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July '24 Farmer Fertilizer Focus - Urea

By: Josh Linville, Vice President- Fertilizer

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July '24 UREA
 
Josh Linville
Fertilizer - Vice President
StoneX Financial Inc. - FCM Division
josh.linville@stonex.com
Major Global Urea Export Location Price Graphs

The intention of the below graphs are not to use to say "my price should be X based on this graph".  These prices are derived from an FOB price point average.  The intent is to show major global price movement trends.  Your values will likely have significant basis difference (similar to your local grain price being different than the traded market price).

This graph is labeled as MT in USD currency.

image-20240625084417-1

What everyone wants to know first, what do we think will happen going forward
GLOBAL
There is a lot of conflicting factors in the world right now.  Production issues continue in Europe/Egypt/Brazil as well as export restrictions still in place for China.  Add to this the recent announcement that India is looking to purchase tonnage (market expectation 1 - 1.5MMT) and that lends a pretty solid bull story.
However, on the flip side, Egyptian production issues should be short lived as they get their gas situation rectified.  Europe and Brazil are longer term issues but that is unchanged.  China?  Well, who knows.  It wouldn't surprise anyone to see them jump into the market, sell a bunch to India and then disappear again.
It makes for a hard call but here goes:
From current values, I'm leaning on values being bearish for the immediate future.  I believe we will see Egyptian production return to normal.  I think that India will shock the world not only in how the offers shape up but in how many tons they actually buy (i.e. I do not think as many as some think).  Add to the list that it is only July.  Lot of time before the next big demand wave.
Basically, it feels like the market did this rally a bit too quick and a bit too aggressively. 
NORTH AMERICA
This piece aggravates me.  I was pretty confident in writing that I was bearish current values the middle of last week.  There were enough factors playing to the downside that it just felt like a matter of time.
Then the values go and fall to close out last week and start this week putting me in the weird predicament of what happens going forward.  So I'll make this call based on NOLA urea barges trading in the $290 - $300 range (just to keep it fair and me from acting like I'm calling a market that already happened!!!!).
With the global view being bearish, believing that we will start fertilizer year 2025 (July 1) higher on starting inventories, grain values are lower and farmer economics are struggling, I'll take the bearish outlook for the next couple months...but a word of caution.
I am struggling to see the market getting to last years lows, meaning there is limited downside from where we are today (at least in near history terms).  NH3 has been set higher than last year.  Plenty of production/inventory issues are still in play.  If we were going to hit/beat last years lows, we needed to do it already.  However, it also feels like limited upside, barring any huge unforeseen disruption.  
So all in, it should be decently rangebound with a tilt to lower nearby.
 
General Global Urea Information
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What has happened in the last 30 days?
Egyptian gas cuts impact urea production
Egyptian urea manufacturers have been struggling in the last month as gas restrictions and then cuts have made their production rates extremely variable and unreliable.
When global urea values started to bounce off their bottom, it was Egyptian manufacturers that set the tone.  Values had dipped to aggressively low values while grain values held at reasonably high prices.  The result is that farmers saw an opportunity and started to lock it in.  Shortly after, traders started to cover short positions as it was better to lock in the profit than put it at risk.  It wasn't long before a pattern was set and the rest of the world started to get onboard.  Several origin points saw their values climb $75 - $85MT from their low's.  
Then, Egyptian production issues started.  Temperatures started to climb which meant domestic demand started to spike.  The result were tight gas inventories.  As has happened in the past, the government stepped in and forced nitrogen manufacturers to restrict production by 20%.  That allowed them to continue to produce but also ensure that enough gas was available for the public.  An already healthy sales book was extended.
It wasn't long before gas shipments were cut altogether...but it wasn't expected to last long.  In fact, gas supplies did resume and production was restarted.  It appeared that everything was back on track, but it wasn't.  Shortly after, manufacturers were told supplies would once again be cut which is where we sit today.
The Egyptian government is heard to be taking steps to bring in enough stock to allow restarts, but at least for the moment, market confidence has taken a hit and their sales books are extended even further which helps to tighten the regional and global S&D. 
Hopefully, normal operations will begin as they always have in the past, but it needs to be watched.
Chinese exports remain restricted, trade data backs the story
Historically, China represents around 10% of the global urea export marketplace which accounted for around 5 - 5.5MMT of a 50 - 55MMT marketplace.  Recent years has reshaped that look.
As global values started to skyrocket and inventories become extremely tight with the outlook getting worse in late 2021/early 2022, the Chinese government intervened.  It saw the possibility that a tightly supplied global market could rush in and purchase a lot of inventory that would normally be reserved for Chinese farmers.  Also, that rush of demand would put Chinese farmers in a non-competitive spot as values would skyrocket.
Rather than allow that to happen, the government stepped in and largely blocked exports from happening.  The idea was that the block would not only allow adequate supplies for Chinese farmers but the lack of export possibilities would keep domestic values lower than they would be.  Unfortunately for the rest of the world, this plan worked.
Even today, as global values have fallen dramatically from their high's and inventories became more flush, the Chinese continue their approach of restrictions.  We have seen waves of product become available, but as the trade data starts to show, the government steps in to slow it down.  Even recently, when the promise of allowing exports to resume caused domestic values to start to climb, the government stepped back from that promise and kept restrictions in place.
Again, as new trade data becomes available, these restrictions are showing themselves as calendar year exports are all but non-existent.  I had believed that they would return well before now...but that has not been the case.  So the world marches on without one of the larger exporters participating and with looming questions of if/when/how much they return.
image-20240701164324-1
India finally announces their purchase tender
As expected, India returned to the urea purchase portal for another block of tons.  
  • Offers are due July 8
  • Shipment period thru August 27

While no statement of tons being desired has been made by IPL (Indian group handling the purchase), some in the market have assumed between 1 - 1.5MMT.  That would be a large block of tons that would help to mop up excess length in the world and perhaps help stabilize values from falling.

But I have my concerns.

For starters, it sounds as though domestic Indian urea stockpiles are healthy.  If true, that likely means they do not have to buy.  Sure, if values were to come in very aggressively, they could see it as a discount and lock up a lot to prepare for their next run.  However, if the market is bold/high on their price offers, you could see them lower the volume or walk away.

Second, the global market has been strong which likely means traders/distributors are long.  India presents a solid opportunity to clear long positions.  If you have been holding tonnage for a while, you likely have a lot of profit in it.  Easier to cut the price to make sure you get to sell in that scenario.

Third, that is a long shipment window.  That kind of tells me they are not desperate for product right now.  It heightens the chance that they walk away.

Fourth, and the biggest thing for me, is how they played the last tender.  If you remember, they initially told the world they had secured over 700K tons.  However, by Monday morning, they had slashed that total by almost half. It sent the global urea market reeling.  I had put out a tweet about it and it blew up with folks from India praising the government for making another step to being self reliant on urea by 2025.  It was a huge political movement.  We could see that again.

Ultimately, we have to wait and see how the cards fall.  We will not know the story until every detail has been figured out.  We have learned the hard way that you do not celebrate too early.  Just when it looks like it is done, something can come from right field. 

Until then, we wait.

U.S. April trade data points to huge import amount
April was a big month for urea import.
Nix that, April was a huge month for urea imports.
Nearly 1.3M tons of urea arrived in the month of April, according to U.S. traded data.  The cumulative total for the fertilizer year had been on pace to just slightly behind the 3-year average.  April blew it out of the water and went well ahead.
But how does it sit vs this years demand needs?
We have continued to use approximately 5 - 5.1M tons of imports needed to meet demand.  April's imports brought the cumulative total to 4.7M+.  June is usually a toss month where only 200 - 300K arrives.  If we assume 250K for June, that means May only needs 100K...if nothing at all.
But May will show decent imports if nothing else because of contractual obligations.  
All in all, that should mean that barring unexpected production issues showing up in the data that was unknown to the market, the U.S. is likely to start the new fertilizer year (July 1) with heavier starting inventories.  Historically speaking, that means that NOLA should operate at a larger than normal discount to the world as it effectively tries to push away further imports.   That is exactly what we have been seeing.  This should remain in effect until there are production issues that limit supply, exports happen that puke some of these extra tons (rumored in May), or the market simply catches up.
Time will tell which, if not all, happen.
image-20240701170230-1
Softening grain prices put pressure on values...but still "ok" vs recent years
The Friday USDA acreage report sent corn values falling which made fertilizer input pricing look worse as a result.  But how does it actually look in comparison?
As of this writing:
  • NOLA urea barge - $290
  • December 2025 corn - $4.58
  • Current ratio - 63

While that isn't the best relationship that has been seen in recent years, it is far from the worst and continues to show that urea is trying to stay "right priced".

Something that may be worth pointing out.  This is less a "I told you so" and more a learning opportunity but back in June, one heck of a value popped up.  NOLA urea barge values had dipped into the $270's while corn values had held in at the $4.90's.  While the corn price was disappointing vs what we have been enjoying the last few years, it was still solid vs the fertilizer input.  The result is that the ratio dipped to 55, a historically aggressive/cheap value.  Even though corn looked higher and urea looked lower going forward, it was an opportunity...that turned out to be short lived.

One, if we see this opportunity pop up, we should give it a lot of consideration.

Two, these values need to be ran locally.  As I always try to remind, I am looking at this from a 50K foot view.  For you, the numbers around you are the ones that truly matter.  It is not a difficult chart to run.  To get the value:

Price of fertilizer / Price of grain = ratio

If you have a retailer who isn't doing this, would like to but is struggling, let us know.

image 96769

 
Where are current values in relation to the past

NOLA/New Orleans, Louisiana 

Number 3 global importer in 2022

image 83787

Price comparisons

Vs 30 days ago - 4% or approximately $13 higher

Vs 90 days ago - -17% or approximately $62 lower

Vs 6 months ago - -1% or approximately $2 lower

Vs 1 year ago - 4% or approximately $13 higher

image-20240625084432-2

U.S. Midwest Average

Vs 30 days ago - unchanged vs last month

Vs 90 days ago - -22% or approximately $104 lower

Vs 6 months ago - 3% or approximately $10 higher

Vs 1 year ago - -21% or approximately $97 lower

 

U.S. Southern Plains Average

Vs 30 days ago - -1% or approximately $5 lower

Vs 90 days ago - -27% or approximately $130 lower

Vs 6 months ago - 1% or approximately $3 higher

Vs 1 year ago - -25% or approximately $120 lower

 

U.S. Northern Plains Average

Vs 30 days ago - unchanged vs last month

Vs 90 days ago - -19% or approximately $90 lower

Vs 6 months ago - unchanged vs 6 months earlier

Vs 1 year ago - -15% or approximately $69 lower

 

Middle East

Number 1 exporter (as a region, not as individual nations)

image 83722

image 83723

image 83724

image 83725

Vs 30 days ago - 15% or approximately $45 higher

Vs 90 days ago - -1% or approximately $5 lower

Vs 6 months ago - 6% or approximately $18 higher

Vs 1 year ago - 28% or approximately $75 higher

image-20240625084443-3

Egypt

Number 4 global exporter in 2022

image 83726

Price comparisons

Vs 30 days ago - 11% or approximately $34 higher

Vs 90 days ago - 2% or approximately $6 higher

Vs 6 months ago - 4% or approximately $15 higher

Vs 1 year ago - 9% or approximately $29 higher

image-20240625084457-4

 

Black Sea

Number 1 global exporter in 2022

image 83727

Price comparisons

Vs 30 days ago - 14% or approximately $38 higher

Vs 90 days ago - 2% or approximately $5 higher

Vs 6 months ago - 12% or approximately $33 higher

Vs 1 year ago - 17% or approximately $45 higher

image-20240625084507-5

China

Number 9 global exporter in 2022

image 83729

Price comparisons

Vs 30 days ago - -1% or approximately $4 lower

Vs 90 days ago - unchanged vs 3-months earlier

Vs 6 months ago - -10% or approximately $37 lower

Vs 1 year ago - 7% or approximately $22 higher

image-20240625084525-6

Brazil

Number 2 global importer in 2022

image 83788

Price comparisons

Vs 30 days ago - 13% or approximately $40 higher

Vs 90 days ago - 2% or approximately $8 higher

Vs 6 months ago - 13% or approximately $40 higher

Vs 1 year ago - 27% or approximately $77 higher

 

image-20240625084536-7
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
  • Continued supply issues (export and/or production) - there are plenty of supply issues around the world.  Egypt/Brazil/Europe/China all have either reduced or completely shut off production and/or exports.  This doesn't take into account global production that needs to go offline for repairs.  If the issue list continues to grow, it means the supply tonnage continues to shrink.
  • India buys a lot more than expected - if the market surprises us and gets very aggressive on pricing and in turn, other offers relent and drop their price, then India could shock the market and buy more than expected.  Maybe not a huge chance, but a chance.
  • Ramp up in global tensions - Russia remains in Ukraine.  China continues to ramp up tensions regarding Taiwan.  Separate, each nation represents a decent portion of global urea.  Combined, it is a very big number.  Hopefully this is a story that doesn't need to be told, but it does need to be watched for.
Bearish Factors
  • Values have gotten to high, runs off demand - demand started to step forward because the value was there.  Since then, urea values have jumped and grain has fallen.  Just as quick as buyers appeared, they disappeared again.  If sellers want to sell, they know what needs done.
  • Egypt/China return - Egypt continues to struggle with their gas supplies, but it looks like that should be fixed sooner than later and production resumes.  China is a bit more murky on their approach but we continue to hope/believe they will return.  If both return to the market, it should help lower price ideas.
  • Return of Europe/Brazil production - notice I didn't lump Europe and Brazil with Egypt/China?  I think there is a better chance of Egypt/China coming back.  Europe and Brazil seem very low probability today.  However, if either one or both shocks us and returns, it should cause the market to reel more than the other two returning.
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.

 

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Josh Linville’s Focal Points
  • Egyptian production and Chinese exports - these are my top two watch points...and I couldn't decide on one or the other, so I combined them.  Egypt did a lot of the work in rallying global price ideas so how they proceed needs to be tracked.  If production continues to suffer, will global values continue to rise?  How about Chinese exports.  If/when they return, it should be like a wet blanket on the fire that has been urea.
  • India tender results - I continue to believe that India has a lot more chance to disappoint global bulls rather than bears (which means it will be the most bullish thing in history, but I digress...).  Prices around the world have rallied a lot in recent weeks.  If India disappoints, we could see a lot of those gains wiped out.
  • How NOLA reacts vs the world - if we start this new fertilizer year flush with urea (like I think we are), it will be fun to watch how NOLA operates vs the world.  How much of a discount will it be?  Will we see heavy exports from time to time?  Will it last until next spring?

StoneX Ratio Calculation

The ratio calculation is derived from Bloomberg historical grains values as well as fertilizer values from StoneX, NPKFAS, and Argus.

The calculation is simply dividing the fertilizer price by each grain price.

All data was sourced from StoneX unless otherwise noted.

 

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