Fertilizer prices are rising at a much more subdued pace than skyrocketing crop prices — and that’s not necessarily a bad thing, said an executive with the world’s largest producer of potash, a key crop nutrient.
Wayne Brownlee, chief financial officer with Potash Corp. of Saskatchewan (TSX:POT), said he does not foresee a repeat this year of the massive fertilizer price run-up of 2008.
“What you’ve seen is a more moderated price increase in fertilizer that has not matched the increase in agriculture commodity prices. And so it’s leaving the farmer in a very healthy situation,” he told a Scotiabank fertilizer industry conference Wednesday in Toronto.
Brownlee said Potash’s customers — farmers — are earning record margins. Instead of experiencing another 2008-style bonanza, Potash foresees “having a firm foundation under customer engagement on an ongoing basis.”
“So we can see growth in prices, but on a moderated basis. That ensures that the volume does not become volatile again.”
Global grain demand has been outstripping supply for seven of the past 11 years, and that has led to deep draw-downs on inventories.
“To put this into perspective, just to stand still and not have the situation get worse, we need crop production this year in the grain sector of five per cent growth,” Brownlee said.
“To actually make a difference, you actually need to be higher than that. You need to be around seven per cent in terms of starting to replenish inventory levels.”
Since production growth is actually at around two per cent per year, farmers have a long way to go to even maintain the status quo.
“So we need almost perfect weather conditions, which we’re not getting,” Brownlee said.
“I think that you should expect sustained pressure on grain prices for the course of this year, and probably into next year.”
Earlier, the CEO of another major fertilizer producer, Agrium Inc. (TSX:AGU), said his company is poised to benefit from the broad-based rise in crop prices.
“The whole sector has really been coming along. If you look at 2008, it wasn’t as broad as this across all the sectors,” Mike Wilson told the conference.
“You don’t just have wheat or corn (doing well). It’s wheat, corn, soybean, cotton, palm oil — you name it. they’re all up high.”
He said Agrium is in a unique position because of its diversity.
The company has both wholesale and retail operations, a geographically dispersed business around the world and provides farmers with products for a wide variety of crops.
“We’re on just about every crop you can think of,” Wilson said. “We manage strawberries, we manage lettuce, obviously all the major crops, sugar cane, palm oil . . . bananas.”
“And by having that diversity, we’re not reliant on one crop.”
Wilson said Agrium, which has its base in North America and has expanded into South America and Australia through acquisitions, is looking at Central Europe as an area that’s ripe for expansion over the coming years.
“We just bought CerealToscana . . . and what that’s done is position and strengthen our European position, mainly in Italy, but we you see us now starting to move into Central Europe,” Wilson said.
“We’re in Bulgaria, we’re in Romania and we’re looking at Central Europe because we think that’s the place we want to be in five to 10 years. There’s a lot of growth opportunity. They’re not applying the appropriate amount of nutrients, they’re not using the latest technology on seed and chemistry.”
He described the North American spring planting season, which has been plagued by wet weather including flooding in Manitoba, as “very interesting.”
“April was terrible, one of the latest starts we’ve seen in history from a farmer point of view,” Wilson said.
“In May, it turned right around. May has been an incredible month. We can’t keep up to the demand.”
Agrium plans to increase its potash production by one million tonnes by 2014. It plans to achieve that growth through so-called “brownfield” expansions to its existing operations, rather than building an entirely new mine from scratch, as some of its rivals are doing.
“What you’re going to find is a lot of the potash expansions that are being talked about, they haven’t gotten in the field yet and they haven’t done their engineering yet, and when they do the capital costs are going to shock them at how expensive it is,” Wilson said.
(Source: The Canadian Press | Lauren Krugel)