Urea futures spot prices rose synchronously,Corresponding risk control introduced to cool down the fertilizer market

In addition to the above-mentioned commodities directly named by national regulatory authorities, the price of chemical fertilizers has also been rising since the beginning of this year. The contribution rate of chemical fertilizers to the increase in food production is more than 40%. Urea, as the most used high-quality and high-efficiency nitrogen fertilizer in agriculture, is an important starting point for food security. Affected by factors such as the shortage of natural gas supply, environmental restrictions on production, coal prices, and rising prices in the international nitrogen fertilizer market, domestic urea prices have officially entered the upward channel since the winter of last year. According to statistics from the China Agricultural Material Circulation Association, the China Urea Price Index (CNPI) rose from 1,765.82 points on November 2, 2020, to 2,344.95 points on May 31, 2021, an increase of 32.8%. In terms of futures, since March 5 this year, the urea 2107 contract has also stepped out of a unilateral rise, with the price rising from 1803 yuan/ton to 2497 yuan/ton (closing price on June 3), an increase of as much as 38.4%.

In this regard, the reporter of "China Agricultural Materials" interviewed several senior industry experts and urea futures analysts, focusing on understanding the current operation of urea futures, and individual analysts also analyzed the market outlook.

In short supply,

Urea market rose unilaterally

Regarding the apparent unilateral rise in the spot market for urea futures, Wang Jing, manager of Guantong Futures Research and Consulting Department, believes that it is mainly caused by the following four factors:

The first is that the overall commodity market is very good this year.

The second very important reason is that last year’s epidemic led to a significant increase in global attention to food security. The demand for agricultural products continues to increase. The demand for food expansion is widespread across the world, and the agricultural demand for urea has reached a relatively high level. Strong support.
The third is industrial demand, especially with the recovery of the real estate market, the demand for industrial urea in related industries such as melamine has also begun to recover, forming a situation where demand in both industry and agriculture is very strong.

The fourth reason is that urea itself is a relatively typical low-inventory commodity. Once it enters the peak season, the market is often triggered at any time. Therefore, various factors can easily form an overall support for the demand for urea.

In addition to strong demand, Yan Sensheng, a urea researcher at Guantong Futures, also said: “This year's dual control policy in Inner Mongolia has led to a decline in regional daily output. After March, the maintenance and temporary shutdown of urea devices in the main production areas increased, increasing daily output. Above 160,000 tons; synthetic ammonia production profits are high, and urea companies’ conversion to synthetic ammonia has increased, and the daily output of urea has also decreased. Finally, urea stocks have been low year-on-year. Especially recently, urea stocks have reached a historic low. National urea companies The inventory is less than 50,000 tons, and the daily output is less than one day. This is also a supplementary factor that has led to the strong urea price this year."
ZCE implements control measures in time

Zhengzhou Commodity Trading pays close attention to the hot unilateral rise of urea, and has introduced corresponding risk control measures:

On May 14, Zhengzhou Commodity Exchange issued a notice on adjusting the trading margin standards, price limits, and transaction fee standards for certain futures contracts. From the settlement on May 18, 2021, the trading margin standards for urea futures contracts will be adjusted to 7%, the price limit will be adjusted to 6%.

On May 28, Zhengzhou Commodity Exchange continued to issue a notice on adjusting the trading margin standard and transaction fee standard of the urea futures 2107 contract. From the settlement on June 2, 2021, the trading margin standard of the urea futures 2107 contract will be adjusted to 10. %; Starting from June 1, 2021, the transaction fee standard for the 2107 urea futures contract has been adjusted to 10 yuan per lot, and the transaction fee standard for intraday closing of Imakura has been adjusted to 10 yuan per lot.

In this regard, Wang Jing explained that it is very normal for the exchange to adopt some corresponding risk control measures when the market is relatively hot and that the introduction of such measures is strictly based on its futures trading. The risk control management method and the futures settlement detailed rules risk management method are adjusted.
"Recently, urea futures have been being fired, and the overall macro sentiment has also risen, mainly because there are not many social inventories, and some trading zones are hoarding goods, driving up the price of urea. Although some manufacturers are repairing, the demand in Northeast China is still Not bad, but the rise is still a bit outrageous, and individual downstream traders have already shown resistance.” Another leading domestic futures company urea product analyst analyzed that the expansion of the rise and fall is to curb excessive speculation on the one hand. At the same time, it can also increase the game space between the two parties, which can scare away some retail investors to a certain extent; increasing the margin can restrain the number of hands in which funds come in and reduce the hype in the futures market.

Yan Sensheng said that the exchange began to implement measures to increase margin and handling fees for the urea 2107 contract this week. After the implementation, investors’ transaction costs have increased, which can cool down market speculation. There was also a brief drop in trading volume. In addition, Yan Sensheng also mentioned that although urea futures rose more, they were far inferior to black varieties. Therefore, the exchange's supervision of urea futures is a reasonable measure and has little impact on the futures market. The market outlook still revolves around the development of urea fundamentals and the recent urea futures are discounted to the spot (the futures price is lower than the spot price), and the speculative sentiment on the urea futures is not strong.

The risk is gradually magnified,

The combination of futures and currents highlights

It is worth noting that the urea futures and the spot have always maintained a close relationship. As the urea industry has a deeper understanding of futures tools, industrial customers are more willing to participate in urea futures, and the combination of futures and spots brings new trade models to the industry. After industrial institutions participate in the futures market, they can help them manage their risks, and at the same time suppress unreasonable fluctuations in the futures market.
Some urea futures analysts said that some factories are expected to increase production capacity in June, which may be a hidden risk for the market. The higher the current price, the greater the risk for spot participants. To reduce risks, it is strongly recommended that practitioners use futures to do hedging or use point price trading to sell. At present, the proportion of point price transactions in the market is still too small. The main reason is that urea has not been popularized. There are still many people who accept point price transactions in some early-market products in Jiangsu and Zhejiang. With the urea futures market, The stable operation of urea products will account for more and more transactions in urea varieties in the future.

Judging from the recent market situation, urea futures are discounted spot. Last week, the urea 2107 contract was once discounted to 120 yuan/ton. Due to the current tight spot supply and frequent price adjustments in the spot market, high prices have continued to be created. Urea futures have begun to passively follow the rise. After the sharp rise in goods on June 3, the basis has already converged. Yan Sensheng believes that, overall, the strong fundamentals of the urea industry have given confidence in the rise of urea, and urea futures have risen simultaneously with the spot market.

The current urea price is at a historical high, and tight supply and demand have contributed to the surge of urea, but the downstream of urea is more sensitive to high-priced urea. Yan Sensheng recommends that investors pay attention to the changes in daily urea production and downstream agricultural demand in the later period. At the same time, the price increase of urea has a greater impact on compound fertilizer companies. Investors can observe the downstream acceptance of high-priced urea from this perspective and pay attention to the real-time basis of the market. The size of the difference, looking for the margin of safety of the transaction. As an important agricultural product, chemical fertilizers affect grain production, and the market outlook needs to pay attention to policy risks and strengthen market supervision.
The prices of some commodities continue to rise sharply, The prices of some varieties hit record highs, Arousing widespread concern from all quarters. On May 24, the National Development and Reform Commission announced that five departments including the National Development and Reform Commission, the Ministry of Industry and Information Technology, the State-owned Assets Supervision and Administration Commission of the State Council, and the State Administration for Market Supervision held a meeting to jointly discuss iron ore, steel, copper, and aluminum. The meeting pointed out that the current round of price increases is the result of a combination of many factors, including international transmission factors, but also many aspects that reflect excessive speculation and speculation, disrupting the normal production and sales cycle. The price increase has contributed to the flames.