Recovery in India? Potash demand goes from elastic to inelastic

Market Realist

Potash overview: Expanding on indicators driving stocks like POT (Part 11 of 13)

(Continued from Part 10)

Input prices

In the last article of this series, we saw rice prices in India rise about 33% since mid-2012, while the rupee also depreciated by a similar amount over that period. But how do input prices stack up?

Urea and DAP Price

Since 2011, wholesale phosphate prices have climbed more than 60%, while urea prices grew by just 10%. Phosphate and potash prices rose on a weaker rupee and subsidy cuts since 2010, even as these fertilizer prices fell as new capacities came online. Urea prices were also affected by the weaker rupee but were given supportive subsidies, as local suppliers account for ~70% of domestic consumption and represent an important block for political votes.

Since urea prices rose just 10% over the period compared to rice and food price increases of 20%, you might say farmers themselves have been able to absorb reductions in potash and phosphate subsidies. Urea consumption accounts for more than twice the consumption of phosphate and four times the consumption of potash in 2010. Remember that retail potash prices rose roughly two to three times since 2011 in India (see the previous article in this series).

Elastic to inelastic

When India first announced subsidy cuts for phosphate and potash around 2011, fertilizer consumption and prices were negatively affected. But how much would consumption falls depends on the price elasticity of potash and phosphate to farmers—how much farmers’ purchase would fall as prices rise. Since potash and phosphate were adequately supplied in previous years, thanks to supportive subsidies, there was little incentive to apply normal rates, given higher prices. This negatively affected Potash Corp. (POT), Mosaic Co. (MOS), Intrepid Potash Inc. (IPI), Sociedad Quimica y Minera de Chile (ADR), and the Market Vectors Agribusiness ETF (MOO).

India and Thailand Rice Prices

Passing higher input costs to consumers

But the use of phosphate and potash can’t be postponed for long periods because it would negatively impact yields and soil quality. If farmers understand this importance, they’ll be more willing to purchase potash over time, passing on price increases to consumers. Prices of basmati rice in India (a premium rice) have more than doubled since the beginning of 2013 in U.S. dollars, while Thailand’s white rice prices (a global benchmark) have fallen.

The government might end up absorbing higher input prices, since the country establishes support prices for grains based on input costs to support production and feed its population. So even with the recent announcement to reduce potash subsidies, the need to apply these fertilizers could offset the government’s intention to cut subsidies, and thereby the fiscal deficit, which would be positive for fertilizer stocks and ETFs but nonetheless negative for India and maybe the WisdomTree India Earnings Fund (EPI).

Continue to Part 12

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