Potash Demand Expected to Rally, Says PotashCorp

The first half of the year has been tough for the fertilizer space, largely due to fairly weak global potash demand. However, one producer is optimistic that demand will recover in the second half of 2015.
Potash Corporation of Saskatchewan (TSX:POT,NYSE:POT) released its July 2015 Market Overview last week, outlining a number of reasons why it believes the second half of the year will be positive. Notably, PotashCorp believes North American farm-level demand will be supported moving forward thanks to strong agronomic need and positive returns on investment from potash fertilization.
The company also notes that already good demand and declining crop conditions in North America and parts of Europe have led to a price rally over the past month.
Mike Ferguson, president and CEO of Gensource Potash (TSXV:GSP), found the market overview to be very positive and informative, noting that PotashCorp is a trustworthy source for such information.
“In terms of the potash world, they really are the king, they know the industry best. They have the most reach. They really are the strategic leader of the industry, so I do have a lot of respect for them and I listen to what they have to say,” Ferguson told Investing News. “In the longer term, I think they are exactly right. The overall potash demand will continue to rise — and in some cases, significantly, as farmers start to apply fertilizers in a balanced way.”

Improved potash demand from Brazil

In addition to North America, PotashCorp believes Brazil may drive the potash price up moving forward. The country’s farm-input purchases slowed down in the first half of the year due to a drop in crop prices, a weak currency and a delay in farm credit availability.
“Recent soybean price rally improves Brazilian soybean economics. Despite farmers’ delayed access to government credit, we expect strong full-season soybean planting during the upcoming planting season,” the company said in its report. “Shipments are expected to accelerate in the third quarter in preparation for the country’s primary planting season. The recent improvement in crop prices and newly announced credit program should support farm level demand throughout the second half.”
Brazil’s recently announced farm credit program will see the government offer $70.3 billion in subsidized farm credit for the next season, which is expected to get under way this month. That represents a 14.7-percent increase from previous years’ budget for the agricultural sector.
Ferguson said that Gensource’s Brazilian partners have dealt with this delay firsthand as well, but the company is optimistic that moving forward the credit facilities will come to those who need them.

China’s agricultural demand remains strong

China’s economic growth for the first half of the year has remained depressed, and the last quarter marked a six-year low; however, the country’s agricultural industry has remained strong.
In a report called “China’s Growing Demand for Agricultural Imports,” the US Department of Agriculture (USDA) highlights the Asian nation’s important roll in the agricultural markets as it “emerges from isolation, liberalizes its economy, and experiences rising living standards.”
The report states that while China’s import demand has evolved in unexpected ways and is difficult to predict, it has also risen dramatically in recent years, with the US becoming the leading supplier.
“During calendar years 2012-13, US. exports of agricultural products to China averaged $25.9 billion per year — a tenfold increase from the late 1990s,” according to the USDA.
PotashCorp also looks in its report at prices and demand for nitrogen, ammonia and urea, noting that both urea and ammonia have seen price improvements.
“Global ammonia prices have moderated compared to second-half 2014, due to lower world energy prices and softer import demand in some regions. Prices have stabilized in recent months given ongoing production challenges in many key ammonia exporting regions such as Ukraine and North Africa,” PotashCorp said. “Urea prices found support in the second quarter from robust demand in most key importing regions and tighter supply from China. We anticipate healthy global urea supplies will keep urea values in a relatively narrow range. US nitrogen solution prices have come under some pressure due to greater supply availability.”
And let’s not forget the contracts signed by both China and India, which PotashCorp believes “should support steady potash shipments to these markets through the remainder of 2015.”

Investor takeaway

The previously mentioned factors, along with weather-related issues in North America, an increase in production at Kharif, Chinese demand and weaker currency values relative to the US dollar, are all worth keeping an eye on moving forward. And while no one can predict the weather, hearing positive points from one of the largest potash producers in the world is encouraging to say the least.
 
Securities Disclosure: I, Kristen Moran, hold no direct investment interest in any company mentioned in this article.
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