Pain Persists for Potash

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Wondering what's new with the king of fertilizers since potash hit the reset button in late July?

Well, August saw North American potash inventories drop for the second straight month, but that still left them 150% above the five-year average. The sales channels are still stuffed, with several factors working against the fertilizer and its producers, which include PotashCorp (NYSE: POT), Mosaic (NYSE: MOS), and Agrium (NYSE: AGU).

First, corn prices have dropped meaningfully this year, and U.S. farm net income is poised to drop 38%. With some farmers struggling to turn a profit at current spot prices, they're more likely to mine the soil for nutrients in the near term than pony up for fresh potash.

Second, farmers are still more than a bit sore about the vertiginous run-up of potash prices resulting in part from the collective supply-side restraint exercised by the small number of globally significant players. Intrepid Potash (NYSE: IPI) has recently spoken of the need to educate buyers about the fact that fertilizer prices have returned to their historical average of 4% of input costs. That message will need to be delivered delicately, so as not to reinforce the perceived arrogance of the potash shot-callers.

Third, crop yields are looking very strong, with the USDA estimating a record corn crop yield of 161.9 bushels per acre. That's likely to mark a peak for some time, since lower potash applications will erode yields, but the prospect of a near-record corn crop in 2009 is also something of a negative for both corn prices and potash demand. Then again, with ethanol blending margins much improved for refiners like Valero Energy (NYSE: VLO), corn demand is also strong. In addition, and much to the chagrin of folks like Smithfield Foods (NYSE: SFD), the government is considering raising the ethanol blending limit from 10% to 15%.

Finally, it's looking to be a late harvest this year, which will further limit fall fertilizer applications.

It's no surprise, then, that PotashCorp has once again cut its earnings guidance for 2009. I feel the same way about 2010 as I did back in June -- with the seeds being sewn for a rebound, next year's prospects remain bright. This appears to be reflected in PotashCorp's resilient share price, though, so I probably wouldn't be a buyer today.