Market Spotlight: Potash prices on the rise

At the end of the day, it's just plant food, but the price of potash continues to soar.

The growing demand for the fertilizer is being fueled by booming global food production and biofuel demand, and potash producers are harvesting the benefits, especially given constrained supply, says Steve Jasinski, a mineral commodity specialist for the U.S. Geological Survey.

"Right now, you have a period with increasing consumption and supply staying stagnant," Jasinski says.

Some analysts, like RBC Capital Markets' Fai Lee, say there's a chance potash prices may reach $1,000 per metric ton by the end of 2008.

Just last week, Potash Corp. of Saskatchewan Inc.'s joint-venture company inked a deal to sell potash to Sinofert Holdings Ltd., a Chinese fertilizer company, for $400 per ton more than a year ago. The joint-venture company, Canpotex, is owned by Potash Corp., Agrium Inc. and Mosaic Co. _ all potash producers.

There aren't many countries that produce potash. Canada produces the bulk of the fertilizer. Drawing a parallel to oil, Morningstar analyst Ben Johnson agrees that tight supply of potash worldwide has helped lift pricing.

"There's only so much of this stuff in the ground," Johnson says. "Supply hasn't really grown much over the past few decades, while demand has been creeping up because of increased consumption in China, India and Brazil."

Continued use of ethanol, a corn-based fuel additive, has also helped potash producers.

"It's difficult to see what the staying power of biofuel is, but it's certainly given the industry a shot in the arm," Johnson says.

Citi Investment Research analyst Brian Yu believes the main driver behind global demand for grain, which has contributed to higher food prices, is the U.S. ethanol program.

"While there is widespread belief that demand from China and India is the culprit, our analysis suggests the U.S. ethanol program is the primary driver," Yu wrote in a recent note to investors, noting a 16 percent year-over-year rise in U.S. corn consumption. Last week, the analyst raised his estimates on a handful of fertilizer companies, expecting them to gain from these trends.

Canada's potash powerhouse, Potash Corp., has certainly benefitted. Shares of the Saskatoon, Saskatchewan-based company have risen nearly 42 percent this year and have been setting all-time highs, most recently at $215.97 on Wednesday.

Earlier Thursday, the company reported its first-quarter profit more than doubled, as strong demand in all markets, tight supply and higher potash prices boosted gross margin. Potash Corp. also hiked its full-year 2008 profit forecast above Wall Street expectations.

According to Thomson Financial, 11 analysts now rate the company's stock at "Buy," or the equivalent, while three rate it at "Neutral" or a similar rating.

Then there's Denver-based Intrepid Potash Inc., whose initial public offering on Tuesday priced at $32 per share, above the expected range of $27 to $29 per share. The company has two production facilities in Utah and three in New Mexico, and ships most of its potash domestically.

Mosaic Co., another producer based in Plymouth, Minn., saw its shares rise nearly 41 percent so far this year. The stock set an all-time high of $143.32 on Tuesday. Soleil Securities Group analyst Mark Gulley acknowledged strong demand for fertilizer, but said a run-up in the share price over the past year means it may be too late to buy the stock at a cheap price. He rates Mosaic "Hold."