P&K -- Forget the Rumor, Sell the Fact
Sep 20, 2013
MosaicCo released near-term guidance for P&K earlier this week and noted continued caution on the part of buyers as suppliers wait out the downtrend. As a result of declines in P&K Mosaic lowered both volume and price guidance.
But the lowered guidance takes into account two items that I call into question. The first is CEO Jim Propanko's comment regarding crop returns. In MosaicCo's press release, Propanko says, "The long-term positive outlook for crop nutrient demand has not changed; high commodity prices are driving record farm returns and making our products more affordable than ever before. These strong fundamentals are expected to drive near record global phosphate and potash shipments in calendar 2013."
Record Farm Returns --
The high commodity prices that Propanko mentioned must surely have been a reference to old-crop marketings -- has he seen the Dec corn chart? -- as new-crop threatens a 3 dollar handle. Old-crop returns will drive sales in as much as it fills farmers' pockets. But with meager returns promised by futures, without some price strength in Dec. corn, taking a risk on a corn pop when booking inputs is unlikely. If anything, new-crop fundamentals will limit demand, particularly for P&K until corn futures turn higher in earnest.
Historically, yes, today's Dec. Corn price at $4.57 is much better than just a few years ago, but at Pro Farmer's projected 155.3 bu average yield, today's futures price suggests returns right around $700.00/acre. If you rent land at USDA's national average of $136/acre and spend $200/acre on fertilizer, your profit margin is already down to just $364/acre before pesticide, herbicide, application fees, operating costs, farm hands and fuel. I'm no math-magician, but this does not feel like a high crop return anymore -- not when compared to the last few years, anyway.
In an effort to manage price risk, growers could hold to the old standby, 18 percent rule. At $700.00/acre in expected new-crop revenue, 18% spent on fertilizer would get you to $126.00/per acre for NPK. At current Monitor Index pricing of 43 cents per pound of N & K and 56 cents per pound of DAP...
- 170lbsN = $73.10;
- 100lbsP = $56.00;
- 60lbsK = 25.80.
These are per acre prices and add up to $154.90/acre for total NPK. Declines in nutrient have made it easy to get excited about wide margins, but corn prices will have to cooperate, and give buyers an inspiring lift to shake dollars loose. In the above scenario, history tells us that, in order to adhere to the budget, growers will shave off a little P&K to save money.
It makes much more sense for Propanko to lower volume and price guidance on this basis. Anytime someone hails nutrient price declines and favorable economics, the potential return -- or lack of -- on that investment cannot be ignored.
Rumors of War --
The second assumption that Mosaic makes is that the breakup of Belorussian Potash Company will continue to pressure prices lower. Belarus, without question will struggle with the transit limitations placed on Belaruskali tenders by Uralkali's exit. Belaruskali can produce all they want, but have limited capacity for sendout logistics.
Meanwhile, many now believe Uralkali's volume-over-price strategy will not pan out, or lead to dramatically lower K pricing. The entire industry is in standdown, waiting for these price declines to run out. This is 'buy the rumor, sell the fact' in black and white and as rumors of more and more price declines in potash circulate, suppliers are held captive on the sidelines. Adding to the confusion is the fact that phosphate is declining sympathetically with potash.
Both volume and price guidance were lowered by MosaicCo this week with respect to P&K. On the basis of new-crop returns, I don't see it. On the basis of the FSU potash war, when it comes time to 'sell the fact', the fact may be that while suppliers warm the bench, potash and phosphate emerge from the rumormill priced higher than expectations. That would put off a lot of P&K until spring, which would lead to an industry inflated with lofty expectations, and lacking in actual commerce for the entire winter, building demand all the while.
The truth is, buyers are eyeing fertilizer price declines as purveyors look for the magic 'buy-in' price peg. Once that first buyer enters the market and pulls the trigger, it will likely pause the price declines, and the ensuing demand may limit any further downside potential.
Everybody knows that guy at the auction... the first one to bid that wrecks it for the whole bidding peanut gallery. Yes, a timely pause at the auction can win you a few bucks and a good deal on a horse. Jumping in too early can jack up the price for the whole auction house, and make one very unpopular at the Stockman's Cafe. However, sit on your hands too long and all the horses may be gone before you decide to raise your hand or 'yelp' a bid.
MosaicCo's report indicates they have lowered both volume and price guidance for shareholders. That means Mosaic expects to make less money and less product. I do not agree that farm economics are as favorable as Propanko said, nor do I agree that FSU potash will run North American prices lower for much longer.
Having said that, the number one influence over the continued price slide for P&K is the fact that there is no demand. Monday's Monitor numbers will tell us more, and a few states have yet to catch up with the declines. These will drive regional average prices lower, but key states -- most notably, Missouri -- have seen the reversal in NH3 already, and during the spring of 2013, Missouri was the price volatility leader.
Declining corn prices, rumors of war and lowered prices and volume are not a recipe for favorable farm economics. Near-term P&K pricing will be driven by demand and once buyers enter the market, we expect P&K pricing to forget the rumor, and sell the fact.
Photo credit: D. Michaelsen, Inputs Monitor