Is Potash Corp. Overpriced? (Part 2)

Note to readers:

This is a follow up of my previous article, Is Potash Corp. Overpriced?, Feb 11, 2009.

Since our last review on POT, we have witnessed some major movements in the share price of Potash Crop. In my previous article I argued that the price of POT (at $90+/share) was unsustainable and it will plunge back to the $65 range, and advised investors to short this particular company.

For a quick review, I argued for $65/share due to the following:

1. China will not buy as much, and China will bargain a better deal.
2. Asia’s other developing countries will delay the purchase.
3. North American farmers will spend less on fertilizer.
4. There won’t be a serious rally in grain prices any time soon.
5. Irrational and uneducated market speculation that is inflating the price. (Pot-bug)

Of the 5 stated above, #2*, #3 and #4 have became a reality in the month of February. And on March 4^th, the news of Uralkali’s (URALY.PK) 25% price cuts on potash delivery to Brazil delivered a tectonic shockwave to the fertilizer industry only to be saved by a positive market sentiment that was ruling the day.

Now, #1 is about to show its ugly head.

What do you mean? The price of ___________ can only go up!

What goes up comes down.

Previously the market estimate was somewhere between $850~$1000/ton for potash fertilizer, and the rumor mills churned out the possibility of $1000/ton + ’premium’. The implication of Uralkali’s 25% price cut poses a serious threat to Potash Corp.’s current and future earning potential. And this fear was reflected in March 4^th price movement.

China and India’s vast consumption of fertilizer gives them a huge leverage in price negotiation. In 2008, China negotiated for a $576/ton while smaller players like South Korea and Japan had to pay a steep premium. With Brazil getting a steep discount, China WILL bargain for a lower price. India WILL bargain for a lower price. How much lower? How realistic can it go down?

Let’s count the obvious baddies.

• The demand of fertilizer is down all over the world
  • So bad that some companies are slashing workers.
  • Drought is causing serious delay in the application of fertilizer.
• The commodity price has gone back to 2006/7
  • Corn price is almost half price of 2008 peak.
  • Soy price is devastated (no demand).
• China had to pay whopping $400/ton increase in fertilizer in 2008 ($176/ton in 2007, $576/ton in 2008).
• Rice shortage in Asia? Nope, not this time.

You can 100% be certain that China & India will try to drive the price down. They will not accept the 2008 prices. The potash industry has been very cut-throat in the 1980s, one has to look at its bloody history to understand it.

To understand pricing in the potash industry, it is useful to re-state the facts:

1) PCS has most of the industry excess capacity,

2) The potash industry has a tendency to ruinous price cutting when supply exceeds demand,

3) The suspension agreement with the U.S. government dictates a minimum price at which Saskatchewan potash producers can sell into the U.S. market, and

4) PCS has taken on the task of the residual supplier to potash markets. If PCS were to produce at full capacity and offer all of its production capability to the market, then prices would be much lower.

(Source: Chapter 5: Fertilizer Price Determination, Agriculture and Agri-food Canada)

Some people are citing the fact that the crop sowing season is dangerously close and China/India must purchase their required loads. Only this time, Potash Crop’s warehouse is piling up huge loads of unsold K.

While it is true that there is no ‘real’ substitute for K, that doesn’t mean one cannot farm without K fertilizer. One can sustain the farming practice with accepting lower yield; perhaps using inferior fertilizer, but cost effective enough to be applicable in vast farming communities in China. One can also choose to grow crops that are less affected by K deficiency in soil. Investors should recognize that K fertilizer is not ‘make or die’ fertilizer. It is a luxury, not a necessity.

No matter how you see it, potash fertilizers are not gold, are not oil, and are definitely not approaching $1000/ton any time soon.

Disclosure: Short POT

Comments

[jimmy46:]

Rice shortage in Asia? Nope, not this time.""""

Maybe not, but at walmart rice is over a dollar a pound,
historicly that's a high price.

A little fertilizer would easily pay for itself

Mar 05 03:21 PM

[freshone:]

you could have wrote a negative article about shorting any stock... relating to fertalizer, steel, copper, healthcare, banks, teddy bears, race cars.

EVERYTHING IS GOING DOWN... so to predict a volitile stock like POT will drop 10-15 points is not impressive. Why don't you go find me a stock thats going higher and then you'll have some clout.

Mar 05 03:56 PM

[P205:]

Interesting take on POT. Keep in mind that a strong argument can be made that crop prices have overcorrected. Global grain stocks-to-use ratio is now around18% far below the 30 year average of 27%. Further, there are 200,000 new mouths to feed per day. These underlying dynamics may prop up pricing. If Chinese demand comes in weak, then short term POT will fall back into the 50 range. However, long term, this stock is a keeper.

Mar 05 05:06 PM

[John Polomny:]

Short term you may right on farmers not applying inputs. However there is a consequeuce in that yields will fall. You might be able to get away with that for a season but if this is done collectively grain prices will recover as carryovers are already at historic lows. It is a pay me now or pay me later type situation in my view.

Mar 05 06:29 PM

[nova:]

Canada is not Russia.

Russian "capitalism" is a joke.
For instance, Russians have sold to their EU customers gas (they buy gas in Turkmenistan and resale it to EU) at prices 35% below they have to pay to the gas suppliers. WOW!

China has a "small" problem: their economy is going down in a hurry. China unemployment is rising fast. It make a good sense to Chinese communist bosses to keep their people from going hungry, therefore, breeding civil unrest.

Finally, US$ is about to depreciate a lot. This is why gold is moving up. The same is true for food. Politicians must feed their people, otherwise, they may be in a grave danger.

Please do not mix up food and oil. The USA control most of Middle Eastern oil suppliers like Saudi, Kuwait, etc.,

PS
If Putin cut oil and gas supply to EU by 50% for a month or two, oil would go easily to $75-80.

Mar 05 07:55 PM

[jeerio:]

POT will likely go down from here, but that's ok. i bought some about 15 minutes before the price cut announcement, and it's forced me to add/average down the past two days vs. selling at a loss.

if it goes down another 10 points, i'll add more, much more. the world isn't ending, especially when it comes to food.

while it would have been nice to have made 3 points in three hours, i'm willing to wait, and likely take 10 points later on.

i'm draping a sheet of Bounce fabric softener on my laptop to make sure it all turns out just right.

Mar 05 11:00 PM

[manuel:]

sorry but how do i know if people writing negative comments are shorting the stock? what would happen if someone shorts the stock and writes negative comments in about every blog commenting the stock? Would he get cought? would his comments be cancelled? If he delivers false informations?

Mar 06 08:50 AM

[manuel:]

uralkali had to negotiate such an agreement with Brazil because Brazil has been hit more by the crises. You can check it out on Uralkali website

Mar 06 08:57 AM

[manuel:]

Uralkali is doing fine, check it out, it goes up

Mar 06 08:59 AM

[manuel:]

well shorting is part of the game, it is risky, nobody knows

Mar 06 09:08 AM

[dave1205:]

The source you have mentioned: " Chapter 5: Fertilizer Price Determination, Agriculture and Agri-food Canada" was prepared in June 1998 - a decade ago... A lot has changed since then. You are backing your analysis on the basis of decade-old data.

Mar 06 09:32 AM

[BxCapricorn:]

Rice is a dollar a pound? Where are you shopping? It's 70 cents/lb at my local supermarket in Las Vegas.

Glad I read this story. I was thinking of buying some POT and did not know many of these pricing factors.

Mar 06 03:32 PM

[BxCapricorn:]

Here's the price of rice. Very nice.

bangkokpundit.blogspot...

Mar 06 03:35 PM

[Doc 224899:]

Paul Choi wrote this: "Investors should recognize that K fertilizer is not ‘make or die’ fertilizer. It is a luxury, not a necessity."

My response: Any corn crop fertilized with fertilizer that includes potash will produce twice as much corn per acre as the same corn crop with all other factors the same except no potash is in the fertilizer mix.

So, Paul, you think people are going to elect to get half the yield from their crops in order to save on potash? I can just imagine the policy-making conversations in India: "I've got the answer, Rahkesh, we'll let twice as many millions of people starve because potash is too expensive this year. We'll just plow the bodies into the fields." That's brilliant policy, huh?

We'll see how the Uralkali production goes, and if they can deliver what they say they can. Russians have managed to botch their potash production twice in the last couple of years due to unsuccessful mining practices (maybe they were unavoidable disasters, maybe they weren't). The Russians are playing hardball with the natural resource markets, if this winter's natural gas story is any indication, and when you play that close to the ragged edge you sometimes get cut on the blade.

Finally, before anyone starts to think Uralkali is going to "bring down Potash Corp", or some other such silliness, let's not forget that last year Potash Corp wrote multi-year contracts with India and China, which covers deliveries to be made in 2009, and demand was so great in 2008 that Potash Corp was only able to make partial deliveries.

Mar 06 05:12 PM

[Nanacat:]

Thank you, Paul!

If I had read your earlier article, perhaps I would not have sold a vertical put :(

Mar 06 05:51 PM

[misiosnechacz:]

I just wonder how far Russia would go without EU money for gas. Oil we can take from somwhere else. No problem they have to sell it to someone. We had it recantly and we survived. Eu finnaly would get fed up and take gas from norway. Money that russia would have to pay for not fullfiling contract agrement . that would nice pile of cash. Eu needs russian gas but russia even more needs euros.


On Mar 05 07:55 PM nova wrote:

> Canada is not Russia.
>
> Russian "capitalism" is a joke.
> For instance, Russians have sold to their EU customers gas (they
> buy gas in Turkmenistan and resale it to EU) at prices 35% below
> they have to pay to the gas suppliers. WOW!
>
> China has a "small" problem: their economy is going down in a hurry.
> China unemployment is rising fast. It make a good sense to Chinese
> communist bosses to keep their people from going hungry, therefore,
> breeding civil unrest.
>
> Finally, US$ is about to depreciate a lot. This is why gold is moving
> up. The same is true for food. Politicians must feed their people,
> otherwise, they may be in a grave danger.
>
> Please do not mix up food and oil. The USA control most of Middle
> Eastern oil suppliers like Saudi, Kuwait, etc.,
>
> PS
> If Putin cut oil and gas supply to EU by 50% for a month or two,
> oil would go easily to $75-80.

Mar 07 05:05 AM

[Paul Choi:]

Dear readers,

1) In my kaChing.com site, I have long foreseen & told members that Dow will eventually fall to DJIA 6500. And when DJIA touches 6500, it will bounce.

2) Meanwhile my prediction, which are also published in both kaChing.com & at SeekingAlpha.com, that POT will continue to fall & it will be hitting a support at $65.

Now, both of my predictions have became a reality in March 6th, 09. I have warned investors that it would be suicidal to long 'anything' in this market, other than perhaps a gun company (SWHC), because the world is becoming more and more insecure & demand for gun will skyrocket... FYI, SWHC has doubled between Jan to Mar 09.

True to my disclosure, I have covered POT over the last few weeks as POT continually broke through its support line; and made an average of 22% return in the last 3 weeks with minimum risks involved.

Now that POT has touched $65/share support, things will get very interesting. At $65, POT present itself as a good opportunity to buy in order to gain 'quick' and 'healthy' profit.

I am not a buy & hold investor (see my profile). I believe that at this price range (64~66) there are numerous stocks that could provide equal/greater returns with lower risks. In the end, the call is yours. If you love the volatility then POT is king.

My father, who was an army officer, always told me that it is important to know when to call it a quit. If you've reached your goal, then it's a time to cash in the chips and review your strategy. Discipline! I plead you not to fall into the trap of 'greed' and hold your shorts forever... The market 'will' bounce.

Finally, I hope readers have benefited through my two articles. I most humbly accept comments, good and bad, from readers.


Regards,



Paul Choi

Mar 09 05:20 AM

[Paul Choi:]

I highly recommend the below article.

seekingalpha.com/artic...

I was writing a similar article and he beat me to it!!
If you don't cash in the chips, you may lose out. So, it's time to bring bacon home!

Mar 09 05:49 AM

[Jeez:]

This is for amusement; don't tell me that you make investment decisions based on what you read here. Every trade has two sides and one can spin a tale either way.

PS: The author does declare that he is short POT. Of course, he is short - how would you take this article if he was long?

On Mar 06 08:50 AM manuel wrote:

> sorry but how do i know if people writing negative comments are shorting
> the stock? what would happen if someone shorts the stock and writes
> negative comments in about every blog commenting the stock? Would
> he get cought? would his comments be cancelled? If he delivers false
> informations?

Mar 09 10:52 PM

[Jeez:]

How come the author does not know what you know - "POT has multi-year contracts". Is this really true. That changes the outcome to a large extent.


On Mar 06 05:12 PM User 224899 wrote:

> Paul Choi wrote this: "Investors should recognize that K fertilizer
> is not ‘make or die’ fertilizer. It is a luxury, not a necessity."
>
>
> My response: Any corn crop fertilized with fertilizer that includes
> potash will produce twice as much corn per acre as the same corn
> crop with all other factors the same except no potash is in the fertilizer
> mix.
>
> So, Paul, you think people are going to elect to get half the yield
> from their crops in order to save on potash? I can just imagine the
> policy-making conversations in India: "I've got the answer, Rahkesh,
> we'll let twice as many millions of people starve because potash
> is too expensive this year. We'll just plow the bodies into the fields."
> That's brilliant policy, huh?
>
> We'll see how the Uralkali production goes, and if they can deliver
> what they say they can. Russians have managed to botch their potash
> production twice in the last couple of years due to unsuccessful
> mining practices (maybe they were unavoidable disasters, maybe they
> weren't). The Russians are playing hardball with the natural resource
> markets, if this winter's natural gas story is any indication, and
> when you play that close to the ragged edge you sometimes get cut
> on the blade.
>
> Finally, before anyone starts to think Uralkali is going to "bring
> down Potash Corp", or some other such silliness, let's not forget
> that last year Potash Corp wrote multi-year contracts with India
> and China, which covers deliveries to be made in 2009, and demand
> was so great in 2008 that Potash Corp was only able to make partial
> deliveries.
>

Mar 09 10:56 PM