Potash Shakeup: Teasing the Bull Behind the Fence

July 31, 2013 05:03 AM

There are a lot of competing theories out there about what will happen now that Uralkali has broken up the FSU joint venture, Belarusian Potash Company (BPC). BPC was made up of Belaruskali, Uralkali and the Belarus Railroad. Reports have surfaced that while a part of BPC, Belaruskali had been making side deals without the consent of Uralkali. Belaruskali's back door dealings threatened the pricing structure of the union and as other producers lowered prices, Belaruskali refused to curtail production which would have helped keep sendout prices within profitable margins.bull

Bear in mind the role potash revenues play in the Lukashenko regime. Belorussian President Lukashenko derives a significant portion of his nation's revenue from potash tenders. But when Uralkali split from BPC, they took rail access to China with them. In response, Belaruskali is expected to run at full capacity and sell as much potash as they can. Uralkali is likely to do the same.

The expected oversupply has global potash players shaking in their boots, canceling new ventures and trimming earnings targets. PotashCorp fell 20% yesterday; MosaicCo fell 21%; Intrepid Potash fell off 23%, in fact, industry watchers are calling this episode, the end of the potash world as we know it.

Foolishness. Investors had looked to fertilizer stocks as a sure bet as world fertilizer demand generally increases year-on-year. They had assumed this farmy stock would be as productive and steadfast as the growers whom fertilizer producers serve. But farming is a risky business, and as ideallic as farm life seems to outsiders, it is not without its dangers. The same is true of fertilizer stocks. The only sure bet on the farm is the sunrise.

Perhaps Uralkali is 'head faking' the industry to mess with North American potash competition. Maybe Uralkali really is upset with Belaruskali and intends to strike out alone. It is conceivable that leaders from both organizations are in a back room somewhere in the foothills of the Ural Mountains slugging vodka and laughing at the capitalist scramble they have created. It could also be that Russia -- home of Uralkali -- is looking to make nice with the European Union and would prefer not to be in business with Belorussian President Lukashenko, dubbed 'Europe's last dictator' by human rights advocates.

This is not the end of the potash world as we know it. This may be the episode that makes investors think twice about teasing a bull through the fence. The drama in the FSU is a reality check for Wall Street players. Fertilizer is a real commodity used by real people to make real food. Profits from investments in fertilizer producers are subject to the same pitfalls as the S&P 500 or stock in Apple or any other traded stock.

Growers will have the last laugh here, as it should be. If Uralkali and Belaruskali -- formerly the providers of roughly half of the world's potash -- each produce at the top end of capacity separately, the world will soon find itself in oversupply, lowering prices. These lower prices resulting from an FSU production/pricing face-off come just in time, and as corn prices are weighed down by apathy and assumptions that the new U.S. crop is 'better than expected', declines in potash will give North American growers another year to bank some K.

Photo credit: zoutedrop / Foter / CC BY


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