Analysis: Potash Prices To Rise?

With the status quo left intact, fertilizer retailers and the farmers who are their customers are stuck with a pricing system they say is rigged against them.

BHP, the world’s largest miner, has a reputation for running its operations at full tilt. If it succeeded in its hostile, $39 billion takeover of Potash Corp, giving it entry into the global fertilizer business, it was expected to follow the same strategy.

The current industry practice — followed by the Canpotex marketing consortium — is to link production rates to prices, assuring high returns for its three members — PotashCorp, Mosaic Co. and Agrium Inc.

But if BHP withdrew from Canpotex, as the Anglo-Australian miner signaled it would do if it acquired Potash, the cartel would have collapsed, stirring competition in the industry and depressing prices. BHP’s approach would probably have the biggest impact on prices in periods of slack demand.

Producers will no longer need to worry about that scenario if Ottawa confirms its rejection of BHP’s bid after a 30-day review period.

Canada’s rejection will "add a lot of stability to the potash market," says David Asbridge, president of NPK Fertilizer Advisory Services in St. Louis, MO. "BHP would have come in and shook things up some and I’m not sure that it would have been all that good for the potash industry."

Prices of several crops including corn — which requires heavy potash application — have shot to two-year highs in 2010, giving farmers more money and incentive to apply fertilizer. U.S. corn prices look likely to stay strong with supplies tight amid growing export and ethanol demand.

"You’re getting a strengthening in potash prices because actual market demand is going up quite tremendously, actually," says Patricia Mohr, vice-president and commodity market specialist at Scotiabank in Toronto.

Weather-Related Price Increases

Spot potash prices at Vancouver that were $342.50 per ton in September are forecast to hit $415 in 2011, Mohr says.

Canpotex recently locked in multi-year supply deals with buyers in China, Indonesia, India and Korea.

The upward trend in potash prices looks less certain more than a year out, Asbridge says, since a big reason for high crop prices are weather-related disasters that hammered crops this year in Canada, the Black Sea region and elsewhere.

A return to normal weather would leave potash prices more vulnerable to the kind of changes BHP was planning.

Farm retailers were hoping that BHP’s takeover would create more predictable supplies and pricing, says David MacKay, president and CEO of the Canadian Association of Agri-Retailers. The Canadian farm retail industry is dominated by Viterra Inc, with privately held Richardson International, Agrium and smaller players also owning outlets.

Some independent dealers lost their businesses in 2008 after fertilizer prices crashed from historic highs, leaving retailers stuck with inventory worth a fraction of what they paid for it.

"You’re caught holding the Old Maid," MacKay says. "We want to see potash priced to market like any other fertilizer or commodity. It’s one of the few natural resources that’s artificially priced."

(Source: Reuters)

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