Update Potash of Saskatchewan (POT)

In a presentation at the Bank of America/Merrill Lynch Global Industries conference on December 15, Potash of Saskatchewan (POT) offered a modestly optimistic view on potash fertilizer demand for 2011—and a very bullish view for global agriculture.

Potash first.

The company affirmed its guidance for 2011 of sales of 9.3 million metric tons. That’s roughly at the low end of Merrill’s projected global demand of 55 to 60 million metric tons in 2011.

The company said that it had seen a strong fall season in North America and believed that most of the fertilizer it sold went directly onto fields rather than into inventories. That should produce strong sales in the spring application season in 2011.

In China inventory draw down has been completed and the company expects consumption in 2011 to return to the 11 million metric ton level that the industry saw before the global economic crisis.

Nothing has convinced the company that it needs to invest in a new Greenfield potash mine. With current capacity, Potash can produce 12 million metric tons and expansions of existing capacity would take that up to 17.1 million tons by 2015. To justify a Greenfield project, Potash said it would need to see roughly a doubling of prices from the third quarter levels.

That should be reassuring to competitors who are building Greenfield mines or expanding existing sites.

Potash was actually much more bullish on global agriculture in general than it was on its own markets. Read more

Update Vale(VALE)

And the biggest winner from Argentina’s huge natural gas from shale discovery in Patagonia?

YPF Sociedad Anonima (YPF) is certainly a winner. The find of 4.5 trillion cubic feet of gas is roughly double the Argentine company’s previous proved natural gas reserves of 2.7 trillion cubic feet. YPF already produces some natural gas from four wells at the Loma La Lata field with a daily output of 100,000 cubic meters.

Repsol YPF (REP), the Spanish oil and gas company that controls YPF, is certainly a winner. Media reports, unconfirmed by either company say the find could hold as much as 250 trillion cubic feet of gas. By contrast Argentina’s proved natural gas reserves before the find totaled 12 to 13 trillion cubic feet. (“Proved” is a much more meaningful measure than “reported in the newspaper,” I’d note.) Repsol is planning to sell 15% of YPF in a public offering.

But the biggest winner might actually be Vale (VALE). The Brazilian iron ore giant is moving to become the biggest fertilizer producer in Brazil and it’s new $4.3 billion Rio Colorado project sits in the neighboring Argentine province of Mendoza. To mine potash there Vale needs natural gas, lots of it, and until this find it looked like it was going to have to battle a tight Argentine natural gas market to get the supplies it needed or import it from somewhere. The alternative sources were all either politically iffy or likely to be very expensive. The Rio Colorado project is scheduled to begin production in the second half of 2013 with initial production capacity of 2.4 million tons and the potential for 4.4 million tons.

And now?

It’s clear now how Vale will find the gas it needs. (And in retrospect I doubt this find comes as a surprise to Vale. We are talking about a mining company that’s pretty good at assessing future resource potential.) Vale will invest $150 million along with YPF to begin developing the find with half of natural gas production going to Vale.

This is the second big deal that Vale has signed to secure infrastructure for the Rio Colorado mine. Read more

Whoops! USDA has to eat its optimistic projections from September 30 on corn crop and sets off commodity surge

It looks like the U.S. Department of Agriculture has been completely wrong-footed by the U.S. corn crop. And that has sent agriculture stocks soaring today, October 8.

Just a few months ago the USDA was projecting a record crop. Just a couple of weeks ago on September 30, the agency projected corn production of 13.16 billion bushels on a near record yield of 162.5 bushels an acre.

On October 8 shockingly lower projections completely reversed the shocking higher estimates issued by the USDA on September 30.

The USDA is now projecting final corn production of 12.664 billion bushels and a yield of 155.8 bushels per acre. Analysts have been arguing that September’s USDA projections were too high given conditions in the field, but even those analysts were projecting a yield of 159.9 bushels per acre. Last year set a record yield at 164.7 bushels an acre.

The revisions to the supply/demand picture were big enough to move the commodity and stock markets. The USDA is now calling for an end of the year corn inventory of just 902 million bushels. That more than 19% below the September estimate of 1.116 billion bushels for year-end inventory. Ending corn inventory for 2009-2010 stood at 1.6708 billion bushels.

Stocks moving up on the news include Mosaic (MOS) and Agrium (AGU) in the fertilizer group, seed companies Monsanto (MON) and Syngenta (SYT) and farm equipment makers Deere (DE) and AGCO (AGCO).

This week or next will see a bid from China for Potash Corp. of Saskatchewan (POT), Canada’s Globe and Mail is reporting.

The newspaper’s sources say Beijing is now deciding which of the proposed bids from China’s state-owned companies it should back. Pending Chinese national holidays beginning on October 1 argue for a decision this week or next.

Among the Chinese companies interested in topping the $38.6 billion bid by Australia’s BHP Billiton (BHP) for the Canadian fertilizer company are, according to the Globe and Mail, the state-owned chemical group Sinochem, which has proposed paying as much as $60 billion, and China Blue Chemical, a division of China National Offshore Oil Corp.

A Chinese bid has become more likely in recent weeks, in my opinion, as news reports have confirmed China’s swing this year to a corn importer from previous self-sufficiency in corn, and as the price of corn has climbed to $5 a bushel on forecasts of a slightly smaller harvest in the United States. Read more

A smaller but better fertilizer deal?

It doesn’t have the splash of BHP Billiton’s (BHP) $40 billion bid for Potash of Saskatchewan (POT), but Agrium (AGU)’s attempt to snatch AWB, Australia’s largest wheat exporter away from GrainCorp (GRCLF) is actually a more important deal for the acquirer.

It looks like Agrium will succeed in succeed breaking up the GrainCorp/AWB deal, since the AWB board has voted to accept Agrium’s offer over that of GrainCorp and most analysts don’t think GrainCorp will come back with a higher bid. I think the acquisition will push Agrium to a new level in the fertilizer markets of Asia. This isn’t simply an effort to deploy some company cash but a strategic move that will open up big new markets for the company.

Agrium has offered $1.1 billion in cash for AWB. That tops GrainCorp’s offer of $980 million in stock.

Canada’s Agrium, North America’s third-largest fertilizer producer by market value, would gain a platform for expanding sales of fertilizers and herbicides into Australia, the world’s fourth largest wheat exporter. But more importantly it would give Agrium a boost in its expansion into Asia. The big prize is China, the world’s largest market for fertilizer. Agrium owns almost 20% of the shares of Chinese fertilizer producer Hanfeng Evergreen, a leading Chinese producer of controlled-release fertilizers Read more