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Despite a volatile potash market, companies believe there are good times around the corner as demand for crops rises.
The mineral has been on a downward trend since the start of the year, part of a longer fall since 2009 amidst the financial crisis, but recent investment in potash companies has been a welcome bright spot in the industry.
Meanwhile, a number of heavyweights believe an overall improvement in the market is likely in the years ahead.
Investment in Agrium spurring interest
On October 24, ValueAct Capital Management, a San Francisco-based investment company, announced the purchase of about 8.2 million shares of Agrium (TSX:AGU) — that’s equivalent to roughly 5.7 percent of the company. On the back of the news, shares in the Saskatchewan-based agricultural supplier jumped 7.6 percent, the most in five years, to $104.33.
In an interview with the Financial Post, Richard Downey, vice president of investor relations at ValueAct, said the company took in interest in Agrium because it believes it is undervalued. “Similar to some of our other big shareholders, they see good growth, good free cash flow as we finish up our expansion projects and they like the retail business as well,” he said.
Seeing a company that handles billions of dollars in investments take a look at Agrium has helped spur interest in the fertilizer industry, with the price of potash steadying over the course of the past week.
Look to the longer term
That said, there are varying opinions on where the price of potash is likely to head in the next couple of years. Some companies argue that while there may be a lot of potash produced, consumption will rise as food demand increases.
For instance, BHP Billiton (NYSE:BHP,ASX:BHP,LSE:BLT) reported that it sees demand for potash growing roughly 2 to 3 percent a year until 2030. It believes that new capacity will be required to meet demand by the end of the decade as future brownfield projects become less feasible. The caveat? The Australian company thinks the market is still in a state of “over-supply” right now.
PotashCorp (TSX:POT,NYSE:POT) has said much the same. The company released its third-quarter earnings last night, showing an 11-percent drop, but focused on the positives. “Even with a weaker crop pricing environment than observed in prior years, potash demand has been more responsive than anyone anticipated,” said Jochen Tilk, the company’s chief executive, on a conference call.
He believes market fundamentals look solid heading into next year.
Everybody has to eat
Amidst those predictions, it’s worth keeping in mind the words of Ethan Park, an analyst with Extract Capital who spoke to Potash Investing News last week. He emphasized the importance of potash to the food industry as a whole.
“The fact of the matter is we only have so much arable land and our demand for food is increasing. Added to that, weather-pattern trends are forcing farmers to find ways to increase yields, and the primary way to do that is with fertilizer applications,” he said.
The upshot, then, seems to be that while the potash market may not be in the best situation currently, higher demand spurred by an increasing need for food crops is likely to bring improvement over the coming years.
Securities Disclosure: I, Nick Wells, hold no direct or indirect investment in any of the companies mentioned in this article.