Why potash companies may be great for value investors (Part 4 of 11)
When farmers experience record yields and production years, a large amount of nutrient would have been absorbed by plants and removed from the soil. This means farmers will have to replenish to maintain nutrient content in the soil.
Revised potash application
Potash Corp.’s (POT) market analysis report showed that recent Iowa State University research report had revised potash application guidelines for various crops grown in the state. The new guidelines suggest farmers should be applying more potash at most defined soil test ranges. A soil test measures the availability of nutrients that plants could uptake.
Recommendation to use more
A soil test level of 150 ppm (similar to the North American median soil test K level) would result in a K2O recommendation of 45 pounds per acre. With the new recommendations, the same soil test level would lead to a recommendation of 80 pounds per acre. This is a huge jump, particularly for corn.
Potash management believes that the study could impact recommendations in nearby states and could be a catalyst for other universities to evaluate recommended rates, which hasn’t been revised for several years.
Farmers could still delay purchases
While this research is encouraging for potash’s long-term prospects, investors should note that farmers’ purchase of fertilizers for the respective marketable year has been more highly correlated with the acreage of corn being planted in the next year.
This likely means farmers are more likely to postpone purchases of fertilizers until they see a more immediate need and use. In the meantime, they will look to find better use of cash. Plus, if farmers expect prices for fertilizers to drop, there’s more of an incentive to delay purchases. So investors may not see most of the demand return—at least not until a few months into the year.
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