Potash prices to stay high

Farmers worldwide appear to be holding out for cheaper potash, but many industry experts say prices aren’t going any lower and demand can only be deferred for so long before crops start to suffer.

Farmers worldwide appear to be holding out for cheaper potash, but many industry experts say prices aren’t going any lower and demand can only be deferred for so long before crops start to suffer.

The price of other minerals used in fertilizer, like phosphate and nitrogen, slumped this year from highs seen in late 2008, but potash companies have successfully curbed supply, allowing prices for that commodity to stay relatively high.

Unfortunately for potash producers, high prices amid a worldwide economic downturn and lower food prices have hurt demand, forcing some, like Potash Corp. of Saskatchewan (TSX:POT), to repeatedly lower earnings and production guidance.

Salman Partners analyst Raymond Goldie said farmers were experiencing “sticker shock” when the spot price neared $900 late last year, and now they’re waiting for it to drop back down to earlier levels.

“That’s what I think the market is anticipating, that potash is going to follow the other two (phosphate and nitrogen) down to where it used to be two and a half years ago,” Goldie said.

“But because of the discipline we’ve seen on the supply side . . . it ain’t gonna happen.”

The potash industry is more concentrated than most, making it easy for producers to respond to slumping demand by cutting production.

Potash Corp. spokesman Bill Johnson agreed that “growers around the world and retailers are looking for some level of comfort that prices won’t move lower” before they buy.

Canpotex — a marketing consortium representing Potash Corp., Agrium Inc. (TSX:AGU) and Mosaic Co. (NYSE:MOS) — recently signed a major new contract in India agreeing to sell 850,000 tonnes of potash at $460 per tonne delivered.

Although highs seen last year have almost been cut in half, a $460-per-tonne price is still much higher than the $200 price seen in 2007.

UBS Investment Research analyst Brian MacArthur said buyers are waiting to see whether ongoing contract negotiations with China will result in a lower price than India got, a move that could send spot prices lower as well.

“The Indian contract price has not been viewed as a market bottom by U.S. or offshore buyers who are waiting to see if China gets a lower price,” MacArthur wrote in a note to clients.

He added that the prospect of record crop yields in the U.S. this fall, despite 30 per cent less potash use, could continue to push crop prices lower, thus hurting demand for the expensive fertilizer.

Saskatoon-based Potash Corp., the world’s largest potash producer, has repeatedly lowered its production and earnings forecasts due to slow fertilizer demand.

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