3 Opportunities in the Shifting Potash Market

Potash Corp. (NYSE: POT  ) lowered earnings guidance just a couple of weeks before its third quarter earnings release. That comes after dour comments from chief competitors Mosaic (NYSE: MOS  ) and Agrium (NYSE: AGU  ) . But don't let the near-term turbulence started by a public spat at a European potash trade group cloud the still bright future for fertilizers.

The big picture
Mosaic is projecting grain use to increase by about two-thirds by 2050. That demand increase is coming from people and animals. More people need more food, which is pretty obvious, but you might wonder, why animals? Because it takes more grain to raise animals for food than it does to just feed a person with grain.

And diets in emerging markets are increasingly including more animal proteins. Agrium notes that the average meat consumption in the mid-1960's in developing markets was just 10 kg a year. By the late 1990's, it was 25 kg a year, and by 2030, it's projected to be nearly 37 kg a year. The increase is even more impressive in China, the most populous nation in the world, with meat consumption going from about 12.5 kg a year in the sixties, to a projected 70 kg a year by 2030.

That's the big picture for potash and other fertilizers. A growing population and changing diets will combine to notably increase demand for grains. One of the easiest ways to increase production is to use fertilizer.

Not today!
That may be true over the longer-term, but today farmers are putting off their fertilizer purchases. In the second quarter, Agrium noted that "Customer demand has been delayed across all three nutrients this quarter." Why put off a purchase that Potash estimates can boost crop yields up to 50%? An industry breakup between two European suppliers has left customers hoping for better prices.

While they may or may not get those prices in the near-term, the interesting thing about fertilizer is that you need the amount you need. It's a biology issue, not a price issue. So demand is fairly predictable over the long-term and price isn't the driving force. In fact, at the end of its fiscal year, Mosaic noted that it expects the current price issues to "moderate over time" because of demand growth.

Even if there's a short-term oversupply situation, given enough time, population growth will take care of it. In the meantime, actions by companies to delay new production, like Mosaic deferring an expansion project, will only make that happen more quickly. And potash mines are expensive projects that take a long time to get up and running.

BHP Billiton's (NYSE: BHP  )  multi-billion dollar potash mine in Canada proves this out. It recently announced a $2.6 billion investment to complete the mine, which won't be operational for several years. Only the largest and strongest companies, like BHP, can pull off that kind of commitment. So, even though more fertilizer supply is coming to market, a large, long-term supply/demand imbalance isn't likely. And, in fact, based on projected grain demand, the new supply will be needed—just like Mosaic suggests.

The time is nigh
That's why today is such an interesting moment. A public pricing spat between European suppliers has led to steep and sudden share price declines at Potash, Mosaic, and Agrium. The long-term picture hasn't changed, and the market reaction appears overdone. That's true even though near-term sales and pricing seem to suggest otherwise. In fact, Potash's CEO recently noted that "We actually have seen this before." Now would be a good time for you to take a look at the companies that help farmers feed the world.

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