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Potash inventory supports higher share prices for potash producers in 2013

North America Potash InventoryEnlarge GraphInventory levels reflect current industry supply and demand balance and safety stock. When inventory levels are rising, it is often a negative sign as it suggests industry demand is cooling. While manufacturers can adjust to the weaker demand by cutting production, they often lag. But when inventory level reaches a certain level, it will usually fall as cyclical demand returns, or the pace of production cuts begins to outpace falling demand.

Potash inventory begins to fall

On March 31st, potash inventory in North America stood at 3.17 million metric tonnes, falling from the prior month’s 3.28 million. Inventory level has been rising in 2012 as delays in supply contract agreements with China cut into demand. India, one of the world’s largest importer of potash, also reduced imports as the depreciating rupee, caused by high inflation of ~7% and declining economic fundamentals, made potash fertilizers much more expensive.

Historic inventory peaks

On the bright side, potash inventory has peaked at ~3.2 million metric tons in the last eight years as cyclical demand returns or supply tightens more than reduction in demand. Unlike nitrogenous fertilizers, farmers do not need to apply potash every year because the nutrient is applied to the soil and not directly consumed by crops. From 2005 to 2008, inventory fell as farmers demanded more potash to take advantage of high crop prices. From 2008 to 2009, inventory rose sharply as crop prices collapsed due to lower economic activity, which made use of potash less attractive.

Current economic environment

Given that India just recently cut interest rates, and China has room to support to economic activity as inflation remains low, global potash demand is expected to increase in 2013. In its recent earnings release, Potash Corp. (POT) announced a 78% increase in potash sales compared to last year, driven by higher demand from farmers who are trying to take advantage of high crop prices in the United States, strong demand from Brazil, and export deals with China and India.

Fertilizer CompositionEnlarge Graph

Companies benefiting from rising potash demand

Potash producers, such as Potash Corp. (POT), Agrium Inc. (AGU) and Mosaic Co. (MOS), will all benefit from higher potash sales. Potash Corp. (POT) and Mosaic Co. (MOS) look to benefit the most as a larger percentage of their revenues are dependent on potash. Higher potash sales will translate to higher margins and earnings, which will, in turn, push share prices higher. The Market Vectors Agribusiness ETF (MOO), which invests in every business stage within agriculture industry’s supply chain, will also benefit.