates be higher/much higher than last year? If we see corn up and application rates improve, this would be a big boost to demand and a big boost to price ideas.
Florida production losses worse than anticipated – reports/rumors/etc. started coming out today that Mosaic may lose upward of 250,000 tons of production due to the hurricane. While phosphate production is a different beast, we have seen estimates come in far too low for restarts. If 250K starts to balloon due to unexpected situations, then we could see prices find a footing.

Bearish Factors

China loosens export restrictions further/fully – while I currently lean toward the "China will further restrict exports" camp, I cannot lose sight of the other end of the spectrum. If China is well ahead on stockpiles and feel's flush with product, we could see the government further loosen export totals. Further export gains by exporter number 1 in the world would certainly have long positions shaking in their boots.
Falling North American production values – we currently see N.A. production as some of the highest cost production in the world. We have also seen the cost of production drop dramatically from its July high as we start Q4. Does this mean the market will drop immediately to that price plus some kicker? Absolutely not. Does it mean the price can drop further than before in order to find the shutoff valve if fall demand ends up terrible? Yes, yes it does.
Demand pushes back...again - we saw this last fall/spring from demand. Farmers cut their application rates to offset high prices. While we think that cut would be slightly less due to the difficulty in doing it year after year, a cut is certainly expected. If it becomes another "bigger than expected", sellers will get nervous.

Where are the current phosphate/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 DAP
Spend 80 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.

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 focal points

I'm changing this going forward simply because I was struggling with what I should put here. Typically, I fill it with general statements that a lot of times you all do not need.

When I look at markets, I try to find the one/couple points that are most important to me that tell the story. That is what I will start doing on this section:

Chinese export levels - yes, how the world's largest exporter of DAP and MAP restricts or allows their flows have a major impact on global price ideas!!! If China continues to allow, or increases the allowance, of phosphate exports, then we could see prices continue to dip. If we see a reversal, also a distinct possibility, the opposite effect.
Fall demand - fall will tell the story. Will application rates return to normal or be cut again? Will fall applicators delay until spring or roll with the fall and wipe out inventories? Once we get thru fall, we will know.

Fertilizers

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