Why potash affordability in China hit a multi-year high
Potash overview: Expanding on indicators driving stocks like POT (Part 8 of 13)
Affordability around the world
As we noted earlier in this series, fertilizers are relatively cheap for U.S. farmers from a historical standpoint. The recent increase in crop prices is one aspect of the industry that’s somewhat positive for fertilizer producers such as Potash Corp. (POT), Mosaic Co. (MOS), Intrepid Potash Inc. (IPI), and Sociedad Quimica y Minera de Chile ADR (SQM), and it’s also relevant to the Market Vectors Agribusiness ETF (MOO). Globally, however, the story might be even better.
Brazil and the United States
Given that soybean and corn prices in Brazil generally track U.S. prices, as one of the largest exporters of agriculture products, and fertilizers (potash and phosphate) basically move in tandem with each other around the world, the price ratios between fertilizers and crop prices in Brazil are similar to those in the United States. So even as the Brazilian real, the national currency, has depreciated against the U.S. dollar over the past few years, farmers aren’t particularly harmed by the weaker real. In Brazil, potash use for soybean takes up ~40% of total consumption, while sugar and maize (corn) make up about 17% each. On a historical basis, you might say potash is fairly priced for sugar farmers.
China
In China, the story is more optimistic, with the affordability of potash above what we’ve seen over the past ten years, driven by a strengthening renminbi, strong government support for agriculture, and a weak fertilizer environment. The corn-to-potash price ratio is now near 1.20x—its highest since 2004. The affordability of potash for rice farmers is also at its highest, based on the average city rice prices that the National Bureau of Statistics started collecting in 2009. These two crops make up ~31% of China’s annual potash consumption, which makes them the two most important crops to follow—aside from vegetables and fruits, which account for another 40%.
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