The Exchanges

Q Is it, is it in that case because they have insufficient supply of gas to feed those, those projects, or is it that gas prices are too high and so they'd be losing money on producing more?

A It's gas prices too high. Uh, when you look at the economics of it, it just doesn't make sense with where global nitrogen values are. And I also think there's the political aspect of it, right? The European political engine has been really charging towards green energy and Frankly, this old school, old technology nitrogen production, from their viewpoint, is very dirty. It's outdated. We don't want to have anything to do with it. So you've already got bad economics for the plan, and then you've got a political outlook that basically sits there and says, don't put any money in these plans because you're probably not long for this world. We're not going to support it. We're doing everything we can to shut you down.

AI assessment note: “It's gas prices too high. Uh, when you look at the economics of it”

Q Okay, so how much of, I mean, I don't know, give me a sense of the magnitude of the shock that has created. How much of global supply then is just, has, you know, vanished while the Strait of Hormuz is closed?

A With that body of water closed, just in itself, I think we're talking about a third of the world's tradable urea, gone. And a good chunk of the global anhydrous, I mean, the same thing. These same plants that produce urea also produce a tremendous amount of anhydrous. But that's not even the worst part of it, right? Then all of a sudden you got to think about, well, what else comes out of that body of water? You've got LNG shipments that are stuck behind there, and that feeds major manufacturers like India. I mean, to give you a scale of it, Europe, we're talking about, you know, their 75% production rate, that's three and a half million tons missing. India is very reliant on those LNG exports from the Persian Gulf. That's how they feed their nitrogen plants. And just to give you a scope of size, they produce over thirty million tons of urea every single year. And at one point at their worst spot, their production rates were down to 50 or 60% of normal because of high prices, because of the lack of the input. So that's on an annualized basis, that's fifteen million tons per year that was missing. That's the equivalent of all of Europe. So that's where this thing is just completely blown out, right? It's, it's no longer just the individual products. Now we're talking about the inputs and for phosphate, it's the lack of sulfur and the lack of anhydrous and the high price of those…

AI assessment note: “I think we're talking about a third of the world's tradable urea, gone.”

Q little bit more resilient because we're a net exporter in that space than you see in other countries. So give me a sense, I mean, you said we were, we've experienced a version of supply tightness that we have never seen before in the history of these markets. How has that manifested? Like, give me, give me an example of pricing or Shortages. Like, what has happened as a result?

A The best thing to show as far as talk about that's actually living proof of it is India. Now, India is a little bit of a different beast. A lot of the world farmers have to ebb and flow their demand based on what prices are because their price is a direct correlation reflection of what the world market is. Indian farmers, they don't care what's going on around the world. Their price stays low and steady, and that's dictated by the government, and what the government does is they subsidize the price difference between that farmer and And the rest of the world. So their demand doesn't move because they just don't care. They paid one of the highest prices we've seen in a very, very long time here recently to buy two and a half million tons. Over 900 dollars a ton. I think the West Coast prices were 935 dollars a ton. East Coast prices were nine 50 plus. An incredibly high price, but they were still able to find the product. What we've been watching very, very closely is countries like Australia. Now, again, I'm not going to say it I was about ready to say fortunately for their drought, because that's not the right way to say it, right? Their drought has been terrible, but from a strict fertilizer standpoint, their demand has been much lower because the farmer is saying, I'm not getting rain, I'm not going to invest in the fertilizer, right? If that rain were to come, they are goin…

AI assessment note: “They paid one of the highest prices we've seen... Over 900 dollars a ton.”

Q So just to clarify, historically, China was the number one phosphate exporter, the number two urea exporter, and then they basically stopped exports. And as of now, they've stated they're going to start exports again this summer, but TBD if that actually happened. So that's thing one that was already contributing to global supply tightness. Then there's Europe and the Ukraine-Russia situation. What impact did that have?

A This goes all the way back to 2021, and during that time, that is when you saw Europe basically sit there and tell Russia, we're not interested in any flows from your Nordstrom II pipeline that you just spent all this money building. And they got into a TIF, and eventually Russia shut off the flows, and then somebody, I still don't think we actually know who did it, plenty of theories, but we don't know, actually blew up the pipelines under the water. Well, from Russia's standpoint, why would I go repair them? Europe doesn't want the gas. I'm not going to go spend the time and the money and the effort to repair those pipelines. European gas values skyrocketed, right? That Dutch GTF went from whatever the normal was, three, four, five dollars in MMBTU to, I think it was August, 20, 21, a 103 dollars in MMBTU. Now, since then, we've normalized the market, and they're finally back to, like, 1015 is kind of their normal range, but that means their production, their nitrogen production in Europe is only sitting about 75% of normal, and that's for all of Europe, and when you start to break that down, That's about three and a half million tons of urea that's not being produced a year. That's a couple million tons of uan not being produced a year. And that hurts. Their farmers aren't going to just sit there and say, well, darn, I guess if we're not producing it, I just won't use it. Th…

AI assessment note: “That's about three and a half million tons of urea that's not being produced”

Q That's, uh, that's how I understand it to be. Let's do it. Start with what's been going on over the past 10 weeks since the U.S. invaded Iran. Like, what's happening in the fertilizer market at the high level?

A We, as a market, have experienced a supply tightness that we've never seen in the history of our markets. Now, we've had periods where supplies have gotten snug. We've seen situations where prices have gotten high. But nothing ever to this extent. And it's all surrounding the Strait of Hormuz, or so the market likes to think. The problem is, if you go back to January one, nitrogen markets and phosphate markets were already dealing with supply tightness because of European production rates, because of a lack of Chinese exports, because the ongoing Russian-Ukraine war. The Strait of Hormuz was just that shot of adrenaline that nobody really needed. So it's just, it's a period that we've never seen in this marketplace. We've always theorized, but it's always one of those tongue-in-cheek like, Who in the world would ever think the straight Hormuz was going to shut down for 1011 weeks? But here we are, and we're just trying to get through it, and trying to kind of transition from the spring season to the summer season, and figure out, how's all this going to play out?

AI assessment note: “We, as a market, have experienced a supply tightness that we've never seen”

Q do want to go back and talk through all those dynamics that you listed out. So let's, let's do this. Let's talk about the pre-Hormuz list of things that was causing supply tightness, and then I want to talk about Hormuz and the impact that it has had. So You mentioned wine, which is China. So what's China's role in the global fertilizer supply chain, and what changed there recently?

A Historically speaking, China is the world's largest phosphate exporter, and it's not even a close second. From a nitrogen standpoint, from a urea standpoint, they are typically the world's second or third biggest exporter. And from my vantage point, now, I do think that there's some domestic production situations they're going through, right? They're trying to clean up their environment. They're dealing with some input, uh, prop supply problems, things like that. But I think China has figured something out. Now, this is my very naive elementary viewpoint of the world. But everybody just talks about, oh, the biggest danger is to communism, right? It's, it's a, it's the U.S. invading them. It's this, it's that. My point of view is, it's none of those things. Communism, communism's biggest fear Is an uprising by their own people. Well, according to Google, about a quarter of their population is tied to ag. So, if they're a net exporter of urea, if they're a net exporter of phosphate, Why not stop those exports? In doing so, you're keeping domestic supplies tight when the rest of the world is struggling, and you're keeping your domestic price low because those, you've basically flooded your own marketplace. You've just made a quarter of your marketplace thrilled beyond any measure of a doubt because they are some of the most competitive farmers in the world because of those low pri…

AI assessment note: “Historically speaking, China is the world's largest phosphate exporter”

Q So we're 10 weeks in now to, uh, the U.S. post-invasion of Iran. I mean, the Strait of Hormuz has been closed for most of that time now. Have we, are we feeling the full effects of that at this point, or is it like a delayed reaction because people have worked through whatever stockpiles they had and, and so on? Where, where are we in the cycle?

A I think we're in a situation where We've gotten past the bulk of the global demand. What I mean by that, everything for the world from a spring perspective, northern hemisphere is kind of wrapping up. What you have in place is what it is. That's what you're going to have. Now we're moving to the summer period, which is typically very, very slow, very, very quiet from a demand standpoint, and when you see your typical low prices for the year. The issue is going to be that period is going to be even quieter because the sellers are going to sit there and say, listen, my price needs to be incredibly high for all these reasons. They're absolutely right. And the buyer's going to sit there and say, well, look at the grain price. Look at all this other stuff. This makes no sense for me to buy it. I'm not going to do anything. So I think we turn into a stalemate. And then as we start to move into, let's say the fall, the winter, the Q three, Q four period of the year, now all of a sudden we're going to start to see more of the carryover effects from what's going on today. And that assumes this entire situation fixes itself. The straight reopens. If it doesn't, and it continues, bad goes to worst every single day that it continues. We haven't, if this thing stays closed for a little while, we do have to start having conversations of who gets it, who's willing to pay the most, who's able …

AI assessment note: “we're going to start to see more of the carryover effects”

Q Okay, so that's the scenario where the, the straight opens in the near term, and then things are still pretty wonky for, for a while. Um, I don't want a fear monger, but in the, in the scenario where the straight stays closed for, who knows, some number of months additionally, what does that look like?

A We have to start having a very hard conversation of shortages around the world. I'm trying to think of a nicer way to say it. I don't think I have a way of doing it. If we, if we get to the fourth of July and the straight is still closed, if we start up with, uh, my youngest is a freshman high school, be a sophomore in the fall. If he goes back to school in the fall and the straight is still closed, we have lost so much supply out there. It's now a situation of who is willing to buy it. It becomes eBay. If I'm a manufacturer that's not situated in the, the Persian Gulf, And I've got tons. I'm going to sit there and say, I have got a vessel ready to load it. I've got the tons at the port. Who's paying me the most? Submit your bids, and I'll let you know who wins.

AI assessment note: “We have to start having a very hard conversation of shortages around the world.”

Q things then, setting aside the global picture, um, does that dire scenario where the Strait of Hormuz remains closed for some number of additional months Are we going to see big impacts in North America, or is it that we're actually pretty insulated? And, you know, most of the rest of the world is going to feel the, besides, I guess, China as well, is going to feel the pain.

A Let's assume that the government is not going to come in and start restricting markets. And what I mean by that is mostly from an export standpoint. If there's no restriction to exports, if the rest of the world's dealing with a situation like phosphate supplies are incredibly hard to find, same thing with urea. People cannot find it, and the price just starts to tick higher and higher and higher. Well, if our price doesn't do anything, well, that export opportunity pops up, an arbitrage opportunity pops up, and we start losing supply that we can't lose. And so that's why you see our market go with the rest of the world, and people do get a little upset when they're sitting there saying, we produce most of this. Why Why is it the Henry Hub is dirt cheap, but my nitrogen price is sky high like the rest of the world? That shouldn't be the case.

AI assessment note: “that's why you see our market go with the rest of the world”

Q when demand normally picks up again and prices rise, that's going to be Super tight already. People will have been basically frozen through the summer, but they'll need to order again. The demand side will need to pick up in the fall. Suppliers will still be tight. Prices will be high, but it may not be a situation where we're effectively rationing fertilizer on a global basis. Is that right?

A Yeah, I think so. And listen, this is all theoretical, right? We've never seen anything like this in the marketplaces. I mean, it's stuff you talk about, you know, classes you can theorize and, you know, Speculate, and that's all we're doing is trying to make as good an educated guess as we possibly can. We don't quite know, but I always look at it from a very fundamental standpoint. The price, the S&D, the buyer and seller, it's all about who has more pressure. When the seller has more pressure, the price falls. When the buyer has more pressure, the price rises. And after we move out of the summer quiet period, we start to move into a situation where that buyer is like, I've got to start getting stuff. I've started, I got to start getting some of these supplies. I got farmers walking in the door. They're wanting to apply some stuff. They're wanting to buy a head. Now all of a sudden that pressure moves back to them and the supplier side, the sell side can sit there and say, listen, all of these tons that weren't produced, that weren't exported, et cetera, is still carrying over. And ultimately speaking, we could see some dips here and there, but I think the entire structure of this marketplace stays higher priced than average, probably through at least spring of 27.

AI assessment note: “Yeah, I think so. And listen, this is all theoretical, right?”

Q How long can it sit on that ship?

A It's going to depend on the conditions of the ship and loading and things like that, and the quality of when it was produced. So, I mean, if it's good quality coming out of the facility, presume it's a well, let's say a tight ship, right? You don't have a bunch of leaks. You don't have humidity getting into the holds. It can last for a while, but the problem is the true nature of it is humidity is a big thing. I mean, you're sailing across the ocean. You're surrounded by water. That water, that humidity seeps its way into it, and that degrades the quality of it. It starts to go down. It starts to kind of break it apart. So I don't know. There's too many variables there, but I would say you're probably talking, you're not talking years. You're probably talking months.

AI assessment note: “you're not talking years. You're probably talking months.”

Q capacity, and so on. I presume that, that people are talking about that in fertilizer world right now. The import-reliant countries must be thinking, um, this is a pretty precarious and dangerous situation. Maybe we don't want to put ourselves in this position in the future. Two questions. One, is that happening? Do you see that happening? And two, how long does it take To stand up new domestic supply?

A I think it's happening to an extent. The problem is, it's not happening on the products that we actually need. Uh, like I said earlier, anhydrous is one that we produce almost all that we already need. So we're not that reliant on imports, and that's where a lot of the new nitrogen production is coming from. It's new anhydrous facilities, and a lot of it's backed by this green energy. Whether it's green or blue, it's clean energy technology. And the issue with that, and I'm not sitting there saying I'm opposed to it. I'm, I am all for new production that cleans up the environment. You know, best friend was a Boy Scout. Most of my boys were Eagle Scouts. And leave the world in a better place than what you got it. I'm all for it. But the problem is we're talking about food supplies. You know, the, the product actually grows that food. And my fear is these products, the technology may be not there quite like we think it is. We're getting ahead of ourselves. And we're leaning too far into it. All of a sudden in the future, we're going to figure out, oh no, we went too far down this path. It doesn't quite work. We need to get back to where it was, which brings you to the second question. Building a new facility takes years, literally years from the second you say, okay, I want to build this. I have the funding. I want to build it to go through the engineering, the construction proce…

AI assessment note: “I think it's happening to an extent... Building a new facility takes years”