The fertilizer industry has been troubled over the past several years with declining prices, oversupply, and political instability. As many are looking for fertilizer to return as a strong, long-term play in commodities, oversupply remains the biggest risk within the industry. Potash may be nearing a long-awaited return as prices gradually rise and demand remains steady, but the industry is not yet in the clear. And the remaining oversupply and accompanying volatility should keep investors cautious.
Still a need to worry
Global demand for potash has had a trickle-down effect on prices that has been hurting the earnings statements of Potash Corp (NYSE:POT), Mosaic (NYSE:MOS), and their peers. North American potash production has long exceeded demand on the continent, requiring North American producers to rely on Asian and Latin American demand to consume the excess. As the largest producer of potash, Potash Corp is especially dependent on international demand to drive profits, though its position as the largest producer enables efficiencies, allowing the company to expand margins for the nutrient.
Worldwide demand for potash is projected to grow slightly faster than phosphorous and nitrogen at a projected 3% annually over the next few years, which sounds at first like a necessary step toward eating away at the current surplus and corresponding low prices. The other consideration in the scenario, however, is that potash supply is projected to increase at an even faster rate, leading to growth of an already large surplus. Over the short haul, Potash Corp and other potash suppliers will need to rely on high volumes and production efficiencies to generate profits, as the projections of excess supply will do little good to increase nutrient prices.
The most recent market data put out by the International Plant Nutrition Institute and Potash Corp shows a slight decline in North American potash production over the first half of 2014. The declining production pairs with increasing domestic sales and decreased exports to still result in an overall drop in potash inventory year over year and when compared with the five-year average. Investors and leaders in the industry alike are hoping that the falling inventory will coincide with rising prices, and recent investments to expand production will have come at the right time to capitalize on an industry that seems primed for a much-needed turnaround.
The concern remains, however, that production expansion by potash producers may have come too soon and will only delay the return to an industry-favorable supply/demand balance that is necessary to bring up both prices and company earnings.
The beauty of potash and the fertilizer industry as a whole is that the products are not in danger of falling out of use or being replaced by emerging technologies. Accordingly, there is little need to try to 'time the market' for an industry that fits well into many long-term portfolios. Oversupply has been and will likely continue to be a stress on the industry, but projections for growth in domestic and international demand should quell worries about the future of the industry.
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Shamus Funk has no position in any stocks mentioned. The Motley Fool owns shares of PotashCorp. 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.