Continued weakness in fertilizer company stocks (Part 1 of 5)
The significance of potash price
Wholesale potash price is one of two factors (the other being sales volume) that influence potash producers’ revenues. When prices rise, so does revenue, which will translate to higher profitability (margins), earnings, and share prices. However, when prices fall, they will have a negative impact on fundamentals and share prices.
Midwest potash price falls to $436 per mt (metric tonne)
According to Green Markets, wholesale potash prices in the Midwest region of the United States stood at $436 per mt on October 7, 2013. This was a decline from $440 per mt (or $400 per short ton) reported at the end of September, reflecting continued weakness.
Summary of historical potash price trends
Prices have fallen since mid-2011, as global food inflation fell due to a successful plantation year and slower economic growth and made potash more expensive for farmers. Policy bias towards nitrogenous fertilizers in India and weaker Indian currency, which made potash more expensive, were also contributing factors to lower potash demand. The breakup of a partnership between Uralkali and Belaruskali that was announced in late July, as well as lower crop prices, contributed to lower wholesale prices.
Midwest potash price above companies’ sales price
The Midwest potash price quoted by Green Markets has historically tread above companies’ selling price because Green Markets’ prices include transportation cost to bring potash from Canada to the United States. The Vancouver spot price, quoted by the World Bank, on the other hand, excludes these costs. Yet its data is only published monthly and lags a little.
Potash companies could see below a $300 per metric tonne sales price in Q4
If we take the average difference in selling price of ~$140 per mt over the past four quarters between the Midwest price and Mosaic Co. (MOS), Potash Corp. (POT) and Agrium Inc.’s (AGU) historical selling prices, these fertilizer companies could see below $300 per mt of sales price in the coming months. We shall continue to monitor whether potash prices will fall below their 2009 support.
Fourth quarter revenues for POT, MOS, AGU, and Intrepid Potash Inc.’s (IPI) revenues will be negatively affected depending on how long potash prices stay at current levels. The share prices of these companies, as well as the Market Vectors Agribusiness ETF (MOO), could also be negatively affected if it isn’t fully priced in. It will also be important for investors to follow what companies might have to say when they release their third quarter earnings late October / early November.
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