December Corn Futures May Limit Potash Recovery

August 7, 2013 07:49 AM

When Uralkali departed from the FSU joint venture BPC, stock prices in Canpotex members PotashCorp, Mosaic and Agrium all fell sharply. The determining factor as to how far each fell was the percentage of production and revenue that potash accounted for within each company. PotashCorp fell the hardest dropping 23 1/2 percent in the two days following the announcement. Mosaic was not far behind posting a 22 3/4 percent decline and Agrium fell just 7 percent.7 21 13 091 (2)

All three have leveled off and made some positive moves toward the upside and while the stock prices did take a hit, the declines may not be over for potash stocks. Confirmation that Uralkali can produce potash at a rate of US$60/tonne is unsettling, and the intentions of both Belaruskali and Uralkali are to flip their price-over-volume strategy on its ear, leaving the rest of us to deal with their marketshare-over-pricing mentality. In other words, these FSU producers intend to flood the market with potash in an effort to capture marketshare at a price that attracts buyers, not sellers.

"The stock charts of those companies are all about the same, from a technical perspective: bearish. There are no early chart clues these stocks have put in market lows. The one thing that could be a very early bullish clue is that just recently the selling pressure has subsided a bit--NO price uptrends, but we have seen some stabilization of the sell-offs. This could be early "basing" at lower price levels that could at some point in the future kick off price uptrends. I would say the path of least resistance for these stock prices remains sideways to lower, until an early bullish clue surfaces," Pro Farmer Technical Consultant Jim Wyckoff told the Inputs Monitor today.

Marketshare via oversupply is making safe-harbor fertilizer stocks appear not-so-safe. On a conference call today, CF Industries suggested tabling a nitrogen project here in the states, hinting the industry recognizes the 'bust' potential in nutrient stocks. We reported weeks ago that greenfield potash projects are dropping like flies and the implication at that time was that expanded production capacity would take too long to pay for itself. Now, with FSU sendouts suggested at least $100 below current FOB pricing, prospects for potash profits will have to recover before anybody thinks its a good idea to add inventory or increase production capacity.

The factor that seems to have slipped under the radar here is continued weakness in December corn futures. PotashCorp, Mosaic and Agrium will find a way to move forward despite threats of thin margins and an FSU that looks more like a nutrient clearinghouse than a profiteer in the near-term. Weakness in corn futures will be a factor in the pace of the recovery, but note that potash pricing has historically been the least sensitive to corn futures of the big three nutrients.

Recent unrelated declines in nitrogen pricing -- indeed nutrient pricing across the board to some degree -- give growers in the Midwest something to celebrate, but weakness in December corn puts growers in the position to decide whether to book purchases in a down corn market with limited price strength in NPK, hoping for a rally in corn prices, or wait until a rally, when returns are more attractive, to book nutrient, risking NPK following corn to the upside.

In times like these, fertilizer manufacturers will look to turn profits where and when they can. My fear is that the remedy for the FSU dust-up, in the eyes of North American fertilizer purveyors will be a rally in fertilizer prices supported by a rally in corn futures. Lets just hope the market remains overconfident in the corn crop until farmers have a chance to book nutrient.

 Photo credit: D. Michaelsen, Inputs Monitor

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