This past July the world of potash was thrown for a loop when one of the two big partnerships controlling the market collapsed. This is when Russia's Uralkali made the decision to pull out of a joint-venture with Belarus Potash Company and to sell through its own trading company while producing at 100% capacity and sending shockwaves through the industry. The move was seen as being so devastating to the potash industry that one analyst quipped that it marked, "the end of the potash world as we know it."
There is no doubt that the Uralkai decision is impacting the potash market. That's clearly seen in the resent results posted by PotashCorp (NYSE: POT ) . Its earnings dropped 45% to $0.41 per share. Further, PotashCorp was forced to revise its full-year earnings estimate lower to a range of $2.00-$2.20 per share from its most recent forecast of $2.45-$2.70 per share.
However, according to CEO Bill Doyle the company's most recent quarter, "can best be characterized as a predictable response to an unpredicted event." He goes on to say that, "while this volatility does not change the long-term underlying fundamentals of fertilizer demand, it did significantly slow market activity and our ability to deliver the results we expected." Unfortunately, all too often investors see short-term problems altering the long-term fundamentals of a business when in most cases they do not.
What's worse is that our predictable response to an unpredictable short-term event is usually to panic. We hardly ever let the dust settle before reacting. Take again the example of the analyst predicting the end of potash. Now, three months later on PotashCorp's earnings conference call, that same analyst could be found asking questions about how much volume PotashCorp and Canpotex -- a partner with Agrium (NYSE: AGU ) and Mosaic (NYSE: MOS ) -- sold into India last quarter. Clearly, the world of potash hasn't ended as he thought it would, though it has been temporarily disrupted.
That's why it's important to look at things from a long-term perspective. Investors in PotashCorp own shares in that company because it has a large, low-cost operation that is diversified into the three nutrients that crops will continue to need in the decades ahead. To top it off the company has a solid balance sheet and pays a stellar dividend.
The same goes for investors in Mosaic. An investment in Mosaic is one more focused on potash and phosphate, because unlike PotashCorp it doesn't produce nitrogen. Meanwhile, an investment in Agrium is one made knowing it's heavily levered to its retail business. The bottom line here is that these are real businesses and not ticker symbols. So, while investors shouldn't expect a whole lot of good news when Agrium and Mosaic both report earnings on Nov. 5, those numbers won't be reason to sell.
Investors instead need to keep the big picture in mind. The long-term fundamentals of the fertilizer market are very solid because farmers have a real challenge to produce enough to feed everyone. Some estimates suggest that farmers need to produce more food over the next 50 years than they have over the past 10,000. Further, they'll need to do that on half the arable land per capita than in the 1970s. It's this thesis that matters, and one company's choice to pull out of a joint venture won't change it.
This is why PotashCorp isn't wilting under the short-term pressure of the current market dislocation. It's making investments for the long term to position itself to take advantage of this future demand. That's why investors need to take the long-term view and sit back and keep collecting it's rock-solid dividend while waiting for the current market storm to pass.
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