Farmer Fertilizer Focus - Urea

By: Josh Linville, Vice President- Fertilizer

Mon, 01 Nov 2021, 23:06

UREA

Josh Linville

Director - Fertilizer

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

Right now, the world urea complex looks like it still has bullishness left in the tank. This was summed up nicely with the currently ongoing Indian urea purchase tender information that was announced today. They need to purchase something in the realm of 1 - 1.25MMT on this purchase...they received offers of only 530KMT. However, 50KMT was disqualified and another 50KMT removed itself from consideration which resulted in only 430KMT being available... and they are not likely to get all of that.

This continues to push the narrative that world inventories are largely sold out thru the remainder of 2021. This is important because as we enter into the Q1 '22 period, we have a lot of global demand that steps up: U.S. / Canada / Brazil / Europe / India / Asia / etc. Moving into Q1, inventories are tight and demand will be high. That is a recipe for higher prices.

For those in North America, all of the above is the same for you...except it is worse. As of today, NOLA urea values were being traded around $735 (give or take). North America is still a net importer and will need millions of tons between now and next spring to meet demand. The lowest price to India netted back to the Arab Gulf (U.S. biggest supplier of imports), at $895.50. When you calculate that into a loaded NOLA barge, the price become $880...almost $150 LOWER than replacement. Unless world values fall completely out of bed (doesn't look likely), North American values have a lot of work to do...

What has happened in the last 30 days?

European natural gas values skyrocketed

As you might have heard, European natural gas values went from single digits to $40 MMBTU before settling back into the lower $20's. It was a massive price rally that saw plenty of finger pointing regarding the why:

The Russians are playing politics with supplies to get their pipeline built
The Europeans got too dependent on solar/wind energy which failed to meet expectations which rapidly increased demand on gas
Traders in the market caused it

I am no natural gas expert and will not pretend to be. All I can tell you is that current gas values are high enough that producers in the region had to slow/stop their production facilities. If they hedged their natural gas inputs (like they should), they likely shut down the plant and sold those contracts back to the market with a hefty profit attached. If they did not hedge their gas inputs (it might shock you...), they were not profitable today or the near future so made the decision to shut things down.

Not all production went down. Some facilities were supported by the governments either because of their needs of the outputs or due to subsidies to guarantee local farmers demand is met.

Regardless, a massive amount of production was lost in a time where inventories were already tight. Not a good combination.

China shut down exports

This situation started with phosphate exports and carried over into urea. The Chinese government has decided that the best way to meet Chinese farmer demand at lower prices is to force product to "stay home". If producers are not allowed to export product to premium markets, their price ideas will drop with a lack of options. A healthy fear of the government helps as well.

The result has been that exports have slowed/stopped which removes large potential blocks of tons that would be available to demand around the world. Again, as mentioned regarding Europe, inventories were already tight. This didn't help.

Egyptian and Arab Gulf producers continued to sell higher priced blocks of tons

As European production struggled, Egyptian producers have flourished on higher and higher sales prices.

The most recent sale seen was at $850. It seemed as though they would continue to lead the charge but this recent India purchase tender tipped the scales with the lowest price offered being a $895 Arab Gulf fob price.

Regardless of which one is leading the charge, the result is the same. Inventories remain extremely tight around the world with most producers appearing to be very well sold to sold out thru the rest of 2021. When they start building stockpiles in January, they will be met with demand from the U.S. / Canada / Brazil / Europe / etc. High demand and low inventories are a volatile mix with trends typically moving higher.

NOLA moved higher but not nearly enough

One of the things that I continue to bang my head against the wall about is NOLA urea being so cheap vs international replacement values.

The U.S. is a net importer of urea. Before we started this fertilizer year, we estimated that we needed around 5M tons of imports. That was before Hurricane Ida. That was before inland production issues. And yet, NOLA remained a steep discount.

A big part of the reason why is due to the heavier than normal import flow. The last few years has seen July thru November imports around 1.3 - 1.5MST. This year, that total sits around 1.9MST. Today, we have more sellers than buyers. To make matters worse, most of the imports are done by companies WITHOUT inland distribution. That means they are forced to sell barges only. Those with the distribution realize this and use it to their advantage. Dragging their feet on buying puts more pressure on the sellers and when they like the price, they gobble everything up and put that profit in their pocket.

That is the why but it cannot continue as it is today. As mentioned above, NOLA is almost $150 BELOW replacement values. Either global prices need to plummet or NOLA needs to rise and it doesn't look like international prices are coming down....

Rumors that Russian may shut down exports as well

There are 2 things that might be driving Russia toward stonewalling urea exports.

1. China is doing it

2. They fear that Europe will buy everything out with their production down, leaving Russian farmers without supply

Both are legit scenarios/reasons that they would. We have not seen anything definitive that these actions are going to take place but given how others are reacting, this needs to stay on our radar.

For lack of a better description, India just fell on its face on buying tons...

On their last purchase tender, India needed to buy around 1.5MMT. In the end, they ignored the higher priced west coast offers and "only" secured 730KMT for the east coast. Last week, when they reentered the market to buy for the west coast, they restricted the offers to only manufacturers (cut out traders). They needed to purchase 1 - 1.25MMT. The result of the offers was less than expected.

Only 530KMT was offered.

50KMT was disqualified

Another 50KMT removed itself from the offer list

In total, they were only offered 430KMT and will not get all of that (most likely many of the tons will be unwilling to drop their price substantially to participate in the sale).

Not only did India come up short in their purchase needs, they just proved to the world just how tight inventories are and that will be a big negotiation factor in the coming weeks/months that should see prices continue to be supported.

Where are current values in relation to the past

For urea, we use NOLA/New Orleans Louisiana as our base point as it is the easiest spot to track.

Vs 30 days ago - +12% or approximately $80 higher
Vs 90 days ago - +73% or approximately $310 higher
Vs 6 months ago - +96% or approximately $360 higher
Vs 1 year ago - +230% or approximately $512 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

World inventories are tight – we have lost Chinese exports. We have lost a lot of Europe production. We may lose Russian exports. The hits just keep on coming.
World demand remains high – India is well behind on stockpiles and needs huge tonnages to "catch up". Q1 will see big demand step forward from around the world. Producers will continue to be in charge of negotiations.
North American values are WELL below replacement – world inventories are tight. World demand is high. If this scenario continues, the U.S./N.A. will need to start competing to get the import tonnages for spring season. That means needing to be closer to in-line/higher than replacement costs which are almost $150 higher than current NOLA.

Bearish Factors

High prices cure high prices – eventually, urea prices will get high enough that demand starts to move away to other crops that are not as nitrogen dependent...right?
We could see Europe production/Chinese exports improve – there is a lot of bad news factored into the current urea marketplace. If we could start to see European natural gas prices plummet (i.e. production come back online) or the Chinese government do an about face (wouldn't be the first time it has happened), supplies would improve as would the mental state of the market.
I'm struggling with a third... – I really am. At the end of the day, we really need a combination of supply improvement and demand destruction to turn the bullish tide. Every commodity is cyclical and urea is no different. However, I shudder at how long we will spend at these values...if not higher.

Where are the current urea/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 135 bushels to pay for 1 ton of urea
Spend 55 bushels to pay for 1 ton of urea

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 urea 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

Everyone, I know how painful current urea values are. They are ridiculously high. Unfortunately, I spend a lot of time trying to figure out how prices are going to drop near term. As you can likely tell on the bulls/bears breakout, I have not been successful. It isn't like a lot of demand can switch to UAN or NH3. They are both struggling in their own unique way.
If the price your retailer is offering you is near the above values mentioned, it is a steal and you should hug them after you write a check. A lot of the retail divisions struggle to keep up with the type of price increases we have seen. Eventually, they will need to start reflecting current values.
THIS IS NOT YOUR RETAILERS FAULT. Heck, this isn't just a North American issue. This isn't just a Chinese issue. This is the result of so many different crazy things coming together all at once. If I had written a newsletter 12 months ago detailing all the things that were about to happen, you would cancel your subscription immediately. I know I would have but that is where we are. The faster we embrace it, the better off we are.
Keep a clear head. Make sound judgement calls for your farm..

Fertilizers

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