Potash Shows its Teeth as Cats Look to Bounce

October 2, 2013 08:05 AM

A reader sent me an e-mail the other day regarding our position on potash. The initial breakup of the FSU potash venture BPC sent shockwaves through the industry. Potash is the one nutrient that is supposed to be stable, right? As investment dollars become a larger player in the decision making prices for potash producers, the influence may bleed through the traditional drivers of nutrient pricing and breed increased volatility into the market. Just what we need... one more variable.

The e-mail I received was in reference to an article I had written about potash pricing, and when the floor might assert itself. My aim with that article was to point out that a Chinese buy-in of a 12.5% stake in Uralkali added to a fresh contracted price to Indian buyers suggested those two nations -- the two biggest potash consumers on the globe -- felt the market was in their favor. If they recognize the time to buy-in is right, the price plunge will have reached equilibrium between price and demand.

The influence of shareholders and quarterly results cannot be ignored here. I wrote to the reader, "The potash global supply situation really didn't change that much when Uralkali left BPC, but because stock prices tumbled in response to the perceived threat of oversupply, product prices fell as well. Had this happened with Dec corn at $7.00, the correlation between 'stock scares' and potash pricing would be more clear."

Find me the report that says 'Corn prices fall, potash prices face pressure', or 'Potash pricing slave to declines in deferred corn contracts'. Its out there, but there is far more press for the notion that because PotashCorp stock -- among others -- fell some 30% at the rumor of Uralkali's goal to oversupply the market, that retail prices will continue to fall.

Again, some strength in corn futures would lend more insight. NH3, DAP, UAN solutions, urea -- all down by around $100.00 compared to the same time last year. Today I put DEC corn around $4.40 -- a generous bid -- and some suggest downside risk to $4.25. The December contract continues to post new lows on a largely sideways trajectory. Meanwhile, Anhydrous and DAP both bounced in retail markets this week with NH3 adding $12.46 and DAP up $16.20.

Perspective --

Stock pressure has run away with potash pricing. December corn may have some room to bleed yet, and we have seen technical weakness rule the chart since before Sept. 30's USDA reports took out another chunk. However, if DEC corn is at its terminal low end range, we would expect nutrient pricing to bounce, and we have. Remember, we do not need a rally in futures... all we need is a leveling off to signal the bottom. At that point, nutrient prices bounce to capture what the technicals perceive as strength -- in this corn market, just staying put counts as close enough to good news.

But as NH3 and DAP bounce, potash continues to fall demonstrating the influence of investor pressure on K's market value. If investors really understood this corn crop, DEC prices would be higher. If those same investors are misguided on corn, why not fertilizer too. These Wall Street players look for big swings to make and break their careers. Fertilizer stocks had been touted as a sleeping giant -- virgin territory for the investor, ripe for profittaking.

Well, sorry guys, but gentle potash has the same teeth as any stock pick. If the current declines in potash were strictly tied to corn prices, the falloff would have been over along with anhydrous and DAP two weeks ago. In this corn market, we would expect fertilizer pricing to seek a corresponding low, but potash has exceeded those declines and is setting itself up for a classic dead cat bounce.

At that point, potash will have to correct higher to reclaim its couple with corn futures. If that scenario plays out, once the Wall Street low in is place for potash, look for investment money to clamor to buy-in to potash shares. If that action can drive retail potash higher, we will know that Dec corn no longer holds exclusive sway over fertilizer pricing.

THIS JUST IN -- My neighbor in writers' row, Meghan Pedersen, just handed me a breaking news story... "Phosphate Export Group PhosChem Disbands". Here we go again... same manure, different name.

Phosphate producer MosaicCo stock currently at 45.62, up 1.63 on the day at 1 pm CT.

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