The Start of a Dry Spell for POT?

Potash Corporation of Saskatchewan Inc. (POT) reported 1st quarter profits of $308 million – down 46% y/y. This was triggered by a 51% decline in revenues to $923 million. Net income received a boost from tax writeback of $113 million. Pre-tax profits were down 74% at $195 million.

Revenue decline is despite a sharp rise in Potash prices – up 112% y/y to $640 per tonne for the North American market and up 79% y/y to $493 per tonne for the export market. Higher prices of potash and other fertilizers restricted usage as farm economics weakened in 4Q08 with farm product prices of peaks.

The current prices, too, may seem uneconomical, especially as the US department of agriculture expects surplus of corn production over demand and grain prices are unlikely to cross or near near-term highs. The price drop recently has been sharp for all fertilizers.

Source: Gridstone Research

The reluctance of farmers to buy at current prices seems to stem from a belief that fertilizer prices will decline further or that it may not make much sense to use fertilizers at current price levels – a fact echoed by the management in the following statements:

In North America, where farmers' financial position is strong, they are still weighing the risk of lower yields from reduced fertilizer application - especially of phosphate and potash - on profitability at a time of strong crop commodity prices. This situation has the potential to reduce nutrient applications for the 2008/09 fertilizer year by significantly more than the record 15 percent reduction in 1982/83, when plantings declined by 40 million acres. To put this reduction into context, it is now expected that US farmers will apply approximately the same amount of nutrients this fertilizer year as they did in 1983. However, the current plantings include 37 million more acres of corn and soybeans. This scenario is unprecedented in magnitude and unpredictable in consequences.

Investing in a commodity company with falling prices could be akin to trying to catch a falling knife. A point to note that sensitivity of profits to prices is sharp – a 1% price increase of all fertilizers in the current quarter would have improved earnings by 4.3% .

While it is too early to say if this is the start of a dry spell of earnings or if we are close to the bottom, invested money could take some time to reap returns. This currently seems to be true for consumer of POT's products and could be true for investors too.

Disclosure: No exposures

Comments

[cyberclark:]

I think POT is solid and upward motivated. When the 240.00 prices were on top POT did not increase production by opening new plants and it did not throw their product at new accounts who were caught short as their old suppliers abandoned them for more cash.<br /><br

Potash Corp looked after their customers and held the market prices they did not abandon them for short term profits<br /><br

Their recent open policies regarding execuative salaries was fresh and forward looking. In my view they remain the brightest star on the board.

Apr 24 11:16 AM

[sdcougar:]

"...We need to raise the price of all forms of carbon, preferably through taxes, but cap and trade will work too."

The 'cap and trade' before congress will have a hard time in the present economic conditions, and the evidence against it can not be suppressed for ever.
See this video on the fraud of MAN-MADE climate change which features scientists who were on the IPCC and point out the fallacies behind the hype.
video.google.fr/videop...

And see all the info in the Senate Minority Report.
Hundreds of scientists are taking a stand against the false claims.
epw.senate.gov/public/...

Apr 24 11:18 AM

[donzelion:]

"Investing in a commodity company with falling prices could be akin to trying to catch a falling knife."

One "catches a falling knife" when there is no floor for the valuation of the asset - if it can go to zero or near zero (e.g., dot-coms, overleveraged brand names, etc). Glance at the 5-year patterns for most S&P 500 - you'll find a significant number that fell 50 - 75% over the period, but POT has still doubled. That suggests folks still believe in the values (just aren't willing to take on ridiculous amounts of leverage to gamble about the values).

If a commodity is a necessity, if there are no readily available alternatives, if company management is prudent and avoided excessive speculation, then one ought to buy without undue trepidation.

Apr 24 01:16 PM

[auto44:]

Fertilizer without water is to a plant is like a mouth full of salt without water to you.

Apr 24 03:42 PM

[auto44:]

If farmers are going to plant seed without fertilizer, guess what is going ot happen to crop prices,the difference in yield is going to be huuuuuge. Jim Rogers is looking pretty smart right now as always.

Apr 24 03:45 PM

[Gunslinger:]

Too bad there has been NO global warming this decade. Kinda shoots down all that talk.

Ironically, global cooling would result in temperate shifts that would have a negative impact on North American wheat and corn production - leading to the crop shortages.

Take a look for the recent cycle of sunspots that we are in, and what impact that will have on temperatures and agriculture. A decent net search should eventually provide those papers.


On Apr 24 10:11 AM Mad Hedge Fund Trader wrote:

> I don't think so. Pack your portfolios with agricultural plays like
> Potash (seekingalpha.com/symbo...), Mosaic (seekingalpha.com/symbo...),
> and Agrium (seekingalpha.com/symbo...) if Dr. Paul Ehrlich
> is just partially right about the impending collapse in the world’s
> food supply. You might even throw in long positions in wheat, corn,
> soybeans, and rice. The never dull, and often controversial Stanford
> biology professor told me he expects that global warming is leading
> to significant changes in world weather patterns that will cause
> droughts in some of the largest food producing areas, causing massive
> famines. Food prices will skyrocket, and billions could die. At greatest
> risk are the big rice producing areas in South Asia, which depend
> on glacial run off from the Himalayas. If the glaciers melt, this
> will be gone. California faces a similar problem if the Sierra snowpack
> disappears. Rising sea levels displacing 500 million people in low
> lying coastal areas is another big problem. One of the 77 year old
> professor’s early books “The Population Bomb” was required reading
> for me in college in 1970, and I used to drive up from Los Angeles
> to hear his lectures (followed by the obligatory side trip to the
> Haight-Ashbury). Other big risks to the economy are the threat of
> a third world nuclear war caused by population pressures, and global
> plagues facilitated by a widespread growth of intercontinental transportation
> and globalization. And I won’t get into the threat of a giant solar
> flare frying our electrical grid. “Super consumption” in the US needs
> to be reined in where the population is growing the fastest. If the
> world adopts an American standard of living, we need four more Earths
> to supply the needed natural resources. We need to raise the price
> of all forms of carbon, preferably through taxes, but cap and trade
> will work too. Population control is the answer to all of these problems,
> which is best achieved by giving women an education, jobs, and rights,
> and has already worked well in Europe and Japan. All sobering food
> for thought.

Apr 24 05:54 PM

[urbanhiker:]

SDCougar and gunslinger- Why do you think the icebergs are melting? I thought everyone except some hard headed Republicans knew about global warming.

Apr 24 07:04 PM

[mplaut:]

POT says that it has seen markets like this before and it knows exactly what to do:

"This response to short term changes in potash demand is the same strategy that has supported our success for more than 20 years now. We followed this approach as recently as 2006 when buyers in China and India waited until July and August respectively to settle contracts and the rest of the world reduced buying to await the outcome.

"Our management team has been around for a long time and we've seen these conditions before. When it's time to gear down, we know how to do that rather than driving full speed off the edge of a cliff, and when it's time to open up and race forward, we are better prepared than ever to meet growing demand."

Apr 26 03:54 PM