Farmer Fertilizer Focus - Urea

By: Josh Linville, Vice President- Fertilizer

Fri, 01 Apr 2022, 00:21

UREA

Josh Linville

Director - Fertilizer

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

The Russian invasion of Ukraine continues which means Russian urea tons are not finding their way around the world. There has been no change in the Chinese governments ban on urea exports. The northern hemisphere is out of time for getting goods in place for the spring season. Grain prices continue to rise. There is a very real chance that India and other countries may step in to purchase earlier than expected for fear of not getting product.

Unfortunately, that is a short list of why I still believe urea prices will be supported in the short term.

The urea market can and probably will change very quickly but today, it is looking like prices will hold.

Should you buy your spring '23 urea needs today

If you have been considering it, I commend you for being willing to look that far ahead. That is a decision most of us are not comfortable even considering.

However, today I do not believe I would lock in those values.

Today, we are at some of the highest urea prices we have ever seen in the history of urea. We are also approximately 11 - 12 months out from the spring of 2023.

Not only those but today's forward looking ratio's vs corn are terrible vs history.

So by buying today, you would be buying the highest price in history a year in advance at the worst ratio we have seen in recent history.

I'm not saying that prices will absolutely come down but remember what happened in January and February. We saw values plummeting with very little reason. If we start getting to the summer months and start to see the market normalize (Russia invasion stop, Chinese exports being, etc.), we could see a good buying opportunity.

I'm just not a fan of buying today.

What has happened in the last 30 days?

The Russian invasion continues

The most shocking thing regarding this invasion is the fact that they actually did it.

The 2nd most shocking thing is how most of the world has come together to punish Russia for its actions.

Most of the world has shunned Russian businesses in backlash of the unjustified invasion of Ukraine. That means not being willing to accept Russian produced urea.

This is huge because if Russia remains cut from the world, approximately 14% of the global urea exports are lost on a yearly basis. Russia accounts for that much of the world trade.

Now, we are starting to see countries like Brazil, India, Mexico, etc. that are stepping forward as willing buyers. If they are willing to buy and are able to receive those tons, it will actually help the global S&D vs Russia being completely cut off which reduces global supplies. These countries might be willing to purchase Russian product, but they still need to get financing willing to participate which can be a struggle. If they can do both of those (be willing to buy and find financing), they still need to find vessels willing to operate in Russian ports.

There are still a lot of questions that needs answers but today, we are operating on the idea that Russia will largely be removed from the world market and that means supplies get tighter.

Chinese government continues to ban exports

Losing Russian exports is bad. Losing Chinese exports at the same time is worse. That means the world is losing near 25% of the global export volume.

Many in the urea market believed that the Chinese government would rescind the urea export ban early with global prices going higher. Unfortunately, that is not the case.

When the ban was enacted, the reasons given was that global supplies were tight and global prices were high. By banning exports, they ensured that there would be adequate product for Chinese farmers. Also by banning exports, it cut Chinese producers from the premium world market and forced them to sell to the discounted domestic market. This means supplies remain high and prices low.

This ban was put in place last fall and since that time, both factors have actually gotten worse.

I currently believe that we could see the ban extended, not shortened. If they do allow exports, it will not be a free market. Expect to see the government govern the size of exports so that it is not overdone, leaving less than adequate supplies for Chinese farmers.

The loss of free markets typically creates higher prices.

Getting too late to bring additional tons to North America (same as last month but we are now down to days/weeks)

The Middle East accounts for approximately half of the urea imports to North America so we need to use that as our time table. If we decided today that we needed an additional 500K tons to come, here is what we are dealing with. This assumes that we have a vessel in the Middle East ready to load today and that there is a port with an open timeslot with product to load it:

It would take approximately 30 days to get from the Middle East to NOLA
Assuming no issues unloading, it would take several days to unload into barges and to hook up power to those barges
You are looking at 2 - 4 weeks of river sail time (depending on destination)
Then several days to unload those barges into a terminal or into railcars
Then several days at least to move that product to an inland storage sight

Long and short, newly called upon tons are not showing up on your doorstep until mid-May at the earliest. This does not mean we will have a shortage. This is more to give an appreciation of how long it takes to get product. When I was in Australia, I was shocked because not only do you have sail time, you also have to hit several ports with a ship. It all takes time.

NOLA urea hit a record high price of $935st

Not celebrating this. Merely pointing it out. The all-time high price of urea now sits at the recent $935 trade that occurred during the month of March.

Not much more to say about that...

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.

One note: the below comparisons are using the COB Friday values (25th) as we always do. As of this morning (28th), NOLA urea values are at least $50 higher. That is how quickly these markets are changing.

Vs 30 days ago - +14% or approximately $112 higher
Vs 90 days ago - +17% or approximately $132 higher
Vs 6 months ago - +37% or approximately $245 higher
Vs 1 year ago - +134% 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

Russia's invasion of Ukraine continues for the foreseeable future – let's cut to the chase. Russia accounts for 14% of the global urea export total. Today, most countries are not willing to do business with Russian companies as a result of the invasion. Even for those countries that will do business with them, it is hard finding ships that will operate in Russian ports. The longer the invasion goes on, the tighter the world supply gets.
Chinese government does not allow exports to start again normally – the market expects that the Chinese government will stop the urea export ban in June as they stated at the beginning. However, the world urea market is worse than when the ban was enacted. If they decide to extend the ban or allow exports in a very controlled manner, it will not be the savior many hope it to be.
Scared buying begins – the best way to explain this is the toilet paper shortage of the Covid era (for those in the U.S.). It started being reported that tp was in tight supplies and what was the response? Hoarding for fear of not getting it. Global urea inventories are tight and countries/governments are scared of not getting what they need. That means we can see demand stepping forward much earlier than normal which could cause prices to rally even further.

Bearish Factors

Putin is removed from power – rather than say the conflict comes to an end, I'm saying Putin is removed. If Putin decides to pull back, I'm afraid the world will not trust him and many of the business blockages will remain in place. However, many only blame Putin. Not Russia's people or businesses. If Putin is removed, we could see the global economy welcome Russia back with open arms. That would include urea shipments.
China reemerges as a urea exporter – I'm not holding my breath that this happens but anything is possible. If the Chinese government lifts export restrictions, that will add several million tons of urea into the global market. That would be a big boost that likely would see prices down.
Demand drags its feet in the face of high prices - above, I talked about how demand could be pulled forward and cause prices to spike. We could also see the opposite. If high prices cause demand to stay away, inventories grow and could cause producers to become desperate to sell as quickly as possible.

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

Do not make angry/frustrated decision on your urea needs. I understand not being happy with the urea market today. It is the highest we have ever seen it. That pisses me off. However, we have to try and keep a level head when it comes time to buy/make decisions on application rates. Do not skimp on your N if it is going to destroy your yield potential.
Talk to your supplier. Your supplier is just as scared of these prices as you are which means they are not willing to buy it in the hopes that you show up. Better to at least have a conversation about what you think you will need. Give them the ammo to prepare as best they can.

Fertilizers

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