Importance of inventory levels
Inventory levels reflect current industry supply and demand balance and safety stock. Rising inventory levels are often a negative sign, as they suggest that industry demand is cooling or that supply is growing faster than expected. While manufacturers can adjust to the weaker demand by cutting production, they often lag. But when inventory level reaches a certain point, it will usually fall as buyers purchase more potash due to price cuts or demand resurgence. Production cuts can also lower inventory level.
Potash inventory sustains decline
At the end of June 2013, North America’s potash inventory stood at 2.70 million mt (metric tonnes), which was lower than May’s ending inventory amount of 2.93 million mt. The inventory level rose in 2012 because delays in supply contract agreements with China cut into demand. Lower food inflation, after a surge in 2011, contributed to the weakness in demand. India—one of the world’s largest importers of potash—also reduced imports. The depreciating rupee (caused by high inflation of ~7% and declining economic fundamentals) made potash fertilizers much more expensive.
Historic inventory peaks
Potash inventory has peaked at ~3.2 million mt in the last eight years, as cyclical demand returns or supply tightens more than reduction in demand. Farmers don’t need to apply potash every year, unlike nitrogenous fertilizers, because they apply the nutrient to the soil and it isn’t directly consumed by crops. From 2005 to 2008, inventory fell because 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 potash use less attractive.
Factors driving the decline
Earlier in the year, Potash Corp. (POT) announced a 78% increase in potash sales compared to the same period last year. High crop prices in the United States, strong demand from Brazil, lower fertilizer prices, as well as export deals with China and India have all contributed to lower inventory levels since the beginning of this year. As long as demand stays strong, even though India’s fertilizer policy continues to hurt potash suppliers and farmers, inventory levels should continue to fall over the next few months. This will support potash producers such as Potash Corp. (POT), Agrium Inc. (AGU), Mosaic Co. (MOS), and Intrepid Potash Inc. (IPI). This will also benefit the Market Vectors Agribusiness ETF (MOO).
© 2013 Market Realist, Inc.
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