Farmer Fertilizer Focus - Potash

By: Josh Linville, Vice President- Fertilizer

Sat, 29 Jan 2022, 19:54

POTASH

Josh Linville

Director - Fertilizer

josh.linville@stonex.com

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

The last couple months, I have said that I didn't think potash would move a lot. Today, I still think that is the case.

There are definitely things that could push global pricing higher: Belarus getting cut off from the world & Russia/Ukraine conflict.

There are also things that make me think prices will fall: low farmer profitability causing potash application cuts, new global production coming online.

Today, I would say we continue to see prices steady to a very slight drop. When fertilizer markets go quiet, prices tend to slide. This is a result of the supply side trying to make things happen. Ultimately, it will come down to the start of spring. For those reading this in North America, I'm here to say that the start in the south is not good. It is extremely dry and fertilizer demand for the application has been almost non-existent. Anytime this happens, it seems to haunt us all the way thru spring. That said, they can kill the wheat crop 10 times but one rain comes thru, it will grow and that demand will come rushing back.

What has happened in the last 30 days?

The Russia/Ukraine political situation continues

Yep, more of the same with the same question being asked: "Will Russia step into Ukraine or not". I could get into a big discussion about it but that isn't the purpose of this newsletter. Here, we talk about its effect on fertilizer.

If Russia decides to invade, the bigger impact to the fertilizer market globally will be the response by the world. I see it being one of three options:

1. Do nothing - I wouldn't think this is an option but Crimea wasn't that long ago...

2. Install sanctions - highest probability in my mind and its effects are always interesting. Many people believe that when a country is sanctioned, it removes that product from the world. That is not correct. Unless the entire globe places sanctions on them, that product will still finds its way into the global supply chain. The difference is it will go to different destinations which will cause new trade flows to develop. Ultimately, it does NOT change the global S&D. What it will likely do is cause the price to go higher for each country that sanctions them as they will be forced to find new flows of potash from inefficient avenues.

3. Fight back/war - this is a low probability option. If Russia goes into the Ukraine and the free world decides to battle back, it could start a full-scale war. In that scenario, it would make sense to park warships/subs/etc. outside each Russian port and threaten to sink any ship that leaves. This would cripple the Russian economy with the intent of crippling their military. This would remove all Russian produced potash from the world stage which would result in higher prices. Again, this is a very low probability option but as 2021 taught us, never think it cannot happen.

Russia accounts for approximately 19% of the world operating capacity of potash. What happens halfway around the world affects you as a farmer. We need to stay vigilant.

Belarus has gone quiet but is not gone

Before Russia started to dominate the headlines, Belarus was enemy number one for a lot of the free world. Since then, things have quieted down...but that doesn't mean it is done either.

Not many realize that Belarus accounts for approximately 15% of the world potash operating capacity. That is a sizeable chunk. If the situation were to deteriorate even further than it already has which means the world cuts them off from exports, there will be a price to pay.

As discussed with Russia, if it is sanctions by some countries, that product will still find its way to the world and those that sanctioned them will pay a higher price. If it is bad enough and the result is to completely shut them down, that is a whole new storyline.

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 - -2% or approximately $12 lower
Vs 90 days ago - -2% or approximately $13 lower
Vs 6 months ago - +22% or approximately $123 higher
Vs 1 year ago - +147% or approximately $401 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

Russia/Ukraine situation deteriorates to war – an absolute worst case scenario for the global potash complex is a war that results in those opposed to Russia parking warships outside their ports with the threat of sinking any ship that departs. That is not going to happen. Well, it is an insanely low probability of happening but if 2021 taught us anything, it is to never say never. More likely is Russia invades, heavy sanctions are placed on them and countries who normally receive a lot of their product from Russia are forced to find other sources. That almost always means higher pricing for that country.
Belarus receives stricter sanctions – like mentioned above, sanctions do not stop the flow of exports. It merely disrupts normal destinations. However, if this happens, their normal destinations are now forced to look for other avenues for their needs and that almost always means inflated pricing.
Big fall/low winter inventories + big spring demand = higher pricing – I'm not saying that you will not find product. Far from it. In fact, potash "feels" like it is the best supplied fertilizer right now. However, potash is still tight in many parts of the world. When supplies are tight and demand comes calling, the natural reaction is to move prices up.

Bearish Factors

Demand destruction like 2008 – the last time we saw these types of values was back in 2008. Looking at those numbers, it appears that demand was down substantially (40% give or take) from normal with some of that destruction coming from less acres but mostly from farmers deciding to cut back rates. If the northern hemisphere starts spring application and finds that demand is half of what it expected, the shock will cause prices to fall.
Grain prices fall – for a lot of farming operations, one of the first inputs to get cut when times get tough is potash. Right now, it seems that the profitability is there to continue applying potash to maximize yields. However, there are A LOT of acres that are on the fringe of profitability. If corn prices started to falter, for example, those acres would quickly move to unprofitable and cuts could quickly be made. Disappoint on the demand side, do not change the supply and prices should fall.
Current high prices cause producers to increase production - for a lot of farmers, you try to produce as many bushels/tons/etc. as you possibly can during times of high values. Fertilizer manufacturers are absolutely no different. When prices are where they are today, the temptation is there to increase production rates and capitalize on huge profits. However, that comes with a cost. If one producer makes that move and other producers see it, they may do the same which causes other to follow. Production rates increasing means more supply...

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 Thoughts

For a lot of acres that are riding the fence about what to plant in a couple months, the profitability is going to be tight. That means the temptations is going to be there to cut your potash application rates. I AM NOT HERE TO TELL YOU HOW TO APPLY. All I am going to say is to think logically about it. If you cut your app rate and it saves you $5/acre, that saving adds up. However, if cutting the rate lowers your corn yield (for example) by 5 bushels/acre, you lost. 5 bushels @ $5.50/bush = $25+. Talk to your agronomist. Take in all the factors. Make the best decision for you.
Do not wait until the last minute. I understand it is hard to pull the trigger with values where they are but I am here to tell you that I am more concerned with logistics today than I have ever been. River systems are dealing with low water levels. That means lighter barge loads and slower shipment times. Rail service has been dropping for the last year and is tough to rely on. It seems like we have fewer and fewer truckers every season. This is not an attempt to scare you into doing something right now. I only believe that if you are waiting to buy, you should be having MORE conversations with your retailers/coop/etc. about your plans. If you do not want to buy a couple hundred tons right now for fear of prices falling, thinking about your supplier who is buying thousands or tens of thousands of tons in the HOPE that you show up. Have more conversations on your needs/timing/etc. so they can make a plan of attack.
Get ready, spring is right around the corner and as it always does, it seems to have snuck up on us. For many areas, there is only 30 - 45 days before we start hitting the fields with dry preplant applications. Get some rest, drink a beer, spend time with the family because it is almost go time!!!

Fertilizers

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