S3:E2 Navigating Fertilizer Markets with Chris Janes
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Show Notes
In 2022 we witnessed record highs in fertilizer inputs. As the year comes to a close, the markets remain volatile leading to unpredictability in one of agriculture’s greats expenditures. Chris Janes, Senior Director of Procurement with Ceres Solutions, shares the three main causes of our current market volatility and what growers can do to manage their risk in 2023.
Europe’s Gas Situation
European countries have seen record prices in natural gas. How does this impact North American Farmers? Natural gas is used in large quantities to make fertilizer for our crops. These higher prices are putting pressure on fertilizer production, making the market very tight.
“They're looking at $1,200 in gas costs just to produce one ton of ammonia,” shared Chris. “That’s not counting all the labor, your facilities, those sorts of things.”
Mississippi River
The Mississippi River is essential for moving barges of fertilizer and corn out of the Midwest. The river has been seeing record low levels. This has reduced capacity by 25-50%, increasing time to move barges. The low levels are slowing traffic moving both ways on the river, creating inherent risk for countries considering importing fertilizer. This may cause the basis to widen between NOLA and inland terminals.
“You could potentially see NOLA almost decouple from the real market interior and in the inland areas potentially,” said Chris.
Ukraine/Russia War
Anytime there is an active war, there can be instability in the marketplace. Currently, we have only imported a fraction of the UAN we typically do from Russia. There is more to learn about this unfolding piece of our imports.
“We've all heard and hear reports almost daily about what's going on between Ukraine and Russia, and so we're really going to have to see how that all unfolds,” said Chris.
What Can Growers Do?
While there is no real hedging against volatile fertilizer markets there are still things growers can do to reduce risk. While every farm is different, tactics like buying in layers may help. The other key is participating in farm planning, and having open honest conversations about your needs, early and often. The team at Ceres Solutions is working hard to remain a secure provider of inputs for growers across Indiana and Michigan.
Transcription
Morgan Seger (00:02):
Every day we rely on food, fuel, and fiber. But how much do you know about these industries we depend on? In this podcast, we dive deep into the production and processes of these everyday essentials. This is Field Points, an original podcast production from Ceres Solutions. Welcome to Field Points. I'm your host, Morgan Seger. In this series, we're focused on agronomy and agronomy inputs going into 2023. One of our most expensive inputs every year is fertilizer. And if we had to describe the fertilizer markets in one word, it would be volatile. Today on the show, I'm joined by Chris Janes from Ceres Solutions, and he's going to unpack what's going on in the fertilizer markets, the three main things that are throwing variables into our pricing and what we can do to mitigate risk and make the best purchases we can to secure our inputs for 2023. Now we know we are releasing this episode in the middle of December 2022, and these markets are bound to change. We actually recorded this episode early November. So between when we recorded to now, there may have been some things change here and there, but the overall message is the same that markets are volatile, and Chris is going to walk us through why that is and how to navigate it. On this episode, I'm joined again by my co-host, John Gibson, director of Seed and Crop Protection for Ceres Solutions, and he kicks us off with this conversation.
John Gibson (01:30):
So Chris, why don't you give us an introduction about yourself and some of your history?
Chris Janes (01:33):
All right, so my name is Chris Janes. I am the Senior Director of Procurement. I've just been with Ceres for just under 60 days. Prior to coming to Ceres I worked within the wholesale distribution network predominantly in the cooperative system, which I spent about 26 years doing that. And a couple of those were in the crop protection side of the business as well. The purpose of this job is to really take a look at how Ceres procures products, so that's crop protection, crop nutrients, potentially seed equipment, those sort of things. And just go through there and see how we're doing today, look at the market and where we think it's going to be in the say, five to 10 years or maybe farther out, and then bring recommendations to the leadership within Ceres and other associated joint venture partners. Again, I'm just getting started and I'm really just trying to sit and learn from folks that I work with, how Ceres goes to market, how they do their business, what risks they have associated with it, and then from there, longer term, develop a plan and be more a part of the decision making process.
John Gibson (02:42):
Chris alluded to it with his background. He has a lot of experience, so it's another person to have an input on what they've experienced historically.
Chris Janes (02:50):
And that's one of the things I really like about Ceres, and one of the reasons I came here is because it's a team approach. It's just not one person making the decision. I may have several years of experience, but there are things that we all are seeing that are brand new to this market. So having other people to bounce ideas off of is very, very helpful, and I think quite frankly needed if we want to survive and thrive in this market and in these markets, I truly believe that we'll talk about 'em here in a bit, but these are the markets where you just want to live to fight another day. You don't swing for the home run, you base it, you do the right things. And I think that'll allow us when we get through this, and there'll always be something new, every year's a different year, but this is not one to get real cute with the markets in my particular opinion.
Morgan Seger (03:39):
So let's talk about the markets. What is going on? Let's start maybe with fertilizer.
Chris Janes (03:44):
Okay. Well, I would just use one word: volatile. They're very, very volatile. There's probably what I would consider three major drivers to the market. So right now that's the European gas situation. Obviously we've all heard and hear reports almost daily about what's going on between Ukraine and Russia, and so we're really going to have to see how that all unfolds. Those gas prices got to a hundred dollars. The Dutch TTF probably within the last 45 days, quite frankly within the last week, it traded a negative number. And if you put it in context of what I would call the natural gas metrics that we use on mm, BTU, it's currently trading at $8. So with that being said though, if you look at the for curve on the Dutch, or excuse me, that gas in the winter months in Europe, it's $40, which it takes approximately 30, and they're a little bit less efficient plants over there, but just use 30 as a round number to produce a ton of ammonia just in the gas alone.
(04:48):
So they're looking at $1,200 in gas costs just to produce one ton of ammonia. That's not counting all the labor, your facilities, those sort of things. So that's one thing. The Mississippi River issues, I've been doing this since 1989, I guess grain, I've never seen them this low. Obviously we're breaking records every day. We see that on the news. So that's something to keep it an extreme eye on. And then the last thing is there's talk of a rail strike. So if things aren't bad enough we have the potential of a rail strike in the past. Usually the government steps in and tells 'em to get back to work, if you will, but just having that threat of that happening, and may we lose a week or two of time, if you will, we'll see how it all plays out. Again, it just adds additional challenges and stress to the market.
John Gibson (05:41):
Chris, I, I'd ask you to expand on a couple of those, but on the gas situation in Europe, what does that do to the rest of the global market?
Chris Janes (05:50):
So what it does and what it has done thank you for bringing that up. I'll just use UAN in this example because it's probably the most extreme. We usually will export about a million tons UAN as an example, and then we'll import about a million tons. So it's kind of a wash. Well, due to this gas issue, we've exported more UAN in a narrow window than I've ever seen in my career, and I think it's approaching around a million tons, I believe. Don't hold me to that point being is Russian imports, I believe to this date is only two 30,000 ton vessels. So 60,000 tons. Normally we'll import again about 900,000 tons of u n. We've got those two vessels. And then the other place that we get it from would be Trinidad. So Russia and Trinidad, Tobago are where we usually get most of our imports from.
(06:42):
So it's got the UAN market very, very tight. There's only so much they produce and they're going to go to where the markets are the highest. Right? It's a global market. I mean, I know we used that, but it truly is a global market. And so what was happening this after summer fill is that every time the US price would move up, the Europeans would go a notch higher, so they would attract all imports. And so when the biggest manufacturer of UAN in the US to date has been shipping, and I don't know the number, but several cargos of UAN over to Europe, and therefore since summer fill. Summer fill was we had a limited amount of tons we could purchase. And since summer fill, the ability to purchase UAN freely has been very, very limited. Matter of fact, we would go weeks if not, and maybe a month or so without any offers. So as far as Ceres, I feel very good. Where we're at today, we've taken advantage of every single opportunity we had to purchase tons. And then as soon as we purchased those and got those secured, we put them out to our growers so they can serve their secure UAN needs for this coming year.
John Gibson (07:52):
Think just as a global market, and you referenced UAN, it'll go where the market deems it, where the highest value is for it. I think some of those countries are just looking at securing food for a population, and that's why we're continuing to see extremely strong prices. Could you also expand on the river levels and what's that, what that's doing from a time standpoint on fertilizer or even grain moving down the river or upriver and how the clock is ticking on getting things moved?
Chris Janes (08:21):
Absolutely, but just real quick, John, I would want to go back and say I use UAN as an example. Ammonia is the same way, and so is urea. Okay? We have urea out of this country as well as far as the river right now, the estimates, it's kind of wide range, but we believe we've lost between 25 and 50% of our capacity. And so what's happening is where you normally would have a 10 foot draft and you could get in a lower miss and put 40 barges together, now you're at about a nine foot draft, and I think the max is around 20 barges. And then we're having groundings in numerous places each week. And so we send the dredge down there, they clean it up, get the barge traffic, moving restriction as far as hours in which you can navigate because some are daylight only or daytime only. So again, and the biggest thing is it's the southbound freight getting down there, which is drain, getting offloaded, getting the barges free and cleaned, and then putting fertilizer and bringing them back up.
John Gibson (09:24):
There's fertilizer there. We just gotta get it moved logistically in the time before we need it.
Chris Janes (09:30):
And along those lines, so what will happen long term, if you are an importer and you have a vessel that you're going to load, let's say in two weeks out of the Middle East, and you're trying to determine whether you take it to South America or NOLA or the East Coast or whatever, you look at NOLA and you say, okay, it's a month, two weeks to load it. It's another month to get over here. Rough numbers. Am I going to have the barges available? Will the water be navigable? Should I just take it somewhere else? Because that seems inherent in risk. So you're going to start seeing that NOLA versus inland terminal, I call it the basis levels. It's going to starting to widen, it's going to uncouple. And so you could potentially see NOLA almost decouple from the real market interior and in the inland areas potentially.
John Gibson (10:20):
Has that already had an effect on the value at NOLA versus South America or other places?
Chris Janes (10:25):
Yes, it has had some not a major degree just yet, but what I will tell you where it really has had effect is that spread or that basis between inland and the river state side here,
Morgan Seger (10:37):
As we see the basis widen on these two options, we have to get fertilizer here in the Midwest. Chris walks us through the downside of trying to get fertilizer from those inland terminals.
Chris Janes (10:48):
Again, what's going to happen is it's going to add cost to these products, right? Because the cheapest alternative may not be in play. So for instance, there's a company in shall met Louisiana that can offload barges and put 'em in rail, but rail values and rail freight is much greater than barge freight. Just as an examples, let's say to Owensboro, Kentucky is 30 bucks as an example, bar rail freight might be 70, 75 as an example. So it just adds cost to it. Plus then from a timing perspective, each barge is 1500 tons. You can move a lot of product in a hurry normally with barges. So in a lot of times we'll tie barges up in Kro or somewhere like that, and then they can distribute. Our supply chain partners will, and let's be honest, the, I mean everyone's facing issues with labor and all those sort of things. It's not necessarily been known for as timeliness either. So we would just take it our taxed industry and put more pressure on them.
Morgan Seger (11:59):
Understanding the global market is important to understanding the impacts on our local economy and what it feels like for Ceres solutions customers right now who are trying to secure their fertilizer for 2023.
Chris Janes (12:12):
From my perspective number one is one thing Ceres has done for some time is to continue to invest or has invested, and it continues to invest in what I would call a robust supply chain. They've built what I would call large terminals or hub plants that will enable them to have speed and space have numerous alternatives if the river were to have some issues done a good job over the years, having great supply partners that understand and value Ceres Solutions. So therefore, I'm not saying it wouldn't be tough, but I think given everything being equal, I like our chances. And then furthermore, generally speaking, Ceres has been pretty aggressive on some of the tighter products where again, we see some issues. So I feel good at this point in time servicing our customers going through spring maybe some hiccups in the south west portion of the business, but again, spring's not necessarily just tomorrow. So we do have time and we'll continue to watch that and monitor it as time goes on.
John Gibson (13:21):
Yeah, I think we talked about farm planning and previously, and I think that's just as critical on crop nutrients, and we're trying to understand our position, what our needs are for the future is really important because we can't make the stuff show up tomorrow. There's time and logistics that need to fall into place for us to have product when our growers need it. So that farm planning rolls into everything that Chris is trying to look at from a crop nutrient standpoint.
Chris Janes (13:50):
I can't emphasize enough if I'm a farmer, making intentions known, bring visibility to what you're thinking and what you're doing. That way we can plan around it. Because one thing we didn't speak of is that given the volatility in these markets generally speaking, most buyers are going to be somewhat cautious. I mean, that's just inherent in these type of markets. Again, we want to so-called live to fight another day.
Morgan Seger (14:16):
Fertilizer markets can be very hard to hedge against, but Chris shares some of the tools that Ceres Solutions uses and that you as a customer can use to mitigate your risk when booking your fertilizer for the next growing season.
Chris Janes (14:28):
So I would say that as far as farmers being on a contract with Ceres, those that is available one thing that I know just from the start is that we're really trying to have a price out there every day so that farmers can see and can quite frankly, if you will, lock in a per acre margin. But if you look at the crop nutrient business alone it's inherent with risk. We really have no true way of hedging ourselves. So some of the metrics we use I guess real quick to go back is we're inherently long. We're long on product generally speaking, because we have to secure it, get it in place for those high demand periods. But some of the things we can do to mitigate our risk is again, we try to watch the world markets and trends and what their impact is on our business.
(15:15):
We use historical data not only from the demand side, but looking at this price versus what corn and beans are worth. We do have a few products that we can put in place in our large storage terminals and purchase later. And then our, I guess our fourth thing that we kind of use, and albeit it's not necessarily a small amount we do use over-the-counter hedging tools or markets. Again, the thing about those is they're nothing like the grain markets when it comes to liquidity. So those are really metrics or things that we use for those big dips that we see or feel that could potentially happen.
John Gibson (15:53):
Brock alluded to it previously as well, but just giving growers the opportunity to buy, whether that be an actual transaction at that time, or a prepay or a contract for a future time. So we offer contracts at different times and it's product specific, so that that's unique is that some product may have a future contract time, others may not at that given time. So we try to provide access to the market as much as possible.
Morgan Seger (16:20):
Size and scale also come into play when it comes to mitigating your risk and securing your fertilizer for the next growing season. Chris and John, walk us through some of the capital investments Ceres has made and how those work to benefit their customers.
Chris Janes (16:35):
I think from that perspective number one is just within the last year or so, did a major upgrade at Fritchton and Pleasant Ridge.
Chris Janes (16:43):
Yep. And you're working on Coldwater right now. And then obviously the Whitesville. And part of that risk mitigation is being able to, if one area is wet or dry or whatever the case may be, or running, is the ability to move product from internally, if you will. If you're in a long position, you feel the market's going to drop at the end of the spring season moving, being able to move that product around. So it's not necessarily an investment, but just I look at it from the mentality of being a team sport and the all four regions communicating with one another and trying to work through our positions as we get those.
John Gibson (17:23):
To Chris's point, almost all of our locations have access to more than one terminal or hub for crop nutrients. So if we got tied at one location, we could reroute, redirect to another one. Or if it's weather related, we could reroute, redirect to another one for the time being and utilize assets as a whole, not just regionally.
Morgan Seger (17:42):
Next, we try to tackle the question, when is the best time to buy your fertilizer
John Gibson (17:48):
Back to our market access? So we would say it's similar to grain. You should probably buy in layers or hedge yourself in some way. So you can do that different ways as a grower but typically growers don't sell all their grain on one day. We would advise not to necessarily always buy all your fertilizer on one day. If you believe it's the right time, you could and we will. But we believe that providing access to the market, whether it's to prepay book or purchase that day or contract for a future, gives you access to make that decision. It gives you transparency to look at the grain market that day and say, okay, at this current cost, at my projected yields and the grain market for contract, here's my projected margins. Do I wanna make that choice today? We believe that's the best way is to have that conversation or that access to the market for the grower to make a good decision with the information they have at that time.
Chris Janes (18:47):
And just along those lines, again, as what we spoke about earlier, we're watching market trends not only here, US state side, but globally generally when we go to purchase stuff, we believe it's time to purchase those. Now, there are times when, again, we want to have a price all the time. That's what part of our sales function is, but we'll try to give that advice. No one's a hundred percent, but I really agree with John in the sense that it's different for every customer and every farm. But when you do make those purchases, I think one way to hedge yourself, again in these type of markets when there's no real clear signal signaling, there's just so much unknowns out there. I mean I think you should sell some of your grain. That's the trust you have out there. And right now the market has given you the opportunity at these levels to lock in and secure a pretty good profit for 2023.
John Gibson (19:45):
Yeah, I think we've said the word volatility a lot today, but I mean, when there's so much volatility, you have to just try to lock in margin positive margin.
Chris Janes (19:54):
Yeah. Well, we're talking about a geopolitical war right now. I mean, we don't know how it's going to turn out. Just this past weekend, right? Russia says on Friday, I believe it was we're not going to be a part of that grain export deal. Yeah, Monday comes around and wheat’s at 50 cents, I don't hold me to these numbers. Corn's up 15. Yeah, beans up eight. I mean, those type of things. I mean, that's 50 bucks an acre on wheat. Rough numbers, right? Again, there's margin in it and you can't go broke making a margin. Okay.
John Gibson (20:24):
Yeah. Well, and I think it's just back to having market access and making the best decision with what we know today. I mean, a lot can change in a short amount of time.
Morgan Seger (20:34):
Similar to the conversation we had in our first episode of this series with Brock Frasch, partnerships are an essential piece to getting this work done. So Chris walks us through how Ceres Solutions leverages partnerships to secure supply of product for their customers.
Chris Janes (20:48):
First of all, I would say with most of our partners, it's not just been a one or two years since we've been partners. It's been a long term relationship and we've all, I guess I'll use the term grown up together, if you will. So with that being said, because we're such good partners, we're very transparent with them. We give them forecasts no less than four times a year. We make them aware of what we're seeing on in our area, and they reciprocate by letting us know what they see with other folks that they may deal with, whether it be Nebraska or Wisconsin or Minnesota. So the sharing of market information, again, it stays within the two partners. It doesn't go out. But I, I'd say at the end of the day, it's just something where it is a true partnership and we're very forthright with them and they're very forthright with us.
John Gibson (21:40):
I think we expect our partnerships to be open and honest both ways, and that's the standard we hold everyone who wants to partner with, sir. So back to Chris's point, I mean, they expect forecasting things from them and we expect things from them. And it's not for short term gain on either side.
Chris Janes (21:58):
And I, I'll just give an example, and this was nothing that was one of our longest standing crop nutrient partners. One of their number one values, and the same with Ceres is integrity. Okay? So that's who we deal with.
Morgan Seger (22:14):
We've said volatility more than anything else in this episode, but I couldn't help myself and asked Chris if he had a crystal ball, what trends would he see and what impact would those trends have?
Chris Janes (22:26):
I would say one trend I do see, and I think it will be here before my career's over in the next 12 plus years, is that every fertilizer will have some sort of inhibitor on it. Okay? Now you may be looking for crop nutrient markets and that sort of thing as far as direction, but that is one thing. I just believe we'll see that. So one thing I do see when we break down the products, I think we'll see UAN stay very snug and very tight going through December and into January. Prepay, if it does loosen up, it's going to be very late in the season, and I don't think it's worth waiting that long to make those decisions. Quite frankly, we can't do that. We owe it to our customer owners to have product in place when they need it. One thing, my crystal ball says that the volatility's not going to leave this thing. It may be river issues and a war today, but there'll be something that's coming here. I just think you have to get your mind wrapped around that. There's always something out there that you won't expect. And the best thing to do is to sit back with no emotion, analyze it and work through it.
John Gibson (23:33):
Not to necessarily say what I see in a crystal ball, but I think just having the understanding to expect the next change of the next unknown, because there's probably something coming.
Morgan Seger (23:42):
Follow up on your inhibitor idea. Do you think that it's going to going to be a policy change that's going to drive that, or do you think it's going to be an efficiency thing at the farm?
Chris Janes (23:50):
I'm hoping it's the latter, right? I think those type of products, there's continued research in them. I think they continue to get better. I think we talk about stimulants and things like that, but I really look at it as from an efficiency perspective, taking a hundred pounds of an and securing it in that profile so that it can be consumed by the corn plant as an example, or same way with phosphates. And I think if we continue to go down that road, it will help us from a policy perspective, because I'm not saying there won't be policy put out there, but it's always better to be proactive and help direct those policies than to not.
John Gibson (24:40):
I would agree completely that we have a part in the story.
Chris Janes (24:44):
If you look at nitrogen in general, how much anhydrous has some sort of inhibitor put on it versus UAN.
John Gibson (24:51):
Urea ammonia is much higher than the other forms, and typically goes on at a higher rate at one given time. I mean, we don't like to drag ammonia around three or four times on the same acre. So yeah, back to Chris's point, usually those UAN or urea at a lower rate per acre is where we're not using them today.
Morgan Seger (25:11):
Well, that wraps up our conversation on fertilizer markets for today. This is a moving target, and I really encourage you to reach out to your local Ceres Solutions representative to learn more about what's going on, because this thing is literally changing daily. I wanna say thank you to Chris for taking time out of his schedule to shed light on what's impacting the fertilizer market in sharing what Ceres is doing to work through this volatility. In our next field points episode, we will be joined by an agronomist, Troy Jenkins, to talk through the key learnings from 2022 and his predictions for 23. You won't wanna miss it. It drops tomorrow.