Farmer Fertilizer Focus - UAN

By: Josh Linville, Vice President- Fertilizer

Mon, 05 Dec 2022, 03:05

December '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

Unless the urea market starts seeing prices rise drastically, UAN manufacturers are going to be feeling the heat which will likely mean lower UAN values.

The big story this month is all about urea and how much prices have fallen. It has gotten to the point where NOLA values have urea at an almost $80 discount to UAN on a flat price comparison. On a price per pound of actual N (the value we all actually care about), that difference is 34 cents.

Inland, the differential is not as stark due to the 2nd biggest story in North America - logistical issues. However, the difference is still stark and based on multiple conversations, it is sounding more and more likely that UAN users are considering a switch to urea.

This possible demand switch has to be catching the attention of manufacturers and we are hearing rumblings that they are a little more willing to consider lower prices. May not be a widespread price fall, but it is definitely a weak point in the armor.

should you buy your Spring '23 uan needs today?

Hold off...for the moment

If I have more UAN to purchase, I would be dragging my feet a bit to see what plays out in the next 30 days.

Urea prices are acting like an anchor on UAN price ideas.

Fall NH3, while still too early to call, looks like it might be closer to "normal" than we originally thought which means less switching to UAN in the spring.

European production levels have improved which has helped global supplies rise/demand fall.

All of this combined with very high grain/UAN ratios make me nervous of stepping in today.

On the flip side, the year end/beginning prepay period is coming and logistics are still a very big fear across North America. Either or both could cause prices to hold...or even rally.

What has happened in the last 30 days?

Some European production plants are restarting!

This is being left unchanged from November because it remains incredibly important for the world of UAN. The addition of these produced tons/loss of demand continues to weigh on price ideas around the world. While we are anxiously watching European natural gas values (have climbed from a bottom of lower $30's to a current lower $40's), today it looks like restarted production will remain online for the short term. Nitrogen plants are difficult to restart/shut off, not to mention expensive. Plant owners are not going to take shut downs likely. With some plants being feared that they will not restart if turned off, it might make sense to continue producing at a loss rather than lose the asset alltogether.

This is not a story I thought I would be writing anytime soon!

When Putin shut off natural gas flows to Europe, prices skyrocketed. Values which had normally been in the single digits skyrocketed to over $100mmbtu. The immediate response from nitrogen producers were to stop production. As Russia continued to invade Ukraine and "someone" sabotaged the Nordstream pipelines, many experts claimed that natural gas values were remain extremely high for a very long time.

Sometimes, markets have a way of making really smart people not look so smart...

As of this writing, the Dutch TTF futures have closed the week with all future months no higher than upper $30's. This did not seem feasible a few short months ago. The result has been a surprising number of nitrogen plant restarts.

Some plants, like those in Poland, officially announced their restart. Others have been highly rumored but have not officially announced. This makes sense from their POV. If they tell the world that their production (supply) is returning, that also means their regional demand is dropping. This is a bearish event and let's face it, they like higher prices.

More promising are rumors that even more plants are coming online in Europe. Some are said to be restarting because it makes financial sense (plants are profitable again). Others are rumored to be restarting because if this process is not done now, there is a chance the plant never restarts. Better to lose a little bit of money on the short term to keep the plant viable for when market conditions improve.

While a lot of damage has already been done for lost production time as well as some plants still being offline, this has been a positive piece of news for buyers that was not highly expected.

North America logistics are in trouble...and that could impact UAN prices

Unless you have been living under a rock (or incredibly busy with fall harvest/fall application/feeding cows/etc.), North American logistics are struggling right now.

The river situation has been dragging on for many weeks...and shows little signs of improving near term. While Midwest rains have helped water flows bump higher for a short time, what it truly needed are heavy moisture events in the north to fill the waterways. Even if that occurs, most of the moisture would come as ice or snow, meaning that the impact to waterways would not be felt until the springtime. It seems we are going to continue to fight thru this for several months to come. Fortunately, the Coast Guard/dredgers/barge owners/barge captains/barge crews are busting their butts to keep traffic flowing...even if at a reduced pace/weight.

Recently, rail strikes have been dominating the news wires. Rail workers across the U.S. have come together to make demands. Railways have been unwilling to give on negotiations. It seemed likely that a strike was going to occur...until Washington D.C. voted to not allow a strike.

Someone should have introduced them to a rail worker and discussed what their voting against a strike would do.

Short theory is that rail workers are now more likely to dig in their heels with that vote. Those that I know that work for railroads and not the type that like to be told what to do. If negotiations continue to fail, I wouldn't be surprised if workers take steps to mess with transportation in the form of not showing to work, working slow, not delivering cars due to "issues", etc.

For the UAN market, the loss of either/both of these methods would be devastating with a result of inland prices jumping further. We are already seeing signs that inland values are holding high while some world/NOLA price ideas have fallen. It simply costs more to move product from point A to point B. It also makes exporting UAN to Europe even more appealing due to fears of not being able to push north.

I cannot understate how important this will be not only to the UAN market but to all fertilizers. Even though this is a U.S. rail strike, it will affect Canadian farmers just as well.

Cross your fingers this crisis is averted.

NOLA UAN is expensive vs urea

I can sincerely say that I did not expect the spread to get this wide between UAN and Urea. That said, I also did not anticipate global urea values to fall nearly as hard as they did.

As the graphs below show, UAN has quickly become an extremely expensive nitrogen alternative.

In the past, the notion that farmers would switch freely between the N sources was largely laughable in the supply/trade sector of the marketplace. Farmers were set on their product and it would take a literal act of God to make them use something else.

However, this year looks like it may break that rule.

There are many out in the market that are saying they are highly considering a switch. If the UAN marketplace wants to keep the value where it is, they will respond by switching. It is several months before the start of spring so plenty of time to take action to make changes.

Now, this talk is easy to have today with very few decisions being made. What will be important is the action. If we get into the calendar year prepay period and find that switching is happening, it will create a tremendous amount of downward price pressure for UAN.

I'm not saying this switch works for everyone but for those that it does, it is worth considering.

Where are current values in relation to the past

NOLA/New Orleans, Louisiana

Number 1 importer (2.5mmt in 2021) AND number 5 exporter (563kmt in 2021)

Top 5 import origins

Russia (42%)
Trinidad/Tobago (33%)
Canada (17%)
Algeria (4%)
Netherlands (2%)

Top 5 export destinations

France (31%)
Belgium (18%)
Argentina (14%)
Germany (6%)
Poland (5%)

Price Comparisons

Vs 30 days ago - -3% or approximately $15 lower
Vs 90 days ago - +9% or approximately $45 higher
Vs 6 months ago - -6% or approximately $35 lower
Vs 1 year ago - -3% or approximately $14 lower

U.S. Midwest Average

Vs 30 days ago - -1% or approximately $7 lower
Vs 90 days ago - +10% or approximately $50 higher
Vs 6 months ago - -3% or approximately $20 lower
Vs 1 year ago - -6% or approximately $35 lower

Black Sea (Russia)

Number 1 exporter (2.2mmt in 2021)

Top 5 export destinations

United States (49%)
Australia (16%)
Argentina (6%)
France (5%)
Canada (4%)

Price comparisons

Vs 30 days ago - -4% or approximately $22 lower
Vs 90 days ago - +12% or approximately $55 higher
Vs 6 months ago - -11% or approximately $63 lower
Vs 1 year ago - -21% or approximately $138 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

European production fails again (same as November) – today, buyers can celebrate European production coming online once again. While it has not meant lower values, it at least seems to put a cap on values. However, winter is coming. If we start losing European production plants again, expect markets to react.
Strong 2023 demand outlook (same as November) – we originally had our 2023 corn acreage set at 90M. Then we revised it up to 91M. In the last several days, given how U.S. harvest appears, we moved it higher still to 93M. There are others pointing to 95M or higher...and it is hard to argue today. Regardless, N demand is going to be big once again.
North America has already exported A LOT (same as November) - as mentioned above, the U.S. has been a net exporter of UAN from May to September. There is a solid chance that trend continues as we get in Q4 '22 trade information. Not only are we exporting but N.A. producers seem to be making more urea/less UAN this year which further tightens our S&D. Will we be able to bring in enough to offset what was lost?

Bearish Factors

Europe continues to turn back on (same as November) - this is why we continue to consider low probability scenarios when the ramifications can be huge! I never thought Europe would turn on like it is but that is certainly the case with rumors of more on the way. As long as this continues, European demand drops which pushes supplies elsewhere around the world. Supplies rise + demand drops = hopefully lower prices.
The price is high enough to influence demand/significantly hurt year end/beginning demand (same as November) – UAN values are very high vs urea. UAN values are very high vs NH3. UAN values are high vs...well, every crop I look at. We have barely started October so there is a lot of time before spring. This raises the chance that demand start switching away.
North American supplies better than expected (same as November) – this can come in many forms. The market is expecting major exports to Europe...but we did not see anything huge in the July export number. Carryover inventory from spring was very heavy. Producers could be producing more UAN than the market expected. All of these and more could lead to much more supply than the market thinks is out there. If demand remains the same and supplies are higher than expected, Econ 101 says prices should fall. Not saying it happens, but this is a point I cannot get out of my head.

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 focal points

European production - plain and simple, as long as Europe production is offline, world supplies are tight. They account for 1 of every 5 tons of UAN produced on planet earth. While the chance is not large, there is a chance production ramps up again so we need to watch for that. However, with the chance being so small, we need to proceed as if that is the case.
Price spread to urea and NH3 - at least here in North America, UAN is a HUGE premium to other N alternatives. If producers think for a second that the wide price spread this far away from spring doesn't have farmers considering changes, they are fooling themselves. If UAN remains this steep a price and such a premium, it is very likely that we will see demand switch away and force the price to come back to normal...whatever that is...
How UAN producers approach the market - unfortunately for buyers, there are limited producers of UAN in North America and around the world. It simply isn't the huge product that urea/NH3/etc. are. That limited number of suppliers means prices are less likely to fall apart as the few producers can be more patient on the marketplace.
North America logistics - global/NOLA values of UAN falling will mean very little to nothing if we lose either rail or river logistics...or both. The loss of one/both would easily outweigh the massive increase in logistical costs to move UAN into place. Unfortunately, sometimes things completely outside the fertilizer markets can impact the fertilizer markets.

All data was sourced from StoneX unless otherwise noted.

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