Farmer Fertilizer Focus - Urea

By: Josh Linville, Vice President- Fertilizer

Tue, 03 May 2022, 15:32

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UREA

Josh Linville

Vice President - Fertilizer

josh.linville@stonex.com

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

Globally:

Russian tons are finding their way into the marketplace
We are very close to finding out if China will start exporting
The India tender is complete, which means we will not see another "large" purchase for a while
We are moving into the annual "dead demand period" for the world

I'm not going to sit here and guarantee that global prices are going to continue dropping because the market has a way of making those comments look stupid. However, it seems like there is still more downside potential than upside.

Unless there is a change in the market, it looks like global urea values will continue to remain under pressure.

For N.A., a lot of the market going forward will be dependent on how the remainder of the spring plays out. That said, it is hard to see a situation where we soak up all the tons that are here.

While a spring demand surge is still expected, it may be too little too late to support prices
Suppliers/producers are likely even more fearful of what they will carry to summer
With prices where they are, demand is likely to be hard to find once past spring demand

There is always that unexpected Black Swan event that can pop up but today, the market is getting more and more comfortable with the current situation. Supplies appear adequate. Demand is dragging its feet. The trend has been lower.

With where the market is today, there remains more downside price potential than upside.

Should you buy your spring '23 urea needs today

I've been sitting here for 5 minutes trying to decide just how in the weeds I am going to go on this section. I could write pages on it, or just try to be funny and say no. That said:

Prices are down hard from their high's, but they are still high - when I look at NOLA urea specifically, values are down almost $400. That is a huge drop! However, when I start looking at where we are today, it doesn't look so attractive anymore. We have been at these values twice: 2008 and 2012.
Current Dec '23 / NOLA urea ratios are still high - when I compare the two, we are looking at a ratio of 87 bushels per ton of urea. Again, that is much better than we have seen in the last 18 months. But when we zoom out, we see that it is still much higher than normal.
The global market is normalizing what is happening - the shock value of the Black Swan events are wearing off. As we see more exports materialize and get closer to big players like China reappearing, prices should dip further
Spring is still almost a full year away for most of the northern hemisphere - look at what has happened in a few short weeks. Imagine what can happen in 10 - 11 months.

Keep in mind this is the POV for the 2023 crop. NOT 2022 crop. That is a different thing all together.

What has happened in the last 30 days?

Russian tons are finding their way around the world

When the Russian invasion of Ukraine started, most of the world took a hard line against Russia in the form of cutting off economic ties. Since the world has started to realize they sort of need Russian fertilizer (among other products) that line has blurred.

Originally, most expected Russian urea exports to be near zero for the remainder of the war/year. Now, we are seeing them show up in countries like Brazil/India/etc. While these may not be "normal" destinations for all the tons, it does represent an addition to the global supply. If Russia starts pounding Brazil with exports, for example, it will start to push out other parties which now need to find new homes around the world. That means more competition which typically means lower prices.

Today, it appears there will be no slowdown to their exports. That raises global supplies and competition.

We are on the precipice of finding out the Chinese export situation

For those new to the newsletter, last fall the Chinese government took the step to ban nitrogen (and phosphate) exports thru June '22 due to high global values and tight global supplies. This was done to lower domestic pricing and ensure adequate supplies for Chinese farmers.

Well, we are now very close to June and I have heard multiple theories on what will happen:

Full return to export flows
Return to exports but at a restricted/government controlled pace (my current theory)
An extension of the ban thru Dec '23
An extension of the ban thru June '23

So, the current belief is anywhere from a full return to an extension thru June '23...to say it is difficult to make calls on the Chinese government actions is an understatement!! They are all educated guesses and we will not know until we know.

Several in the urea space seem to believe that the ban will remain in place. World supplies are STILL tight and world prices are STILL high. That would mean they have the reasons in place to keep tons home. However, producers there also want to participate in the world market and jump on high margins.

If the ban is extended, that seems to be mostly baked into the current market which means values will rise but not in a huge way. However, if the ban is completely dropped, that would see a surge in supplies that is not expected. That could weigh on price ideas...heavily.

India's purchase tender comes and goes without much alarm

Last month, I discussed the large India purchase tender announcement. These tenders are a great gauge on the world urea marketplace as there is nowhere to hide. All the information is made public and it shows what people are willing to sell and how much they have.

This tender came and went without much of a hiccup. They originally said they were targeting 1.5MMT. They ended up purchasing 1.65MMT. The lowest prices offered were in line with expectations (between $715 - $725 delivered each coast). The total offered tonnage was slightly below expectations but not surprisingly so.

In the end, we did not see a huge purchase which would wipe up all global inventories and we also did not see someone cut their price huge to be the lowest offered value. For all the expectation and hype, it was a yawner.

NOLA urea looking VERY cheap vs UAN

At this point in the calendar, it is safe to say that most of the spring NH3 demand is done which puts the focus on urea and UAN for N needs.

There is a HUGE discrepancy in these markets that normally see the difference in a few pennies of each other:

NOLA Urea - $570 or $0.62/lb of actual N
NOLA UAN - $595 or $0.93/lb of actual N

That is OVER 30 cents difference and will make it very interesting to see how demand flows between the products.

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 lower
Vs 90 days ago - -5% or approximately $30 lower
Vs 6 months ago - -29% or approximately $228 lower
Vs 1 year ago - +44% or approximately $175 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

Still no official word regarding China's export ban – the Chinese government may start allowing full exports in June. They may extend the ban thru June '23. No one knows. If we find out that they are extending the ban, that is going to keep world supplies tight and supportive pricing.
Demand is growing for the 2023 crop – without going into all the details, this crop year is not working out as expected. We keep hearing that we may lose millions of acres in the Northern Plains alone to prevent plant. While that is bearish short term, it can be bullish longer term. If we do not raise the crop this year, we have to make up next year. We could see the corn number well above 93M...
Extremely short application window for spring – I think this would be a more local issue than overall market mover. If the spring finally opens, we could see demand hit in a way we have never seen and logistics will not be able to keep up. Most buyers might find themselves asking "how quick can you get it here" and not even care on the price.

Bearish Factors

China could completely drop the export ban – the global urea market fears Chinese exports. They can be big and with Chinese coal production rising, we could see fertilizer production come back online. If we see the government drop the ban completely, it not only injects new supplies into the marketplace, it also raises the fear of what China could still do in the future.
Russia continues to find homes for its product – at the onset of the Ukraine invasion, most of the world shut itself to the Russian economy as a retaliation. It was the best way to make a point without joining the war. Today, we have seen a lot of countries blur or do away with that line in order to gain access to new, cheaper supplies. Any gain in supply helps to lower price ideas.
Demand past spring is going to be dodgy - spring remains 10 - 11 months out for most of the northern hemisphere and today's values do not scream buy me. Unless we see prices down substantially, it is easy to make a case that demand will stay away for a while. That pushes pressure back to the supplier/producer.

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

Be thinking about what you need to finish this spring. Urea values are dropping. There is no doubt about that. However, they are dropping in the Gulf of Mexico. Once this spring starts hitting (if that ever happens), tons in the gulf will mean very little to tons in place unless you are willing to wait a month for them to show up. I get holding out in hopes of lower pricing but do not lose sight of the fact that you need N to raise a crop.
Stay attentive to the market. Prices are coming off their high's. There is a long time between today and next spring. Seems like a perfect time to disconnect and chill out. Trust me, there is nothing more that I would like to do. That said, I'm leaving for a short vacation with my family tomorrow and I will be glued to my phone. There are a lot of heavy hitting storylines on both side of the aisle. Eventually, one will win out. We need to be an alert and ready to move if the time comes.
Prices are way off their high's but do not lose sight of where we are. NOLA urea got to a high in the lower $900's. Global urea points around the world set their own records. We are off significantly from those high's but keep in mind that from a historical POV, we have only been at these values a couple times. That doesn't mean prices will fall out of bed but it means we have spent MUCH more time lower than today's price rather than higher.

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