Farmer Fertilizer Focus - Potash

By: Josh Linville, Vice President- Fertilizer

Fri, 01 Apr 2022, 00:23

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POTASH

Josh Linville

Director - Fertilizer

josh.linville@stonex.com

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

At this point, it all depends on how spring season plays out for the northern hemisphere. If we have another solid run, that means that inventories will be wiped out which clears the way for potash producers to name their price. If it is a really poor spring where farmers back off their potash application rates significantly, it will result in a "full" system entering summer which means potash producers will need to fight for demand.

That said, today I am steady to bullish potash values for the short term.

Even if the spring season isn't that great, we are losing a TREMENDOUS amount of product with Belarus and Russian tons not finding their way to the international market. If both of them stay removed from the world market, combined they represent 36% of global production and approximately 41% of global exports. The worst drop in demand was in 2008 which is estimated at 40% from normal. Even if we repeated 2008, it is only equal and still keeps the producer in charge.

Sorry everyone, I wish I had a better outlook but right now, I wouldn't hold my breath on steeply discounted values this summer...

Should you lock in fall '22/spring '23 potash needs today?

I'm getting this question A LOT and it is a great question so I thought it was important enough to add this piece in for this month.

Long answer short - NO

Can I guarantee that prices will get cheaper this summer? Of course not. If you read the section above, you will notice that I actually do not anticipate prices dropping much as we move past spring. So why do I not recommend buying today?
If you lock in your price today, you will be locking in your potash at the highest price you have likely ever seen 7 months in advance of the fall season and almost a full year before the spring season. A lot can change in just a few weeks. Imagine what can change in 7 to 11 months. If we see a removal of Putin or multiple steps toward peace, we could see the world reengage with Russia/Belarus. If we find out that spring demand was significantly lower than anticipated, we could see values down.

Again, I'm not saying that I am convinced that prices will drop. With prices where they are, I think a lot of the market is going to take a wait and see approach which could put the pressure back on the producers. I think it is worth waiting and seeing what happens...

Now, if we see potash producers drop their price to incentivize demand to step forward, my answer changes very quickly.

What has happened in the last 30 days?

The Russian invasion continues

This remains an unchanged situation. The Russian invasion of Ukraine continues with no signs of stopping in the short term. That means that a lot of the world remains unwilling to do business with Russia and Russian business's.

However, we have seen some stepping forward and being willing to do business. Countries such as Brazil, India, etc. have not only shown a willingness to continues business with them but to also do business in Russia's currency (Ruble).

Countries such as these being willing to do business is extremely important for the global potash market. If the entire world were to basically say no to buying from them, then Russia's export volume is completely lost. That equates to roughly 21% of the global trade. However, if enough countries stepped forward to buy Russia's typical 7M tons of potash exports per year, then the global potash S&D doesn't change. In that case, the countries willing to do business with Russia will likely receive a lower price while those unwilling will pay higher.

Today, the fertilizer market is trading on the idea that Russia is lost to the world. That creates a VERY tight supply situation today and moving forward.

Belarus continues to be cut from the world as well

Losing Russian exports is bad. Losing Belarusian potash exports at the same time is worse.

As you can see from the info below, Belarus accounts for approximately 21% of the global potash trade (same as Russia). That means that with Russia and Belarus cut from the world, we are currently missing 42% of the global export volume. That is over 14M tons per year that will vanish.

What makes the Belarus situation worse than Russia is where it sits. Russia has access to deep water ports still which it can use to ship products (assuming countries will do business with them). However, Belarus is land locked. In normal times, they would ship their product thru Lithuania, to her deep water ports and then to customers around the world As retaliation to Belarus's part in Russia's invasion of Ukraine, Lithuania has closed its borders. This leaves Belarus with few to no options for exporting their product.

The world was already tighter than normal on supplies of potash. This situation is making it so much worse.

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 - +15% or approximately $110 higher
Vs 90 days ago - +21% or approximately $145 higher
Vs 6 months ago - +26% or approximately $170 higher
Vs 1 year ago - +163% or approximately $515 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

Low inventory levels leave producers in charge – potash stockpiles were low following the end of spring '21. Potash stockpiles were low following the end of fall '21. We anticipate that potash stockpiles will be low following the end of this spring which will carry into the "summer fill period". Low inventory levels means producers can be patient and hold their price.
Russia/Belarus continue to not participate in the world market - Belarus/Russia account for approximately 36% of the global production capacity. Belarus/Russia account for approximately 41% of global potash exports. There is no easy way to say it. The longer both countries remain cut off from the world economy, the tighter the global potash market gets.
Grain prices continue to climb – this is much more an emotional bull factor but an emotional bull factor all the same. If grain prices continue to rally, especially corn, the potash market will see that as a bullish signal as demand is much less likely to be cut. Unchanged supply + higher perceived demand = higher prices.

Bearish Factors

Demand destruction like 2008 – this is a bearish factor that has been listed for a few months in a row and it STILL remains my number 1 bear factor. There is a lot of anger and angst on the farmer level. Rightfully so. That means farmers are looking for ways to cut inputs. One of the easiest remains potash. 2008, while a different market setup, proved that we could cut demand substantially (down 40% that year). If we cut demand by that much this spring, supplies will not feel as tight as they do today.
Producers lower prices to incentivize summer fill demand – this is a bit of a stretch but is a possibility. If I am a potash producer, I have to know that I am in control o the market today and for the foreseeable future. However, I also know that there is going to be tremendous push-back from demand at these levels. Especially with fall season still 8 months away. If I want to put sales on the books, I need to drop my price fairly substantially to bring demand forward. If this happens, do not expect a lot of tons to be available. This will be a small layer by small layer program as they work the market higher again.
Higher prices bring about new production announcements - high prices cure high prices. Sometimes that is by destroyed demand (significant possibility). Sometimes that is by increased supply. With margin potential huge for producers, we could see new production announcements. Those announcements would weigh heavily on the market and could cause prices to fall as long positions look to sell.

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 most spring demand, it is too late for me to make any recommendations. By the time some of you read this, you will have planters hooked up to the tractors. If you are still on the fence about whether or not you want to spend the money on potash, just keep in mind the whole picture. If you cut your potash application and it saves you $5/acre but ultimately ends up costing you 2 bushels of corn yield potential, you have taken a step backwards.
While I cannot guarantee that potash values will go lower this summer, I'm not in love with the concept of buying my fall '22/spring '23 potash needs at these values. These are some of the highest prices we have on record. That means that you would be locking in the highest priced potash you have ever seen 7 - 11 months before you need it. We have seen tremendous market shifts in only 2 - 3 months. Imagine what can happen in 7 - 11.
BE CAREFUL. It is that time of year again. It is so easy to decide to work thru the night or push a little harder. Especially when a storm is coming or when you are close to being finished. Chances are you will push and nothing will happen. However, that small chance is still lingering that something could happen. You could fall asleep at the wheel. You could lose focus and wreck your machine. Obviously I'm not telling you what to do. I am only asking you to do all you can to finish the spring safe and healthy.

Fertilizers

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