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.
Glaser: Looking further out, what's your long-term outlook for potash?
Stafford: Right now at the typical plant gate in Saskatchewan you can buy a metric ton of potash for about $480. Our long-term forecast for prices is just below $400. So, we think there is going to be some long-term pressure on potash prices. The main reason for this is we think that supply is going to grow faster than demand over the long run.
You've got some big large brownfield projects from some of the major Canadian producers like Potash Corp at Saskatchewan and Mosaic. And then there is also the potential for impact from large greenfield expansion projects from some of the large global miners in the world such as BHP Billiton. So, the main point is we think that supply will grow faster than demand, and that will put some long-term pressure on potash prices.
Glaser: Given that those prices could be coming down, which producers look like they are the best-positioned and represent the best values right now for investors?
Stafford: So, we really like Potash Corporation of Saskatchewan. We think it's the best-positioned player. It is at the very low end of the cost curve with its low-cost potash mines, and we also think the stock is attractively valued right now compared with some of the other potash producers and fertilizer producers in this space. So, we think with some of the expansion projects that Potash Corp has coming on line in the near future, it will really be able to grab some of that value that's created there.
Glaser: Jeff, I appreciate you sharing your thoughts today.
Stafford: Thanks, Jeremy.
Glaser: From Morningstar, I'm Jeremy Glaser.