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Wholesale potash touches 2010 lows, a key level to watch

The significance of potash price

Wholesale potash price is one of the key factors that influence potash producers’ revenues. When wholesale prices rise, they have a direct positive impact on revenue. As revenue climbs, so do margins, earnings, cash flows, and share prices. However, when price falls, it has a negative impact on companies’ financial accounts.

Wholesale Potash Price 2013-08-28Enlarge Graph

Potash price touches $400

Wholesale potash prices in the midwest region of the United States just touched the 2010 low of ~$400 per short tons on August 12 and have stayed at that depressed level so far, as last reported on August 26, according to information from Green Markets. Prices have been falling since mid-2011 after a successful plantation year resulted, global food inflation came down, and world economic growth slowed. That has made potash much more expensive to farmers, which led to weaker demand. The Indian government’s policy bias towards nitrogenous fertilizers and new capacity additions also didn’t help prices. So wholesale potash prices and demand are often influenced by macroeconomic conditions.

Factors driving potash lower in 2013

Last year’s drought in the United States had brought corn prices back above $7.00 per bushel, which U.S. farmers took advantage of by purchasing large quantities of potash. China has also returned to the market to purchase more as wholesale prices came down. Nonetheless, additional capacity and persisting competitive pressure continued to push potash price down this year, according to Potash Corp. (POT)’s second quarter earnings. Falling prices are negative for revenue, but they were somewhat counterbalanced with increased demand, as they make potash much more affordable to farmers. But with the drop in corn prices that we’ve seen in July—thanks to expectations of a record corn output in the United States—demand could be negatively affected. That’s a double whammy.

Impact on potash companies

Because a large percent of the market is held by a few firms, and prices are now sitting at 2010′s low, major potash producers such as Potash Corp. (POT), Mosaic Co. (MOS), Intrepid Potash Corp. (IPI), and Agrium Inc. (AGU) could coordinate to adjust production, support prices, and maintain high profitability. In light of lower potash prices, Mosaic Co. (MOS) has recently announced plans to put its expansion plan on hold until prices recover. That could also support shares of Market Vectors Agribusiness ETF (MOO), which invests in agriculture stocks.

News that Uralkali, one of the world’s largest producers of potash, will break away from its partnership with Belaruskali and increase output, coupled with the company’s forward statement that potash prices will fall to $300, sent stocks tumbling ~20% in July. Major producers, however, aren’t so worried, as they will continue to conduct business as usual and they have expressed that there will be some kind of resolution, as prices at $300 will also hurt Uralkali. The Uralkali CEO was recently jailed in Belarus (a country that depends on potash sales, which make up 6% of its exports) on criminal charges for “abuse of power for private gains,” as reported in the Wall Street Journal. If both parties behave logically, it’s more likely that they will form some kind of agreement. Besides, the event has already priced in fully or mostly.