Fertilizer producer Mosaic (MOS 0.52%) noted lower potash pricing as a key factor behind "weaker results." That's an issue being felt across the potash market, with a spillover effect in the phosphate and nitrogen spaces. That spells continued weakness for players like Mosaic, PotashCorp (POT +0.00%), and more broadly diversified Agrium (NYSE: AGU).
Dirty laundry
Potash sales have historically been handled through two large selling consortiums, one based in North America and one in Europe. Earlier in the year, in something of a surprise move, one of the European group's members broke ranks. That set off a price decline in the potash market and led to share price drops at Mosaic, PotashCorp, and Agrium—all of which sell through the North American consortium -- Canpotex.
It's only been a few months since the news of the breakup, and the market has yet to fully digest the impact. That's led distributors to delay buying fertilizer products, choosing instead to sell down inventory. This is the result of both uncertainty and customers hoping for a better price. Like Mosaic, PotashCorp noted weakness across all of its product lines in the third quarter because of the European breakup and what it called "paralysis" in key selling regions.
Long-term demand
But Potash management isn't too concerned: "Admittedly, the recent slowdown in potash demand and decline in pricing have been challenging, but that does not mean the prospects for our industry have forever changed. The fundamental realities of food production and soil fertility continued to underpin our business."
Mosaic, meanwhile, is expecting demand to be "lumpy" but that the industry will see "over this decade a 3% annual growth rate." Indeed, the science of farming coupled with worldwide demographics pretty much ensures increased demand.
With a still growing world population, more food will be needed. One of the best and cheapest ways to improve crop yields is to apply fertilizers. There's no way around this fact, and it underpins the industry's long-term prospects.
A tough stretch
So you should expect the rest of this year -- and probably the early part of next year -- to be difficult for companies like Mosaic, PotashCorp, and Agrium. That's the bad news. The good news is that, long-term, there should be plenty of demand and that will eventually lead to higher prices.
Of this trio, Agrium is probably the best positioned to weather the storm. That's because the company is widely diversified, with fertilizers accounting for just under a quarter of the company's revenues. It also sells seeds and pesticides, and owns its own retail outlets. In fact, despite a tough third quarter and expectations for continued industry weakness, Agrium just increased its dividend by 50%. Clearly, management sees brighter days ahead.
Mosaic, meanwhile, notes that "while troughs are a part of every cyclical industry, these periods provide significant opportunities..." Most recently, that's meant a deal to buy the phosphate business of CF Industries (CF 1.22%). This purchase, that includes a deal for Mosaic to buy key inputs from CF, will expand the company's phosphate production by around around 20%.
And while PotashCorp has reduced its estimates for global potash demand, it highlights the United States and South America as areas where demand is starting to pick up again. Key markets China and India remain weak spots, but even so, PotashCorp remains confident that Canpotex is well positioned over the long-term in those two countries.
Look to the long term
There's little question that PotashCorp, Mosaic, and Agrium will continue to feel the pinch of a weak fertilizer market in the fourth quarter. That could easily linger into the early part of next year, too. However, longer term this trio is still positive on the industry's prospects and you should be too.
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