Around two years ago, Brazil declared its intention to wean itself off of fertilizer imports by 2020. While acknowledging that it could not fully meet domestic potassium demand, Brazil's stated aim was to become self-sufficient in nitrogen and phosphates, and to reduce its dependence on foreign potash (water-soluble potassium) significantly. Considering that Brazil is one of the world's largest potash consumers, importing 90% of its requirements, might this be shaping up to be a major blow to international producers?
Feeding a hungry planet
Over the last 30 years, Brazil has transformed itself into a breadbasket, and it's done so in large measure by dramatically increasing farm inputs. The government is seeking to close that loop, putting pressure on the industry to triple spending on domestic fertilizer capacity over the course of the next five years.
Why might the country want to become less reliant on imports? Beyond the usual national security arguments, there's the matter of competitiveness. Transportation of nutrients to inland farms from ports can be very expensive and time consuming. As a result, Brazil's farmers are losing out to countries like the U.S.
To address this issue, Brazil's government wheedled miner Vale (NYSE:VALE), in which it has a golden share, to invest in potash and phosphates. Vale's investment plan now calls for $8.8 billion in spending on fertilizers over the next five years. Coupled with related plans from state-owned Petrobras, predictions are that Brazil will reduce its overall dependence on fertilizer imports from 72% to 28% by 2017.
You'd think that this might have foreign potash suppliers quaking in their boots, but you'd be wrong.
PotashCorp (NYSE:POT) and Russia's Uralkali are the two primary potash suppliers to Brazilian farmers. PotashCorp makes only a passing reference to Brazil in its 2012 10-K: "Potash from our Saskatchewan operations for sale outside Canada and the United States is sold exclusively to Canpotex, which is an export marketing and sales company. A significant portion of Canpotex sales are to China, Brazil, India, Indonesia, Malaysia and Japan."
CF Industries (NYSE:CF) gets a little closer to stating a risk in its 2012 10-K: "Other geopolitical factors like temporary disruptions in fertilizer trade related to government intervention or changes in the buying/selling patterns of key consuming/exporting countries such as China, India and Brazil, among others, often play a major role in shaping near-term market fundamentals."
Agrium (NYSE:AGU) is all smiles in its 2012 annual report, highlighting the fact that it had expanded its retail presence in southern Brazil. Mosaic (NYSE:MOS) shows in its 2012 10-K that it derives nearly 20% of its net sales from Brazil, and identifies only currency risk in that market.
Not quite impending doom...
Maybe this is because, for all its grand talk, Brazil is finding its progress toward self-sufficiency to be slow indeed. In 2012, Brazil consumed a record 8.1 million tons of potash, 9.3% more than in previous years. With 90% of that coming from imports, powerful voices within Brazil are concerned about the security of their agricultural boom.
But potash remains the toughest element of fertilizer's NPK triad. Vale's Taquari mine is expected to close in 2016, owing to exhaustion of its reserves. Taquari produces around 10% of Brazil's potash demand, so it will leave quite a void to be filled. Last week Vale also announced the suspension of its Rio Colorado venture in Argentina, which was supposed to turn Brazil's neighbor into a top potash supplier.
Meanwhile, despite publicly pushing to increase production, Brazil's government actually taxes domestic fertilizer production more heavily than imports. States charge sales tax on domestic fertilizers at 8.4% and levy a mining tariff of 2%, from which imports are exempt.
No wonder foreign suppliers seem to have concluded that Brazil is all bark and no bite. PotashCorp noted in its Q1 2013 earnings report that the "Latin American market, particularly Brazil, started the year at a record pace and we have a strong order book well into the second quarter." Agrium talks of leveraging "robust crop protection product demand growth in Brazil in 2013."
Trouble may still lurk
Meet Verde Potash, a Brazilian fertilizer development company. Its Cerrado Verde project is a potash-rich deposit in the heart of Brazil's largest agriculture market is quickly scalable, and connects to Brazil's largest fertilizer distribution districts via existing and high-quality infrastructure. Vale is also looking at some potential new sites to fill the production gap from its Taquari mine.
And in what could turn out to be the biggest bombshell of all, Potassio do Brasil announced in April that it had discovered a large potassium deposit in the Brazilian Amazon. If the deposit is confirmed, Brazil could meet its own domestic demand within 10 years, according to the company.
Time will tell if this discovery is everything the company says. It certainly seems that near-term prospects for foreign suppliers remain strong. Still, investors should keep a close eye on Verde Potash and Potassio do Brasil, because they could prove to be game changers. And if the government ever gets serious enough to change its tariff structure, foreign suppliers may have to think twice about the risk they face in such a vital market.
Sara Murphy has no position in any stocks mentioned. Follow her on Twitter @SMurphSmiles. The Motley Fool owns shares of CF Industries Holdings and Companhia Vale Ads. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.