India’s subsidy cut for potash dampens optimism for demand recovery in 2013World demand for potash — a type of fertilizer that is used to enhance water retention of plants, increase crop yields and plants’ disease resistance — is highly dependent on government stimulus. When government subsidies for potash increases, farmers are enticed to purchase more of the fertilizer, which will benefit potash producers, such as Potash Corp. (POT), Mosaic Co. (MOS) and Agrium Inc. (AGU). But when subsidies are cut, potash fertilizers will become much more expensive for farmers to purchase and use, which lowers potash demand as well as revenues and earnings for potash producers.

India cuts subsidy for potash again

On Wednesday, May 1st, India decided to cut subsidies on potash based fertilizers in the fiscal year that began in April. In order to rein in on its fiscal deficit, potash fertilizers (muriate of potash) will be cut 21.5% to 11,300 rupees per tonne, according to the government. While falling potash fertilizer prices could have helped farmers this year, a subsidy cut will unlikely support it. Farmers in India can expect high potash prices for the remainder of the year.

Because potash fertilizes will remain expensive without the subsidy, retailers will also import less as farmers’ demand stays low. As India imports all of its potash, which makes up about a fifth of global imports, international suppliers, such as Potash Corp. (POT), Mosaic Co. (MOS) and Agrium Inc. (AGU), will be negatively affected. Last year, potash producers were already negatively affected by a 10% reduction in potash subsidies and a weaker rupee that made imported goods much more expensive for farmers.

Short-term to long-term effects on potash

Although farmers can forgo use of potash from time to time as the nutrient is not directly consumed by the plants and are applied to the soil, long-term absence of adequate potash application will hurt India’s crop yields and agriculture industry. As long as the government continues to be lobbied or influenced by its domestic nitrogenous fertilizer producers, potash demand will unlikely recover, which will negatively impact potash producer’s revenues, earnings, and free cash flows.

While the VanEck Vectors Agribusiness ETF (MOO) will also be negatively affected, because it invests in every stage of the agriculture sector’s value chain, higher global crop prices will likely offset India’s low potash demand. On the basis that the government cannot keep its current policy forever, demand for potash will have to return eventually — any forwent use of potash is only a postponement, which will benefit potash producers in the long run.

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