Listening to the Potash of Saskatchewan (POT) conference call today, July 29, I kept thinking that some one was going to yell, “Cue the plague of locusts.”
In Russia grain production will fall by 20% because of drought, the company said. Canadian wheat production is forecast to be down 20% because of flooding during planting season. In India, after a string of bad harvests from insufficient monsoon rains, too much rain is rotting crops in storage.
The company forecast that China will have to import about 75% of its soybean needs in 2010 and 1.7 million tons of corn. India could hit record levels of grain imports.
Food commodity prices are likely to rise as 2010 goes on and next year, so farmers in countries such as Brazil and the United States that did have good harvests to export should have plenty of cash to increase purchases of fertilizer.
That will make 2010-2011 a tight year for fertilizer supplies. Potash of Saskatchewan estimated that global potash production capacity will be about 60 million tons. The company forecasts potash demand of about 55 million tons. That will require operating rates of 90%, a level that’s historically meant a tight market and rising fertilizer prices.
Before the stock market opened on July 29 Potash of Saskatchewan reported second quarter earnings per share of $1.32, above the Wall Street consensus by 19 cents a share. Revenue climbed 68% from the second quarter of 2009 to $1.44 billion.
Even lackluster guidance—the company simply confirmed 2010 earnings per share of $5.00 to $5.50, in line with the consensus forecast of $5.31—didn’t prevent the stock from rising more than 5% on the day.
Full disclosure: I don’t own shares of any company mentioned in this post in my personal portfolio.
Thanks for the mention southof8. I mentioned in that comment that my studies for a major Canadian fertilizer producer showed a strong positive correlation between fertilizer and grain prices with a slight lag. The recent runup in POT is probably making that case right now. I hope very few people sold their POT and missed the current run, which I suspect could take it up to the $120s again.
You really do have to be independent to do well with this type of stock since most of the “analysts” will be reducing their target prices after the stock has fallen and will put it at a strong buy just before it is about to fall! Jim doesn’t usually make such bad calls but I think he is just too analytical to get it right on commodity stocks.
Don’t forget to take some profits but always keep some for the big run or the takeover. In most countries a takeover would not be allowed but Canada has a dismaying habit of letting foreigners buy strategic assets. The Chinese have huge dollar stockpiles unlimited mouths to feed, and a good relationship with Canada so don’t be too shocked to see a bid.
southof8 – I’m long POT and holding on tight. Only I hope with a good year next year, it will break through $130 and move higher.
sigli – Hope next year is as strong as projected.
What do you or anyone else think about BHP Billiton’s Jansen potash mine project, and how this might affect global potash supply and demand, and POT’s prospects?
@creativekev
I didn’t take it Bill Doyle’s comments to mean tight fertilizer supply in the face of strong demand. POT estimates 50 mt consumption/60mt capacity. Next year is when they think it’ll look really good at 55 mt consumption, leaving little excess production capacity. That leaves no room for mine floods, power disruptions, and other shutdowns.
Other positives are this year’s consumption was still below long term trend, and dealers are not stocking anything. Bill Doyle is another Andrew Forest mining hyper optimist, but if he’s right then next year will look really good for the sector.
Even though I didn’t do it, I think Jim’s recommendation to sell was well timed. Also IIRC it was tempered by the long view, which was fundamentally positive. Now, the ‘global demand’ (plague of locusts) scenario makes the short(er) view a bit more positive. …nice to get the update without having to sit in on the conference call… The question is: “When will POT be a ‘buy’?”
Jim has pretty much called POT consistently since last October. His price targets went from 125 to 130 to 135. Stock went up too. He emphasized of alll commodity producers, POT has the greatest ability to control supply by controlling production given they have such a large share of the market capacity. When prices were low it cut production and kept its costs down. When they went up, it ramped up. This is a well run company.
Hence my extreme surprise when Jim sold a few months ago after raising his target the month before (sold in April after praising and raising in March, if memory serves me).
Whether POT is any better than any other fortune teller at predicting the future is debatable. What’s not is that it controls its own profitability by being able to control production based on market prices, so is better leveraged to growth of middle class in emerging markets than pretty much any other commodity. If you think the third world will eat better over time, then you’ve gotta think farmers will need more potash to produce the corn to feed the pigs and cows. And you don’t have to worry about whether chines banks are cooking the books.
RyanPatrick called it when he said in response to Jim’s sell order that Potash is a core holding and trades in a range. 85 has been the consistent bottom for the last 18 months or so. It topped at around 130 in Feb or so, then moved down back to around 85. It was at 85 within the last 6 weeks or so. It’s moving up again. Jump on board if you ain’t already and hold on tight if you are.
Jim,
Thanks for the update on POT. Tight fertilizer supply and rising fertilizer prices are what I’ve been waiting for as I’m holding POT. But how much faith should we have in all these projections from Potash? They would naturally want to put a positive spin on things. Could their projections be too optimistic?
Jim,
I’m a little confused due to the general re-org of all things Jubak. Will you no longer offer buy/sell/hold calls along with expected share price and date because of the fund and the newsletter, or is the main limitation of this site the timing of future updates?