Potash Prices Should Remain Elevated - RBC

It has been a rough couple of weeks for the potash industry. First, European potash company K+S AG reduced its prices, a major no-no as far as its rivals are concerned. Then, the mighty Potash Corp. of Saskatchewan Inc. (POT) made a massive cut to its earnings outlook that had to be embarrassing.

But here is some good news, courtesy of analyst Fai Lee at RBC Capital Markets: potash fundamentals are still excellent in the short term and long term, and should remain above historical levels.

In the short term, Mr. Lee wrote that producers have done an excellent job of curtailing production to meet falling demand, with over 14 million tonnes of output expected to be cut this year. He also suggested that the next fiscal year should be a fairly profitable one for most U.S. farmers, which gives them more incentive to buy fertilizer and maximize crop yields. And one other factor is that the decline in fertilizer applications during the 2008-2009 fertilizer year could actually hurt soil fertility levels.

"In sustainable agriculture, potassium removed from crops will eventually have to be replaced or crop yields will be negatively impacted," he wrote in a note to clients.

For the longer term, Mr. Lee pointed to high barriers to entry in the potash sector, a balanced supply-demand outlook, and the ongoing need to feed a growing population as reasons to be optimistic about pricing. He noted that the global population is growing at a rate of 2.5 people per second, or by about 79 million people a year. And of course, much of that growth is in key potash markets like China, India and Brazil.

He wrote:

In the major agricultural regions of China, India and Brazil, potash application rates are significantly below scientifically-recommended levels and improved fertilizer practices could lead to higher yields.

Comments

[Mad Hedge F...:]

It should if you believe in the bull market in food. During the sixties, new dwarf varieties, irrigation, fertilizer, and heavy duty pesticides tripled crop yields, unleashing a green revolution. But guess what? The world population has doubled from 3.5 to 7 billion since then, eating up surpluses, and is expected to rise to 9 billion by 2050. Now we are running out of water in key areas like the American West and Northern India, droughts are hitting Africa and China, soil is exhausted, and global warming is shriveling yields. Water supplies are so polluted with toxic pesticide residues that rural cancer rates are soaring. Food reserves are now at 20 year lows. Rising emerging market standards of living are consuming more and better food, with Chinese pork production rising 45% from 1993 to 2005. The problem is that meat is an incredibly inefficient calorie transmission mechanism, creating demand for five times more grain than just eating the grain alone. I won’t even mention the strain the politically inspired ethanol and biofuel programs have placed on the system. It is possible that genetic engineering, sustainable farming, and smart irrigation could lead to a second green revolution, but the burden is on scientists to deliver. The net net of all of this is that food prices are going up, a lot. Entertain core long positions in corn, wheat, and soybeans on the next dip, as well as the second derivative plays like Agrium (AGU), Potash (POT) and Monsanto (MON). You might also look at DB Commodities Tracking Index Fund (DBC). These will all surpass last year’s stratospheric highs at some point.

Jun 30 01:42 PM

[cameroni:]

Despite the significant change to earnings by Potash Corp I am still very bullish on that company and the industry in general. I liken their announcement of a major downward revision in profits as being akin to "ripping the bandaid off quick'. In other words, getting it over with. Being finished with the bad news and moving on.

Let's face it, plenty of other companies are going to candy-coat earnings and fudge the numbers despite internal knowledge and evidence that business has dropped over the last several quarters. They will prop up earnings with all the devices at their disposal. Potash Corp is just taking it on the chin now and telling it like it is. Got to respect that.

Potash sales are certain to rise though as the author has noted. Crop yields could be significantly improved with heavier and more frequent applications. Skipping application years will cost farmers eventually. The future drivers of the agricultural business are mouths to feed though and there are limits to food production without these inputs. Fertilizer is a key to achieving the yields the world is demanding.

I think potash is a terrific investment and the future is bright for this product.

Jul 01 03:21 AM