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Sell-off in Indian rupee negative for potash and phosphate demand

Xun Yao Chen, Agriculture Analyst

The importance of the Indian rupee

Just like how the U.S. dollar can influence crop prices, fluctuations in the Indian rupee can have a significant impact on potash demand. As potash trades globally, the standard currency for exchange is in U.S. dollars. When the Indian rupee weakens, it’s often a negative for potash suppliers, because buyers in India will have to pay more in rupees to purchase the same quantity that’s listed in dollars.

(Read more: Mosaic and CF Industries could be severely undervalued (Part 2))

Indian Rupee

Rupee depreciates further

One U.S. dollar can now be exchanged for 63.35 Indian rupees, as of  August 23, 2013, compared to just 54.00 in April—representing an increase of 18%. Indian rupees have been depreciating since 2011 due to high inflation 1 , the fiscal deficit, and deteriorating economic fundamentals. As the country’s prospects fell, foreign investors pulled money out of the country, lowering the demand for the rupee. Better economic fundamentals in the United States and Europe and a sooner-or-later end to the bond purchase program in the United States have not helped either.

(Read more: Mosaic and CF Industries could be severely undervalued (Part 3))

Potash and phosphate negatively affected

Because India imports all of its potash and some phosphate too, demand for these two fertilizers will be negatively affected, as a lower rupee makes it more expensive for India to import them. Lower subsidy for the two fertilizers, despite reducing the maximum retail price for farmers, isn’t likely to help much either. And unlike nitrogenous fertilizers, farmers can forgo using potash fertilizers for a period.

In 2012, weaker demand from India had negatively impacted potash and phosphate suppliers such as Intrepid Potash Corp. (IPI), Potash Corp. (POT), Mosaic Co. (MOS), and Agrium Inc. (AGU). The Market Vectors Agribusiness ETF (MOO) was also negatively affected, but not as much since the ETF invests in every stage of the agriculture industry.

(Read more: Cheap fertilizer prices to increase demand for fertilizer producers)

Outlook for fiscal year 2013

Although farmers can’t forgo using potash for a long period, as it damages the soil and makes recovery much more costly, a higher rupee will simply make potash unattractive, despite falling potash prices. With inflation riding high, phosphate inventory elevated, and economic growth seen to fall below 5% this year, potash and phosphate demand will likely be negatively affected over the medium term, as we discussed three months ago. As long as fundamentals in India continue to do poorly, fertilizer stocks will be negatively affected. On a positive note, wholesale potash price has fallen in the United States.

For more information on India’s economic fundamentals, visit our Emerging Markets page.

  1. A depreciating (cheaper) rupee means you can purchase more with $1.00, so it’s illustrated as an upward move on the chart

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