Farmer Fertilizer Focus - UAN

By: Josh Linville, Vice President- Fertilizer

Thu, 01 Sep 2022, 17:41

September '22 UAN (28% / 32%)

Josh Linville

Vice President- Fertilizer

major global uan export location price graph

As mentioned in other products, the price graphs should be viewed by their price direction, not their absolute price. The first graph looks at the Black Sea and NOLA values on a short ton basis. The second looks at the same points except in metric ton. Both are in USD.

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

As long as European production remains down, producers get to call the shots. Europe accounts for approximately 20% of global production of UAN. That is 1 out of every 5 tons produced globally and for the most part, Europe is lost for now.

That said, I've never met a producer that let a good crisis go to waste.

Prices are up from last month and frankly, I'm not sure it is done. In the last 30 days, we have lost the majority of European production. That is around 20% of global capacity that is no longer there. Not only that, but remaining world producers have more options. It isn't like European farmers are going to say "oh well, we will just go without".

Unless there is a drastic change (possible), it is very hard to see UAN price ideas falling. Urea is high priced. NH3 is high priced. Grain prices remain high. That is a lot of leading indicators that support higher price ideas...and producers love money!

should you buy your Spring '23 uan needs today?

Keep layering

There are a lot of factors out there that are pointing to continued price increases. I know this month is going to sound like a broken record across nitrogen products but it is that important.

Europe accounts for 20% of all UAN produced in the world and as of today, most of that production is lost.

Now, we will likely see other global producers ramp up their UAN production (at the cost of urea production) to offset the loss. We will also see European farmers likely switch some acres away to save on nitrogen costs as well. This is what a free market does. It finds balance.

Unfortunately for those still needing to buy, the trend looks to remain higher until Europe comes online again. If the current numbers make sense for your operation, a layer doesn't hurt.

What has happened in the last 30 days?

Europe falls

Tired of hearing about this yet? I hope not as it will continue to be repeated!!!

When the Dutch TTF (Europe natural gas market we track most actively) broke above $70MMBtu, we started to hear of production shut downs in Europe. Then the price broke above $80 and the rest of the European announcements came. In the end, the price spike just above $100 but it didn't matter. The production damage had been done with the result being most production down in the region.

I shared the below slide last month to highlight how important Russia and Trinidad were to N.A. buyers (substantial amount of all imports come from those 2 locations). This month, move away from the pie chart and over to the left. U.S. and Canada combine for approximately 45% of global UAN production. However, Europe sits at number 2 with 21% of production or around 7M tons per year.

That is why this is such a big deal to demand around the world. What is happening in Europe matters to you. As long as this situation continues, prices are going to remain high.

There is light, albeit faint, at the end of the tunnel. Dutch TTF values have since fallen to lower $70's/upper $60's for nearby months. Still not low enough to bring production back online but getting closer. We also presume that nitrogen plants will lean toward UAN production in order to offset the loss. Unless Europe turns on, prices are going to remain high but the market is doing what it can.

N.A. summer fill values are hard to come by

Have you walked into your retailer asking for a UAN fill price, only to be told they have nothing to offer?

DO NOT GET MAD AT THEM. IT IS NOT THEIR DOING.

Producers are not one to let a good crisis go to waste. They fully realize the extent of production loss in Europe and what it means for global S&D. Frankly, if you put yourself in their shoes, would you go out and sell everything you had at a lower price? I'm not trying to justify the action. Merely trying to shed light on the reasoning.

In the end, retailers are working hard to get programs put together but that is near impossible when there is no market. There will be further programs shortly and retailers will have pricing again. It is alright to be miffed. Just do not take it out on the messenger.

Where are current values in relation to the past

NOLA/New Orleans, Louisiana

Vs 30 days ago - +11% or approximately $45 higher
Vs 90 days ago - -26% or approximately $155 lower
Vs 6 months ago - -21% or approximately $120 lower
Vs 1 year ago - +39% or approximately $124 higher

Black Sea

Vs 30 days ago - +2% or approximately $12 lower
Vs 90 days ago - -17% or approximately $99 lower
Vs 6 months ago - -21% or approximately $125 lower
Vs 1 year ago - +51% or approximately $162 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

Grain values high + supply fears = big demand – there is a lot of the current market that is more scared of not finding product in the spring than the price change. That means a subset of demand could care less the price. They just want to be able to dip their finger into it and know it is there. With that kind of mentality, we could see bigger price increases that ultimately do nothing to offset demand.
European production remains offline – the major event of production going down has already occurred and is mostly baked into the current market. However, if this continues for the foreseeable future, we are likely to see values continue to climb. The NOLA UAN futures market certainly backs that narrative with Q1 '23 values settling in the mid-$500's.
Grain prices hold/push higher - while the current grain/UAN ratios look like crap, the overall profit of a lot of farms is still very positive. As long as grain values hold, farmers will want to maximize yield. In order to maximize yield, UAN is needed. As long as UAN is needed, prices remain high.

Bearish Factors

Europe turns back on - I was about to write this as the 3rd in this list before coming to the realization that this is absolutely the number 1 bear factor. Natural gas prices have been falling. Not to the point that production turns on but it is working lower. We are also hearing of governments possibly taking steps to help production turn on again. If this happens, buyers are likely to run for the hills and sellers to come out in force. That spells lower prices.
"Why buy today at stupidly high prices when I can wait until spring?" – this year, there is a wide array of opinions of how to approach purchases for next years crop. I think there is a substantial number of farmers who are looking at today's prices and wondering why in the world they need to jump when April is a full 8 months away. Better to wait and see if a reset comes later this year/early next year. If enough demand stays away, retailers will be hesitant to buy more. If retailers are hesitant, suppliers/producers get backed up with product and that can force them to fire sale.
Producers start leaning into UAN production – with Europe production lost, there is a gaping hole in UAN supplies globally. That means nitrogen producers who have the ability to switch between higher urea or higher UAN production rates are likely to lean into UAN. This, coupled with likely demand destruction due to acre switching, could help offset a lot more of the production loss than many currently assume.

Where are the current uan/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 100 bushels to pay for 1 ton of UAN
Spend 60 bushels to pay for 1 ton of UAN

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 UAN 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

Make your own decision - these are tough times, folks. There are a lot of global factors that could push prices higher and a lot of global factors that could push them lower. Certainly seems there is no "one size fits all" approach to this thing. At the end of the day, we need to know what works for us. Not our neighbor. Not our supplier. For us. Look at the numbers and make the decision that best fits you and your farm.
Hedge - if you do lock in UAN, please consider selling some grain next year. I think I will have said this on every single newsletter but the worst outcome is not that we buy UAN and the price of UAN falls. No, the worst situation is that we buy UAN and the price of grain falls. If the price of UAN falls, it is an opportunity cost. If the price of grain falls, we are in a bad situation. You have to decide to do what you are most comfortable with but if you have any comfort in selling ahead, please consider it.
Hold on tight - this fertilizer year looks like it is going to have a lot of volatility. Keep your head on a swivel and look for those opportunities. There is plenty of time before next spring but 7 months will fly by.

Fertilizers

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