There’s just one more big customer negotiation standing between Potash of Saskatchewan (POT) and a bottom for potash prices. Unfortunately for anyone hoping for a quick fix that customer is China and the Chinese are likely to take their time striking a deal.
In its second quarter earnings report Potash said that it projected a turnaround in global fertilizer demand in the second half of the year. Since then other fertilizer companies such as Agrium (AGU) have made the same prediction.
I think the fertilizer companies have a pretty good handle on future volume, that is, they know how much fertilizer is stock piled, how many farmers have been cutting back on how much fertilizer they use, and how much longer lower levels of application can go on before it cuts into yields.
What no one knows at this point is what price those future tons of fertilizer will sell for. The consensus just a few weeks ago was that the price set in recent negotiations with India put in a bottom. But China, the world’s largest buyer of potash fertilizer, now looks to be aiming to lower the price some more.
Exactly how much more? No one is sure, although the best guess is that while China is looking for a lower price than the $460 a metric ton that India agreed to pay for potash, the price won’t be a whole lot lower. Maybe some where around the $439 a metric ton that domestic producers are getting for potash in China.
As long as the price is not punitively lower, simply removing the uncertainly should lead the stocks in the sector to rally.
Demand for potash fertilizer has collapsed in China and with it the country’s need for imports. Potash imports hit a record 9.4 million metric tons in 2007, and then dropped to just 5 million tons in 2008. In the first half of 2009 imports dropped even more to an annual rate of just 3.4 million tons.
 But because potash use by China’s farmers fell even faster, the country has built up a huge stockpile of about 6.8 million tons at the beginning of 2009. Do the math: China has 6.8 million tons in stockpiles; it produces about 3 million tons domestically, and total consumption is running at about 7 million tons. Do you see a reason for China to settle quickly at a higher price?
The two things potash companies have in their favor are 1) the size of China’s stockpiles, and 2) the country’s desire to buy more while the price is low in order to save on future imports. Forcing down the price too much hurts China’s domestic producers and reduces the value of the country’s existing stock pile. Letting negotiations drag on too long limits China’s chance to buy big now while global prices are low.
The guess by Wall Street fertilizer analysts is that the final deal will be at $400 to $460 a ton and that a deal isn’t likely before the end of the third quarter of 2009.
(Full disclosure: I own shares of Potash of Saskatchewan in my personal portfolio.)
Potash (potassium) is one of the three macronutrients used by most plants. The other two are Phosphates (phosphorus) and nitrogen. Some soils are naturally high in potassium but most are not so most crops on most soils must have potassium added to produce maximum yields. It is possible to “bank” potassium and phosphorus in most soils and use the stored nutrients for a period of time but eventually they must be replaced. Nitrogen is different in that it must be applied more often since it can leach out of soils or volatilize into the atmosphere.
Can someone remind me what potash is good for? I know it is good for corn, but, since ethanol is no longer in favor, I was wondering if there is any other BIG market for potash.
I totally agree with NB above. That would be great and extremely helpful.
Even though prices for fert are sitting low now as Jim points out in his excellent book, the long term trend is that the world needs more food and higher yields. I think POT is a great long term buy. In at 66 and 85
Jim – one suggestion. In the “Jubak’s Pick” page, if doable, you could add a %age holding column which will show readers what %age of your tot portfolio a specific position represents. And at the end of it, you could show the balance of cash %. That would address queries such as one above and show your readers your %age allocs at all times. My 2c.
It’s amazing to me how elastic China’s fertilizer demand seems to be. I assume that people are not eating significantly less, but rather, as you suggest, that farmers are essentially deferring their need for fertilizer by depleting the soil somewhat, until grain prices rebound. In that case, then might we expect above average demand in the next growing season, as farmers face the need to replenish their soil? I realize that’s simplistic and ignores the issue of stockpiles, but at some point it’s a pay-me-now or pay-me-later kind of proposition, isn’t it, assuming that food consumption is relatively constant?
thanks for the update Jim, POT is one of my biggest positions, got in at 94
Jim, in your current portfolio, how much is still in a cash position? I was a faithful follower but lost touch since you left MSN. I think you were still about 50% cash in May.