Farmer Fertilizer Focus - Potash

By: Josh Linville, Vice President- Fertilizer

Wed, 01 Sep 2021, 13:58

Potash

Josh Linville

Director - Fertilizer

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

Our interpretation is that potash prices will hold/push higher as we get closer to the fall application season. What happens past the fall season is too hard to call today:

Will we see demand destruction that causes ending inventories to be really high (less bins to fill, producers get more aggressive on price to fill)
Will we see mother nature shut us out of the fields
Will demand not only be there but surprise us with how big it is as farmers look to maximize yields with corn at $5+

If this had been sent out 2 weeks ago, I would have had a more bearish view on potash. Unfortunately, the early reports from wheat country is the P & K application rates are beating most expectations which means demand destruction isn't happening...yet.

There are others that continue to report that their fall prepay numbers are way down and there is still significant push back. With only 60 days until November 1, I have to lean toward prices holding but there are a lot of variables in the air right now.

What has happened in the last 30 days?

Wheat demand is surprising the marketplace

From a supply POV, very little has changed. We are still looking for clarity on U.S. sanctions against Belarus (will potash be included or exempt from the sanctions). No new announcements have been made to production rates around the world (higher or lower). The supply side of the equation has been status quo.

However, on the demand side, things have been shifting. There had been a growing chorus of the market that had expected demand in the fall to be down. Potash prices where they currently are will do that. However, wheat country has been surprising a lot of the marketplace with how big the demand has been. That has people thinking "if wheat country can spend that much on fertilizer, corn farmers should be able to do that and then some". It isn't a dig on the wheat farmer, just the way the fertilizer market works.

If supply expectations remain the same and demand expectations grow, Econ 101 tells us that prices will be firm. With only 60 days until November 1st, we will have our answer before we know it.

Outside the above, potash has been really quiet

Otherwise, there is nothing new to report for potash. August is a typically VERY slow month for fertilizer. It is one of the few times that the market feels it can take off for vacation, catch up on projects, etc. and not miss too much action.

From a potash perspective, this held true. There was a single barge that did trade significantly higher (by $30) that caught the attention of the market. However, that was followed with a trade back to the original level and the high price trade was seen as an anomaly. Everyone is in wait and see mode for fall.

Where are current values in relation to the past

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

Vs 30 days ago - unchanged or approximately $1 higher
Vs 90 days ago - +51% or approximately $185 higher
Vs 6 months ago - +69% or approximately $225
Vs 1 year ago - +186% or approximately $358

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

Fall demand might surprise the market – there have been many in the potash market that have been expecting/preparing for a fall season with a lot of demand destruction. That means putting fewer tons in place. If demand come from nowhere and surprises suppliers, inventories will not be sitting there waiting. That means scrambling to find just in time product which means just in time pricing.
With only 60 days until fall application, any upswing in demand will see logistics struggle to prepare – this goes together with the above point. Even if the market signals that fall demand will be there, the window to prepare is closing quickly. 60 days seems like a really long time but for fertilizer logistics, it goes in the blink of an eye.
The world still feels tight on supplies – for the short term, it doesn't seem that there is a glut of product anywhere in the world. Inventories feel snug which means producers do not have to sell. A producer who does not have to sell does not willingly drop their price...

Bearish Factors

World producers can oversupply the world very quickly – 80% of the world production capacity lies in 4 major regions (Canada/Belarus/Russia/China). These regions all typically play nice and produce just enough to meet demand. However, if one area decides to capitalize on these high prices and increase production, that could cause the others to do the same. Operating capacity outpaces world demand and we could be flush with product in months.
Even if demand is prepared to apply, mother nature may have other ideas – if you haven't read other products yet, you are going to see this one again and again. There is no guarantee that mother nature will allow us to get into the fields this fall. If conditions turn south, application doesn't happen. That keeps inventory levels high and pushes back on producers who then start to scramble (i.e. lower price) to offload product.
Current ratios to any grain are terrible – I'm not saying that most farmers look at their operation from the ratio perspective. However, I'm willing to bet that most will see that corn has only gone from $3.75 to $5 while potash has gone up over $350. You do not need to understand the ratio approach to appreciate that potash is up significantly more than any grain gain.

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 110 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 Thoughts

Yes, I know that potash prices are stupidly high and it feels like they are gouging you. Trust me, if that thought is going thru your head, you are in very good company. I'm not going to try and justify the price increase to you. I am only going to say that this price rally has taken so many perfect storm scenarios and black swan events coming together that it still boggles my mind. I try to imagine going back in time 12 months ago and trying to tell a room of people where the market would be by September 2021. Even knowing what happened, I would still struggle to explain it....
There is absolutely nothing wrong with changing your approach (i.e. delaying application/reducing app rates/etc.). That is your call. Your farm is just that...YOURS. You call the shots.
If you do decide to make changes to your potash approach, I only ask that you think thru the ramifications of that choice and think of how you can help calm the waters.
- If you are typically a fall application and are deciding to wait until spring, have a conversation with your supplier/applier. They deserve to know ahead of time what you plan to do so they can make preparations.
- If you are going to cut back application rates, have an honest conversation with yourself in regards to if that will hurt your overall yield potential. If cutting back does hurt your yield, does that damage your entire operation.

Fertilizers

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