Wondering what's new with the king of fertilizers since
potash
hit the reset buttonin late July?
Well, August saw North American potash inventories drop
for the second straight month, but that still left them 150%
above the five-year average. The sales channels are still
stuffed, with several factors working against the fertilizer
and its producers, which include
PotashCorp (NYSE: POT),
Mosaic (NYSE: MOS), and
Agrium (NYSE: AGU).
First, corn prices have dropped meaningfully this year,
and U.S. farm net income is poised to drop 38%. With some
farmers struggling to turn a profit at current spot prices,
they're more likely to mine the soil for nutrients in the
near term than pony up for fresh potash.
Second, farmers are still more than a bit sore about the
vertiginous run-up of potash prices resulting in part from
the collective supply-side restraint exercised by the small
number of globally significant players.
Intrepid Potash (NYSE: IPI) has recently
spoken of the need to educate buyers about the fact that
fertilizer prices have returned to their historical average
of 4% of input costs. That message will need to be delivered
delicately, so as not to reinforce the perceived arrogance of
the potash shot-callers.
Third, crop yields are looking very strong, with the USDA
estimating a record corn crop yield of 161.9 bushels per
acre. That's likely to mark a peak for some time, as lower
potash applications will erode yields, but the prospect of a
near-record corn crop in 2009 is also something of a negative
for both corn prices and potash demand. Then again, with
ethanol blending margins much improved for refiners like
Valero Energy (NYSE: VLO), corn demand is
also strong. In addition, and much to the chagrin of folks
like
Smithfield Foods (NYSE: SFD), the government
is considering raising the ethanol blending limit from 10% to
15%.
Finally, it's looking to be a late harvest this year,
which will further limit fall fertilizer applications.
It's no surprise, then, that PotashCorp has
once againcut its earnings guidance for 2009. I feel the
same way about 2010 as I did
back in June-- with the seeds being sewn for a rebound,
next year's prospects remain bright. This appears to be
reflected in PotashCorp's resilient share price, though, so I
probably wouldn't be a buyer today.
This article was originally published as
Pain Persists for Potashon
Fool.com
Copyright © 2009 The Motley Fool, LLC. All rights
reserved.
|