U.S. urea barge prices have rebounded to near year-ago levels but an increase in rice acres, elevated corn stocks and increasingly abundant Chinese urea supply have set the stage for the 2014-15 fertilizer cycle.
The majority of available urea barges are currently offered for August at similar prices to a year ago. But last week's urea Nola barge assessment midpoint was $35/st higher than the prior year, owing to steady demand for prompt barges to meet rice demand.
August barge prices are reflected on the low end of last week's $316-395/st fob Nola range with many traders viewing this loading period as the real market for urea. Meanwhile, the high end of the price range is based on ongoing trades for soon-to-be-loaded or loaded barges moving to meet rice demand, and suppliers likely capturing attractive margins based on elevated late-season warehouse prices .
Last year's assessment the week before the Southwestern Fertilizer Conference of $317-324/st fob Nola was also backed by prompt urea trades on the high end, but higher levels of warehouse inventory and less pull from rice acres in the southeast meant a narrower premium for prompt barges. Trades for August loading barges booked the week before the conference last year were in the range of $317-318/st fob Nola.
Much of the tightness in warehouse supply can be attributed to growth in planted rice acres, which rose 22pc this season to 3.05mn according to the US Department of Agriculture. While this increase pales in comparison to the 91.6mn acres of corn planted this season, the 500,000 rice acre increase shaped this year's late-season urea trade.
Rather than the typical lapse in demand for prompt barges as corn top dress wanes in June, buying continued as warehouses in the US southeast struggled to keep up with the crop's heavy nitrogen needs. Barges that would have otherwise gone to begin restocking warehouses further north were diverted to the south, leaving stocks tight and prices elevated in wholesale markets like Inola/Catoosa, Oklahoma, St Louis, Missouri, and Cincinnati/Jeffersonville, Ohio. With warehouse netbacks topping $400/st fob Nola equivalent well into July, trades for prompt barges have continued at an over $70/st premium to the forward market.
Forward prices could come under pressure as the market digests the impact of lower corn prices on farmer demand in 2014-15. The current corn crop is rated good or excellent, up 10 percentage points from this time last year. Ideal growing conditions expected to continue, and corn stocks-to-use is expected to rise from 8.4pc for the 2013-14 marketing year to almost 13pc in 2014-15.
Last year's pre-conference front-month corn prices were around $5.40/bushel, over 40pc higher than $3.80/bushel now. Fertilizer budgets could come under downward pressure in the coming season, and even more acres may alternate to different crops. Even with farmers flush with cash following what looks to be an exceptional 2014 crop, it will be tough to argue for an increase in nitrogen consumption next year against the backdrop of declining farm economics.
Another industry shift from last year is increasing supply from the world's largest urea exporter, China, and an increasing focus from the country on propping up export prices in the face of an abundance of supply.
Following revisions to the Chinese export tax structure implemented at the beginning of 2014, January-May urea exports are up over three-fold from the same period last year to 3.8mn t. Over 400,000t of this total, about eight vessels, reached the US. Many, including PCS, expect China's urea exports to be smoother over the course of the year, which would mean less third and fourth quarter US imports of Chinese urea.
Another 1.4mn t of Chinese urea reached India in the January-May period with some sold at prices the China Nitrogen Fertilizer Industry Association (CNFIA) claims are below the cost of production. The CNFIA condemned traders for offering Chinese cargoes into India under its June purchase tender without producer-backing at prices that net back to the $250s/t fob China.
At a meeting of nitrogen market participants in Beijing last week, a proposal emerged to maintain prices around $270/t fob China, above current offers in the $260s/t. While the true impact on tender offers of this intervention remains to be seen, reports indicate traders are increasingly wary of shorting the Chinese market with CNFIA voicing its hopes producers will embrace this arguably artificial market floor.
The impact on the US granular market is for now unclear. If inventories build in China because of artificially high offers, there is concern this could ultimately result in a rush of sales and collapsing global prices. Near-term, however, a coordinated effort to keep prices offered to India elevated may keep global export benchmarks firm.
Last year, prices trended immediately lower following this week's industry gathering, bottoming at $281/st fob Nola in mid-October before rebounding to $353/st fob Nola by the first week in January. This week's conference will again set the tone for fall business as suppliers prepare for 2015.