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“I can't give advice, but if I was buying and having to make decisions, I would be looking to lock in my nitrogen pricing.”
— Sam Taylor, Executive Director of Research for Farm Inputs, North American Market, RaboResearch
Farmers will face steep increases for seed prices and a volatile nitrogen market, according to Sam Taylor, RaboResearch’s executive director of research for farm inputs in the North American market.
In this episode of the Strip-Till Farmer podcast, Taylor explains his projections for high seed prices in 2023, plus gives us his analysis of the potash, nitrogen and broader fertilizer markets.
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Full Transcript
Michaela Paukner:
Welcome to the Strip-Till Farmer Podcast, brought to you by the Pluribus Lite from Dawn Equipment. I'm Michaela Paukner, Managing Editor at Strip-Till Farmer. In today's episode of the podcast, Sam Taylor, RaboResearch's Executive Director of Research for Farm Inputs in the North American Market, explains his projections for high seed prices in 2023, plus gives us his analysis of the potash, nitrogen, and broader fertilizer markets.
Sam Taylor:
My name is Sam Taylor. I'm Executive Director of Research for Farm Inputs in the North American Market and I'm part of a global research team that analyzes the farm input. That's what we refer to as the seeds, the chemistry, the fertilizers, and then more into the ag productivity side. Some of the biologicals but also farm economics and things in that aspect.
Michaela Paukner:
Okay. What does the landscape look like for seed in 2023?
Sam Taylor:
I think the landscape is probably quite inflationary based on a 2022 market. And this is really for a couple of reasons. First and foremost was the cost incurred by the seed producers. They bear all the same inflationary pricing that growers have seen over the last couple of years on fertilizers and inputs in general. Then secondly has been the run up in stock commodity prices as a result of the Russia/Ukraine crisis. Those are probably the two key catalysts for why we're likely to see seed pricing possibly probably go up in the double digit percentage year over year.
Michaela Paukner:
And what can farmers do to deal with those inflationary prices?
Sam Taylor:
What can they do? There's a limit to necessarily do too much with it. What they can do is potentially shift purchasing patterns, prepay using different forms of financing options. Vendor financing kind of solutions. Those very often are quite an appealing source of credit, particularly in a higher interest rate environment. But as far as necessarily offset a lot of this, you probably have to look towards the other inputs to really mitigate these kind of high pricing.
Michaela Paukner:
We had some farmers that had told us that there were cover crop seed shortages, and I was wondering if you had any insights on that.
Sam Taylor:
We haven't really heard about that. That's interesting. I hadn't heard about that. I will have to have a look into that, I'm afraid. Cover cropping is not as widely used as potentially it should be. The last thing a seed company wants to do is be holding inventory because it's just a massive drag on working capital and on the pricing dynamics in the industry. It wouldn't surprise me if there was not an overhang of inventory and there were pockets in the geography where you couldn't necessarily get exactly the cover crop that you want. That wouldn't surprise me at all, but I hadn't heard of it. I'm not sure how much it would really concern too many growers. I think they might be just make another decision.
Michaela Paukner:
What is your outlook for some of those other inputs?
Sam Taylor:
It seems like on a almost daily basis at the moment we're seeing ammonia prices in particular go up. I think several of the in market producers have sent pricing up 10%, 15%, either today or yesterday depending on where you are in the North American market. And this is as a result of the European national gas dynamic and the potential further upside in soft commodity pricing given the hit to yields from weather. But it is primarily that first factor. You've got somewhere in the region of 70% of European ammonia production is now curtailed. Urea production, some urea production, some UAN production, some nitrate production also curtailed. And this is really as a result of the high natural gas price in Europe. Even in the North American market, we've got about $10 per MMBtu pricing. And that's one of the highest prices we've seen since probably mid to late, early 2000s, so like kind of 2008 kind of time period.
Whereas in Europe it's at about $92 per MMBtu. Their production, nitrogen production platforms are completely not cost competitive. The spread in product operating costs to actual underlying price is somewhere in the region of $2,000 now. You'd need some kind of convergence or you need to turn off the switch and they basically decided to turn off the switch. And this is likely to persist until we see a rebalancing natural gas prices or a meteoric run up in nitrogen pricing. But even if we don't see the meteoric run up in nitrogen pricing, we're going to see upward momentum as a result of, or we're likely to see upward momentum as a result of curtailed production and tighter supply/demand balances.
And I think there's still quite a long way to go in this. This did happen last year potentially to a lesser extent than it's happening now. The scale of curtailment last year didn't get as high as it is now in Europe. And what this permeated at, what this led to was conversations around does it make more sense to plant corn or soybean? And we're going to face those same questions coming forward. With the high cost of nitrogen, should growers be switching to soybeans? And I think the probability is that those lower yielding acres, then their affordability, their return on investment on nitrogen might make them look potentially at other crops instead.
Michaela Paukner:
And what would that do for the markets if more people are starting to look at other crops versus planting more corn or soybeans?
Sam Taylor:
I think soybeans should be fine. Obviously soybeans being a legume, it sequesters nitrogen from the air. It's more of a question of do they switch from corn to soybean? It would be further inflationary dynamic towards corn pricing. And I'm not the best person to speak to the actual pricing forecasts, but I would say that they are more constructive for longer than we have had certainly in the last few years. Our baseline view is that irrespective of input pricing, there should be scope for profit next year for North American growers, the gross profit outlook might not necessarily be as strong as 2022, but there still should be some fairly decent margins for growers in the North American market.
Michaela Paukner:
And what do those margins look like in comparison to 2022?
Sam Taylor:
Below '22. That's the view at the moment. But I would say that this time last year we were talking about a tighter margin environment and then the Russia/Ukraine crisis happens. You're kind of almost conditioned at this point to say, "Well, we can't be too deterministic on it because we don't know what the next exogenous factor is going to be coming down-
Michaela Paukner:
Sure.
Sam Taylor:
... the pike it's going to change, have to change our assessments." I think with regard to other inputs, there's probably a slightly different dynamic. Potash seems to be creeping down slowly in price. There seems to be more potash in the market than had once been feared. Russia seems to be back exporting phosphate and potash at a comparable level to prior conflict. They're basically exporting the vast majority of nitrogen products excluding ammonia at that similar level. The concern on the potash is the Belarusians still being shut out of the market to a certain kind of extent and having to re-route that product. But when we look to some of those key importing markets, we look to some of the fundamentals, it still looks like there is an amount of potash in the key markets, Brazil, North America that should or could see some pricing come down a little bit for growers.
Michaela Paukner:
You're predicting potash pricing will come down, is this next year?
Sam Taylor:
Not necessarily. No. Even now it's still kind of creeping down a little bit and I'm not ... This isn't like a precipitous falloff or anything like that. It's just that the fundamentals suggests that there is the run up in pricing post Russia/Ukraine conflict was to attract potash to markets and out of fear of scarcity of how much volume is going to leave Russia and Belarus. Those have been abated. The kind of seasonal components have been abated a little bit. When we ran into the summer fill for potash, retailers and distributors were happy to sit back a little bit and see the price pull off a little bit, which suggests that actually they might have an amount of inventory as well. We've heard from some of the retailers in the industry that there is their fear, they still feel they're sitting with ample inventory so there's not the same inflationary pressure on potash that there is on nitrogen [inaudible 00:09:09].
Michaela Paukner:
Okay. And how dependent are North American growers on the potash that's coming from Russia?
Sam Taylor:
Not really, but it's a global balance sheet. The vast majority of the imports of potash come from the Canadian market, but I think last week there were four ships of potash parked outside the Gulf waiting to be unloaded. We do get potash from Russia and I don't think we've had any issues really of getting stuff. I think that there has been pains to point out that there's a risk of over compliance and that sanctions were very often tied towards individuals or companies associated with individuals but not necessarily on those products, and that's inclusive of the soft commodities as well.
A lot of the concern has been insurance traders, like association risk that has delayed them, payment risk, these kind of things. There's also just a reluctance. There's certain companies which are controlled by Russians who are under direct sanctions, so they needed to disassociate themselves with these companies before they will trade with them. But I was speaking to a European retailer this morning and they are still waiting for confirmation from their central bank as to whether they can still trade with this particular Russian exporter product. Until they know that they're not trading with it. It just means that not everyone is within the market willing and able to trade with them.
Michaela Paukner:
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Talking about your analysis for the nitrogen market, could you just go over what you're expecting?
Sam Taylor:
I expect a decent increase in pricing. I think that on a seasonal basis you could see a 20 to 30% rise between now and the end of the year. And I don't think that that necessarily counts for the risk premium that's involved there. It could be materially higher and I would expect it to be materially higher to be honest. I mean, having jumped 15% yesterday in price in Iowa, so.
Michaela Paukner:
What is the risk premium?
Sam Taylor:
Basically just the risk price to the upside.
Michaela Paukner:
And can you explain to me how that factors into pricing and then why that would influence this projected 20 to 30%?
Sam Taylor:
No, the 20 to 30% is basically a normal seasonal cadence ostensibly. There are basically two real demand periods for ... Well, it's a bit more than two, but there's key demand periods. There's a kind of the summer ... Like a full application and a spring application. And just because growers want product at that time, there is a seasonal cadence to it where prices tend to increase for their fundamental base at that point. And that 20 to 30 is a kind of normal seasonal swing from say midsummer, full demand-
Michaela Paukner:
Oh, sure.
Sam Taylor:
... and then back down, then it goes up again in February. That kind of spread 20 to 30% is quite a normal price spread. You pencil that in as just in any normal year. Between now and say fall, you could see that 20% price increase. But given the fact that you've got high natural gas prices and natural gas counts for about 80%, 70 to 90% of the cost of producing nitrogen and you've got it's unaffordable for European producers to produce nitrogen, there is just a risk that we get into this scenario where there's not enough nitrogen ostensibly at the current market price, so the market price goes up. It really wouldn't surprise me if we got a 40% increase in nitrogen between now and the end of the year.
I'm not forecasting that, but it could be quite a significant magnitude of difference between what is now and what we see say in February pricing for nitrogen. And a lot of this will come down to things beyond our control. If we have a really cold winter and there's high domestic demand for natural gas, that's going to tighten the gas balance sheet, that's going to send natural gas prices up, that's going to cause even more difficulty for nitrogen producers to produce stuff and that's just going to raise the price. If we have a mild winter, that's probably quite supportive. The price is not going to their worst kind of scenario. But at the moment you have to look at what's happening in Europe and you have to have a look at what's happening in the North American market.
Michaela Paukner:
Where is most of the nitrogen that North American growers are using coming from?
Sam Taylor:
It's predominantly coming from the North American market, but we do also get imports from other markets, all kinds of markets, but it's a globally traded commodity. Just because we are not importing it from a certain area doesn't mean that we are not going to feel the effect of a tightness in another market. And actually the result of Europe shutting down their ammonia production is that they're pulling in ammonia from North America to then upgrade into nitrates, urea, and UAM, which causes that tighter balance sheet in the North American market. That tighter balance sheet has greater volatility risk when you come to those peak demand kind of dynamics. Everything seems to be setting itself up for a lot of risk and volatility as we head into full application and demand dynamics. There's just a lot of risk I think on the nitrogen side, that's the point I want to make. And now there's certainly like our clients, so the farmers that we lend to are pains to just highlight the potential that it could get a lot worse between now and the end of the year on nitrogen.
Michaela Paukner:
Do you think that there's any relief to the increase coming?
Sam Taylor:
I think that the relief is going to be one of those unpredictable elements. If the natural gas price suddenly collapses because they start to free flow, send natural gas into Europe. I mean, maybe you could create the notion that the war in Ukraine goes so badly for Russia that they need to try and sue for peace and one of their gestures to sue for peace is to allow more natural gas into Europe. But quite easy, you could use that narrative to say that they'd cut off natural gas altogether. It's really hard to necessarily rationalize for any kind of game theory what would necessarily happen because Putin's a mad man and you can't really rationalize with a mad man.
Michaela Paukner:
Knowing that there's so many moving pieces and parts, what goes into your analysis and how are you factoring in that type of stuff?
Sam Taylor:
What I would say is that everything we say at the moment is basically it's non-deterministic, it falls within a parameter of probabilities. The probability assign this much that it'll fall within a certain bandwidth and it's easier to ... There's a tighter probability on certain products. You can forecast these things a little bit easier on certain products. But you have to look at things like seasonality, core inputs, so that might be a sulfur and oil, a natural gas, and then the underlying commodity as well. Kind of a corn, a soybean, whatever it is. Then you have to make best judgements along with it. I mean, all models are wrong. All models end up being wrong, but some are useful. You run scenario analysis. If you see X million tons being pulled off the market, what does this do?
And you'd shop a model and go, "Okay, well we think that this is the parameters of risk that if this happens, then we think, okay, prices could react in this dynamic." That's as much as we can really do rather than make a deterministic view that ammonia prices are going to be at $1,400 by December. It's too difficult to do that. And anyone who's doing that is a little bit of a cowboy. And anyone who's got fertilizer pricing accurate over the last 18 to 24 months has mostly got them right by being wrong initially. The market just happenstancing to hit to that point. It's a very difficult, and I was with one of the better industry analysts over the weekend who he told me he hasn't got anything right for the last 24 months, literally nothing right for the last 20 months.
It's difficult. It's very difficult and so it's a case of creating the parameters under which you can be right, and that is being not declarative, not deterministic. Highlight the risks, highlight the leading indicators that could encourage a grower to make a decision because they're saying, "This, this, this happen. Okay, these are good signals that in two months' time, one months' time, prices are going to go up. I'm going to make a move now." And that's probably the best thing to be doing.
Michaela Paukner:
It's going into tighter inventory in fall. How will that trickle down to the farmer and what can they do to prepare for that?
Sam Taylor:
What can they do? I mean, I think that if you know what you are going to plant, you could offset some risk by making purchasing decisions as soon as possible, trying to take inventory as soon as possible, pre-purchasing on some products, these kind of things. This is trying to create a scenario that is continuous across a very diverse landscape. Some people don't have enough money to do this, some people need to market their costs for this. Some people aren't sure what they're going to plant because they fall in a marginal acreage and you don't want to buy nitrogen and then plant soybeans or something like that because it's a complete waste of time. I would just take the view that nitrogen is the most volatile input that they're going to face for their 2023 plant season.
Michaela Paukner:
In that case, knowing that nitrogen would be the most volatile, is that the thing that they should make the purchasing decision sooner rather than later?
Sam Taylor:
I can't give advice, but if I was buying, if I was having to make decisions, I would be looking to lock in my nitrogen pricing.
Michaela Paukner:
Thanks to Sam Taylor for today's conversation. The full transcript of this episode is available at StripTillFarmer.com/podcasts. I'd recommend giving it a read. As somebody who's not well versed on market forecast, I definitely gained a better understanding of Sam's analysis after reading it. Many thanks to the Pluribus Lite from Dawn Equipment for helping to make this Strip-Till Podcast series possible. From all of us here at Strip-Till Farmer, I'm Michaela Paukner. Thanks for listening.
