11/5/2024 Weekly Fertilizer Hedge Idea
Today, there are a lot of reasons that seem to point to supported global nitrogen/urea values around the world.
- EU production remains at 75% of capacity - 2.5 to 3M tons not being produced...and need to be "replaced"
- Chinese exports are still looking like they will end 4.5 to 5M ton short of historic "norms" - historically, they would export between 5 to 5.5M per year. January thru September only has them at 254K tons. They could fall well short of normal, with not much hope showing for Q1.
- Brazil still offline with no signs of returning - that is around 1.5M tons missing/needs replacing
- Egypt lost (we think) around 1M tons - more missing tons on the global scale
All of this will either be proved or disproved early next week as offers are due with the ongoing India purchase tender. How the market reacts will tell a lot of the state of the world.
However, when it comes down to it, it continues to feel like a market that is being controlled by China. If they were suddenly to change their approach and start exporting heavily, the market will likely struggle to hold value...just as everyone is being forced by the calendar to put tons into sheds for spring season.
So how do we approach this?
First, the best option is to back to back the market. If you can sell your farmer/buy your tons/lock in your margin, that is the answer. There is no need for anything different to typical approaches...but we continue to hear from folks that buyers are still reluctant.
Second, we can start buying physical product today while offsetting the price risk by selling late Q1/early Q2 NOLA urea paper. The approach is that if the markets do decline, we lose on our physical position but gain on the paper position (presuming the basis remains unchanged). However, on the flip side, if the market appreciates, what we gain on the physical we lose on the short paper position (again, assuming no basis change). That gives peace of mind that we can have the physical positions in place without staying up all night worrying about the price falling.
The beauty of it is that you are not "stuck" with the position. Let's say you buy the physical, sell the paper and then a week later you are convinced that the market is moving higher. You can buy back that paper position and make yourself long physical product. Maybe a few days later you are no longer convinced it is moving higher and in fact, you think prices are going down. Great, go sell paper again.
We do not want you to be rolling thru paper trades willy nilly (though it makes our life more fun!!!). Anything we can do to save money should be the right answer but I point this out to show how we can change our minds and change our protection as our POV on the market changes.
It is still early November so there is a lot of time between now and spring...but there really isn't. Not from a logistical POV. These next few months will fly by.
If you want to walk thru it, let us know.
All data was sourced from StoneX unless otherwise noted.
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