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By Jeremy Glaser and Jeffrey Stafford, CFA | 09-18-2012 10:00 AM

Potash Prices Not Ready to Grow

The summer drought is a near-term positive for potash producers, but they could feel pricing pressure from long-term oversupply.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. With the drought this summer, many people have been wondering about agricultural prices and what that means for the fertilizer market. I'm here with Jeff Stafford; he is an equity analyst. We’re going to look at the potash market in particular and see what companies are well-positioned.

Jeff, thanks for joining me today.

Jeff Stafford: No problem Jeremy.

Glaser: So, what's been happening with potash prices recently?

Stafford: We've seen potash prices come down about 10% over the last year, and that’s really because of factors in both the domestic and international markets. Domestically dealers have built up expanded storage capacity over the last few years, and they really started this selling season with higher-than-normal potash inventories. To avoid price risk they worked down those inventories throughout the year and they wanted to end the spring selling season with inventories close to zero. So, that's really put some pressure on sales at the producer level, the Potash Corps and Mosaics of the world, and you’ve seen that filter through to some price pressure for potash.

Then also on the international front you've had two large buyers, China and India, really hesitant in the last several quarters. Really India is an interesting story because there's been a shift there in the subsidy policy by the government to favor nitrogen sales over potash sales. India has really been hesitant and the shipments to that country have been lower than what has been anticipated in the last year or so.

Glaser: So, those prices have come down. Is this a temporary blip? What impact has the drought had on these prices? Where do you see things going from here?

Stafford: My near-term expectations are that potash prices in the market are going to be more settled and more of a balanced market. I think you’ve seen that destocking really take place at the dealer level, and that's worked its way through the market. So, I think there should be some support and maybe a floor at the producer level for prices for potash.

Then also with the drought, that's very interesting because we think it's actually been a positive for potash producers. Really, the thing to look at there is the interplay between what happens to yields in the drought and what happens to prices. So, there is the offsetting impact between the two and their impact on farmer incomes. So, yields have come down quite a bit, but prices for corn and soybeans in North America have also skyrocketed, and it's left farmer incomes in a similar position to what they were last year. And last year was a very strong year for farmer incomes.

So basically, we think that farmers have as much money to spend on fertilizers in the near term and going into next season as they did last year, plus add in higher crop prices, which we think will provide strong incentives for farmers to plant more acres going into next year. And that should support strong fertilizer sales.

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