Although the potash industry was pulverized yesterday after the world's biggest producer said it would no longer abide by limits on its output, it was an outcome that was bound to happen sooner or later and is one that will ultimately benefit the industry.

The decision by Russia's Uralkali to end its distribution agreement with Belarus, which controls roughly 43% of global exports, means the price of potash that had been artificially propped up for years -- and reached as high as $900 a ton before the global economic meltdown in 2008 -- will now trade at more reasonable levels, perhaps as low as $300 a ton by the end of the year, according to Uralkali.

While the immediate effect was to crush the stock prices of producers like PotashCorp (NYSE:POT) and Mosaic (NYSE:MOS), which tumbled 16% and 17%, respectively, it means there will be an industry shakeout that will have only the best companies producing enough to meet demand.

It also means that potash miners like Vale (NYSE:VALE) were seemingly prescient in walking away from new projects while BHP Billiton was fortunate its expansion plans were delayed. Or maybe they just saw the writing on the wall.

Last September, Uralkali settled a U.S. antitrust claim for around $13 million that charged the producer and a cartel that included PotashCorp, Mosaic, and Agrium (NYSE: AGU) of conspiring to raise prices since 2003. All told, the group controlled about 70% of the world's potash.

The expected collapse in pricing as a result of Uralkali's move means competitors will likely stay away from the business now as margins get sliced. Uralkali looks to be making a push for market share at a time when its rivals are constrained and because it enjoys some of the fattest margins in the industry, it can withstand the compression that will pressure others. It also has the benefit of being the lowest-cost producer and of being readily able to supply China by train.

It's one of the reasons Intrepid Potash (NYSE:IPI) was hit so hard, falling 29% on the news, as it's considered to be one of the higher-cost producers. Uralkali says the average cost of producing potash runs around $200 per ton so the lower pricing environment will make for a trying time for marginal producers. Moreover, because Intrepid is also not affiliated with any marketing group -- Potash, Mosaic, and Agrium control Canpotex -- it doesn't have the same negotiating heft as do its rivals to set prices. 

In comparison, Uralkali has costs per ton of around $62 meaning it can withstand longer the effects of a price war. Fortunately for Agrium it is far more diversified than other potash producers so its stock only dropped 5% yesterday. The potash stocks continued to fall today, though, again, Agrium's decline was minimal.

Yet the falling prices engendered by Uralkali maxing out production and willingness to sell its output at spot may very well boost demand again. By limiting the amount of competition coming into the market, spurring demand for potash through lower prices, and allowing the strongest producers to survive, the potash industry will be a much healthier space going forward.

That doesn't mean Uralkali won't patch up its differences with Belarus -- it could be a negotiating ploy after all -- but the upheaval caused by the announcement let investors see which of the players were swimming naked, as Warren Buffett might say, allowing them to identify the weak links that will get pulverized again during the next tumult.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.