Farmer Fertilizer Focus - Potash

By: Josh Linville, Vice President- Fertilizer

Fri, 29 Jul 2022, 21:38

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POTASH

Josh Linville

Vice President - Fertilizer

josh.linville@stonex.com

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

Potash, after largely holding together after setting its high price this spring, has been the slow bleeder of fertilizer products. Prices originally held together as the world came to terms with the loss of Belarus exports. However, dodgy demand and carryover inventories being higher than expected out of spring have weighed on the marketplace.

Potash has only dropped around $100 in N.A. from its springtime high's while all other products have seen several hundred dollar drops.

Unless we see grain values start shooting up, it seems as though potash will continue to hold steady to slightly lower over the next month or two. While things can (and probably will because why not...) change quickly, today there is little reason to get excited about locking up potash. Buyers know they have time on their side and also know there is nothing saying they HAVE to apply this fall.

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

This has to come down to each farm organization.

I think we will continue to see a slow bleeder in potash but I do not think this will result in the price dropping $100's of dollars.

While I want to say wait until the last minute and buy then in hopes of prices continuing to fall, I'm also worried about supplies not being in the right place at the right time.

If you are worried about supplies when you need them and today's values allow you to lock in a profit, that is the right call.

If you think there is more than enough supply in place and your numbers are a bit tough for 2023, then that is the right call.

Sorry, another month, another politician non-answer.

Unfortunately, that is where my head is today. I do not think there is one size fits all in potash today. While I continue to lean toward lower pricing, I also appreciate the fact that we only have 3 months until November. 3 months is 1/3rd of a year. 3 months is 120 days. I know that feels like a lifetime but in the fertilizer world, it really isn't.

Weigh your pros and cons. Look at your profitability. Your numbers will tell you your answers.

What has happened in the last 30 days?

Lithuania continues to block Belarus potash shipments...

...thus, the world is losing approximately 20% of its normal potash exports per year.

I know for those of you that have been on this newsletter for a while, you have heard this story over and over and over again. I'm sorry but if it were not so important, I would not continue including it. It is, so I will.

Originally, we thought that both Russian and Belarus potash exports would grind to a halt. Many nations around the world talked a big game of completely cutting off business with both countries as a result of their part in invading Ukraine.

Well, somewhere between the news podium and their desk, someone pulled those politicians to the side and reminded them that their people need food. Hence Russia exports slowing slightly but not nearly to the extent we originally expected. This was a win for those needing product and desiring lower prices.

Unfortunately for Belarus, it isn't that simple. Russia still has access to the world thru her deep sea ports. Belarus is completely land locked. To its south is Ukraine. Well, they are not going to ship their product thru a war zone and thru "enemy" territory. To their north is Lithuania who, as a result of Belarus helping Russia, has completely blocked shipments thru and out their ports. Logistical options to the east and west are limited and cannot handle their normal flows.

The simple result is that Belarus exports have ground to a halt.

One day, these shipments will return. Whether that be thru a new avenue thru Russia or thru Lithuania, these tons will return. Unfortunately, trying to figure out the day is proving...complicated. All we know is that today is not that day.

New production help is on the way

High prices cure high prices. Sometimes that is due to demand lowering. Sometimes it is due to new supplies coming online. Sometimes, it is a combination of the 2.

Luckily, we are starting to hear of a lot more production expansions being announced around the world. There are several in Canada that should be coming sooner than later. There are a few in Russia that should start churning out product in the coming months/years. We even have to assume that Belarus will return sometime soon, though which logistical avenue will be used remains a question.

What I am saying is that more supply is on its way with the very real possibility that supplies will be plentiful. If that makes you smile in the thought that it will mean lower pricing, you are right!

I'm not confident this will have a massive effect between now and Q4 '22. By Q2 '23, we could see prices softer (especially if this fall is a bust). Beyond that, hopefully we will finally see some much needed help on lower prices.

What will fall (Q4 '22) demand look like?

This is a tough call because it is hard to tell what millions of farmers around the world will do with prices where they are.

I've heard from a lot of farmers in the last couple months and their answers could be more different if they tried!

While I think the price of potash is too darn high, I can sell next years crop/buy potash and still lock in a profit so that is what I'm doing today.
I'm afraid supply will not be there when I need it so I'm stepping forward now.
I will put on normal application rates but I'm not buying anything until my butt leaves the combine seat.
I've got adequate potash levels in the soil. I can cut back rates and not harm overall yield potential.

That would be the short list but you get the idea.

Today, we are assuming that we will see application rates down 10 - 15% between the fall and spring seasons. That alone is a big cut. The harder call is telling how much fall demand will be there. If it turns into another poor season where we do not move inventories, that means we lead into winter with full sheds and nowhere for winter produced potash to go. That could weigh on prices.

We will get this answer but there will be snow on the ground by the time we do.

Potash prices are high vs most comparisons

I know that I've been one of the more vocal people in the market about this being a different fertilizer situation than anything we have ever seen. This is a supply driven market whereas all the years prior have been demand driven. Still, that doesn't mean we cannot compare to the past!

I am going to start doing something that I have always been cautious of doing. I'm going to start talking more about actual NOLA pricing. I haven't done it in the past because I didn't want anyone seeing those values and thinking that their retail price should be the same. Please remember that NOLA is for barge (or bigger quantities) and that the product resides on the river in New Orleans, LA. There is a lot of costs (interest, insurance, logistics, etc.) to move it from there to where you are.

That said, this week closed with the NOLA market at $720. Using that number:

Price vs history (looking at the same week each year)

2022 - NOLA priced at $720
2021 - NOLA priced at $555 or approximately $165 lower
2020 - NOLA priced at $191 or approximately $527 lower
2019 - NOLA priced at $251 or approximately $469 lower
2018 - NOLA priced at $262.50 or approximately $457.50 lower

Price vs corn values

2022 - spending approximately 116 bushels of Dec '23 corn to buy 1 ton of potash
2021 - spending approximately 111 bushels of Dec '22 corn to buy 1 ton of potash
2020 - spending approximately 52 bushels of Dec '21 corn to buy 1 ton of potash
2019 - spending approximately 60 bushels of Dec '20 corn to buy 1 ton of potash
2018 - spending approximately 65 bushels of Dec '19 corn to buy 1 ton of potash

Those are the 2 biggest comparisons that we use to determine the value and both show that today's price is extremely high.

Again, as mentioned so many times before, this does not mean that we think potash is going to be cut in half. The world is still contending with a market missing approximately 1/5th of its normal exports. It is impossible to lose that kind of volume and not have it disrupt normal.

This should serve as a reminder that the next time we have a chance to build soil potash levels when the ratio/price gets low, we should consider it.

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 - -4% or approximately $30 lower
Vs 90 days ago - -10% or approximately $80 lower
Vs 6 months ago - +10% or approximately $64 higher
Vs 1 year ago - +31% or approximately $170 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

Belarus remains cut off from the world – unchanged from June/July and still the number 1 global factor driving potash: yes, we expect that global application rates of potash will be down due to the high cost. However, we do not think that demand loss will outweigh the loss of Belarusian exports which account for 7M tons/year or approximately 20% of the global export marketplace. With them gone, the world is simply tight.
Strong export options - again, this is a repeat of last month but still very important: with Belarus gone, their normal buyers are out looking for new suppliers. It is not as though they will throw their hands in the air and give up. No, they will look for the next best options. Those options (like Canada) know they have more options and will use that to their higher priced benefit.
Strong '23 demand – alright, now I'm just feeling lazy...same as July but still important: since July, we have actually raises our 2023 U.S. corn acreage estimate from 90M to 92M acres. This is even more demand and does not take into global demand. Even with application cuts, the demand is still large.

Bearish Factors

Lithuania gives in and allows Belarus to flow potash to its ports – feel like I'm beating a dead horse...same as since the day Lithuania stopped allowing Belarus exports: the world wants to punish both Russia and Belarus for their parts in the invasion of Ukraine. However, the world also realizes just how important feeding its people is. Without potash, it is hard to grow crops. If Lithuania gets enough pressure to drop the shipment ban, we could see a full return of Belarus shipments. Adding that flow would cause prices to fall overnight and a situation like this could happen overnight...doesn't seem likely today but it is possible.
Buyer resistance – how thrilled are you to pay more than you have ever had to pay to raise a crop? I'm going to guess not very. I'm also going to guess that your feelings have you considering changing your approach. Will you reduce application rates? If you typically apply in the fall, will you wait for winter or spring? If you normally buy early to prepare for fall, will you drag your feet until the last minute before fall season? Any and all of these are possibilities and could see demand scurry away for the next few months at least.
Recession destroys crop price which makes potash price unsustainable - the last 2 quarters in the U.S. have seen the GDP shrink. That is the very definition of a recession, regardless of which party holds the office. We need to be concerned with how bad this recession will be. If it is bad enough that we see investment funds leaving grains, even if fundamentally supported, we could see grain values fall. We are already seeing the ratio's far too high (grain's priced too low/potash priced too high).

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

Lithuania...watch Lithuania - one of the first things I do each morning is google Lithuania to see if there is any change. In my mind, Lithuania is the single biggest factor out there. If they let Belarus exports resume, prices are falling and falling hard. As long as the ban is in place, prices are probably seeing a little pressure but nothing huge. There are a lot of other things to watch but for me, this is number 1.
Help is on the way - well, maybe not for this growing cycle ('23 crop) but it is on the way. There are some expansions to production coming in Canada. Russia has some projects that will be coming online. Eventually, Belarus will return. Whether that is more immediate thru Lithuania or longer term with Russia reportedly building a deep sea port to export their products globally, we do not know but we are confident they will return. These all mean more supply which should lean very hard on prices. 2 - 3 years down the road, there should be plenty of supply to meet demand.
Make good/logical decisions - I've mentioned it before and darn it (didn't want to say darn it but also wanted my compliance department to approve this!!!!) I'm going to keep mentioning it. These are very big numbers that you have to consider buying. It isn't comfortable. It is a lot of money. Just make sure that when you go to pull the trigger, you are making a logical and profitable decision. You can save a lot of money by scaling back your potash application rate. That feels good today. However, it will not feel so good if it costs you 20 bushels per acre. I'm not saying what is right or wrong, I'm just asking you to consider the full picture.
Work WITH your retailer - I know that a lot of farmers view their retailer almost as an adversary. I see it quite the opposite. I see them as some of the cheapest hired hands for farmers around world and play a crucial part in growing the crops that feed the world. That said, I implore you to have conversations with your retailer/coop/etc. I'm guessing that you are looking at current potash values and are nervous about pulling the trigger on your fall/winter/spring needs for fear of prices falling thru the floor. Imagine it from their POV. They have to buy for their entire territory and hold that price risk until farmers show up checks in hands. A lot of the retailers lived thru the 2008 debacle and watched friends lose their jobs and their companies. There is a lot of risk and volatility out there today. The more we can communicate about our needs, the better chance we have of making it thru this fertilizer year.

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