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Playing the Fertilizer Trade With Potash

07 June 2011

GLOBAL - Food prices have been rising. The price change has been significant enough to create difficulties in emerging markets. Some countries have had demonstrations and riots, writes Michael Filloon, a contributor to Seeking Alpha.

There are several reasons for the increase in food prices:

  • Emerging markets such as China and India have a new middle class.
  • With increased industrialization, people move from rural to urban areas.
  • Increased wages are first spent on a better diet.
  • An increase in meat consumption versus a grains-based diet creates more demand for food.
  • It takes significantly more to feed animals that go to slaughter as opposed to crops going straight to the dinner table.
  • Biofuels also have increased consumption.
  • Mandates for ethanol production from corn and biodiesel from soybeans have tightened supply and demand.
  • Very few countries have additional acres to convert to farmland. This creates problems as industrial growth creates demand for residential and commercial property.
  • As the world population increases, the total amount of farmland will continue to decrease.
  • The only way to increase the amount of food is to increase yield.

Since much of the world under-applies fertilizer, it creates an interesting scenario. Fertilizer is composed of three key nutrients. Potash is mined and is primarily used as a crop nutrient. Its potassium strengthens plant stalks and roots. Potassium also helps plants fight disease and injury, while improving yields. It also improves color, flavor and texture.

Phosphate is made from ancient marine fossils. It is used in fertilizer, feed and industrial products. Phosphate aids in photosynthesis, cell division, crop maturity and yields. When used as a feed supplement, it aids in skeletal development and animal muscular repair. Nitrogen occurs naturally in the air, but has to be converted for use in agriculture. Nitrogen increases crop yield, and plant growth. It is responsible for how green a plant is.

There are several reasons to be bullish fertilizer and the companies that produce it.

There is less available farmland.

Population growth increases the size of urban areas, thus decreasing available farmland. The world population is expected to grow to 9 billion by 2050.

With better economics in emerging markets, more people are eating meat. A meat diet takes a substantially greater amount of grain.

The BRIC nations have historically under applied fertilizer. The decreased farmland will put further pressure to increase production, which should lead to these nations increasing fertilizer application to that of the United States or Europe.

Five markets currently account for 80 per cent of the world's fertilizer consumption. By breaking down these markets and identifying changes over time it gives an idea of where the fertilizer business is going.

China

  • 19.6 per cent of the world's population
  • Uses 30.5 per cent of the world's fertilizer
  • Meat consumption has increased almost 700 per cent in last 30 years
  • Fruit and vegetable consumption is up almost 1000 per cent in the last 30 years
  • Imports 80 per cent of soybean consumption
  • 75 per cent of potash is imported

India

  • 17.6 per cent of the world's population
  • Uses 16.4 per cent of world's fertilizer
  • Fertilizer consumption has increased 4.5 per cent annually this decade
  • Yields are 20-50 per cent of the United State's cropland
  • Has no indigenous potash
  • Potash is under applicated when compared to nitrogen and phosphate
  • 70 per cent of soil is potassium deficient

Asia excluding China and India

  • 19.8 per cent of the world's population
  • Uses 11.3 per cent of world's fertilizer
  • Leading producer of oil palm, rubber and rice
  • Indonesia and Malaysia have doubled palm oil production in last 10 years
  • No indigenous potash

Latin America

  • 8.5 per cent of world's population
  • Uses 9.2 per cent of world's fertilizer
  • Produces 60 per cent of global coffee supply
  • Produces half of the world's soybeans and sugar
  • Corn is grown for export
  • Brazilian soil is naturally deficient in potassium, and needs potash
  • 80 per cent of potash is imported

North America

  • 5.1 per cent of world's population
  • Uses 12.5 per cent of world's fertilizer
  • Major suppliers of food and fiber
  • U.S. accounts for 40 per cent of global trade of wheat, corn, soybeans and cotton
  • Efficient agricultural production
  • Biofuels have increased need of corn and soybeans
Of the three nutrients in fertilizer, potassium has more upside.
  • Potash is used worldwide, but only 12 countries produce significant production.
  • Some 20 per cent of potash production is government-controlled.
  • Canada, Russia, and Belarus account for 67 per cent of world production and 80 per cent of world reserves.
  • An increase in potash production is difficult in cost and time. A Greenfield project takes a minimum of 7 years including ramp up. Including infrastructure, Greenfield projects cost CDN $4.7 billion to $6.2 billion to add 2 million tonnes KCL annually.

These reasons help to validate companies already in production. Potash Corp. (POT) has a market cap of $48.3 billion. It has several Brownfield projects recently completed and in progress. Brownfield projects are underused or abandoned properties updated or redeveloped for the purpose of adding production. Potash started its Brownfield projects in 2003 ($7.3 billion) and expects to increase production to 17.1 tonnes by 2015. Potash has stated it will start Greenfield projects if needed, but current Brownfield projects will be adequate for addressing demand.

In 2010, it earned $1.8 billion or $1.98/share on a post split basis. It was the second highest earnings in the history of Potash. It generated $2.6 billion in gross margins, including $1.8 billion from potash. It was more than double the gross margin figure in 2009. In 2010, Potash had a 43 per cent return. Potash's 5 year investor return is 382 per cent as of May of this year. In 2010, global potash shipments reached approximately 53 million tonnes. In 2011, it is estimated this number will increase from 55 to 60 million tonnes. This demand will be very close to global supply, and should continue to allow for price increases. The first quarter of 2011 had earnings per share of $.84 compared to $.49/share in the fourth quarter of 2010. The fourth quarter of 2010 had a gross margin of $1.1 billion, a new record. Some 70 per cent of this margin was generated by potash. In summary, Potash Corp. has a head start bringing production to market. Sixty percent of the spending to increase production is completed. Potash is a main player in Canpotex.

Intrepid Potash (IPI) has a market cap of $2.39 billion. It produces potash from three mines located in Utah and New Mexico. Intrepid is the largest producer of muriate of potash in the United States. Since 2004, Intrepid has supplied 8.5 per cent of United States potash consumption and 1.5 per cent of the world's. It is one of two world exporters of langbeinite, which is better for chloride sensitive crops. In the first quarter of 2011, potash production increased 36 per cent year over year. Average potash sales prices increased to $442/ton compared to $354/ton in the first quarter of 2010. Average sales prices for Trio (Langbeinite) in the first quarter of 2011 was $204/ton versus the first quarter of 2010's price of $167/ton. As of march 31 of 2011, Intrepid had no debt and $142.3 million in cash.

Compass Minerals (CMP) is the largest producer of sulfate of potash in the western hemisphere. It also has a salt business. Of 2010 sales, specialty potash fertilizer was 18 per cent. It is currently expanding production of potash. Compass expects the second quarter of 2011 production to be 90000 tons and full year 400000 tons. Its sulfate of potash is used on chloride-sensitive crops. It is used on fruits, vegetables and tree nuts which are 4 per cent of total United States harvested acreage, but 37 per cent of total revenue.

Global demand is 8 million tons per year. Sulfate of potash sells at a premium to muriate of potash by $150 per short ton. SOP has pricing power due to the higher margins of crops it is applicated on. Compass estimates the next decade will have 5 per cent growth in its fertilizer business compared to the historical 3 per cent. Compass' Great Salt Lake will undergo a three phase, low cost production increase. The first phase was began in 2008 and will increase capacity by 100000 tons year.

By the end of 2011, pond-based production will increase by 40 per cent to 350000 tons/year. Phase two began last year and will add 220000 tons of annual capacity. By 2015, production will increase by 60 per cent to 570000 tons per year. The third phase will take five years to complete but will double solar pond-based annual capacity. Compass is the only company in North America that has certified organic SOP. As of April of 2011, Compass increased fertilizer prices by $50/ton.

Chemical & Mining Company of Chile Inc. (SQM) has several specialty businesses.
  • Specialty Plant Nutrition - 50 per cent World Market Share
  • Iodine & Derivatives - 36 per cent World Market Share
  • Lithium & Derivatives - 26 per cent World Market Share
  • Potassium
  • Industrial Chemicals

Chemical & Mining has a vast supply of caliche in northern Chile. Caliche is composed of gypsum, sodium chloride, salts and sand. This naturally forming salt or "Chile saltpeter" is composed of sodium nitrate and potassium nitrate. It is the largest known natural source of nitrates in the world and has a high concentration of iodine. Its salar brines have the largest concentrations of iodine and potassium ever known. The potassium from the salar brines and nitrates from the Atacama are used to form its specialty plant nutrition. Potassium nitrate is:

  • Chlorine Free
  • Fully Water Soluble
  • 100 per cent Natural
  • Absorbed Quickly

Potassium Nitrate is used on:

  • Vegetables - 41 per cent
  • Industrial Crops - 28 per cent
  • Fruits - 22 per cent
  • Others - 9 per cent

Demand drivers for Potassium Nitrate are:

  • Increased Cost of Land
  • Increased World Demand for Premium Fruit and Vegetables
  • Some regional issues with obtaining Proper Water Supply

Chemical & Mining's specialty plant nutrition controls 50 per cent of the world market share. It was 28 per cent of total company gross margin in 2010. Specialty plant nutrition was 33 per cent of total company revenues ($604 million).

Chemical & Mining also produces muriate of potash. The company estimates it will be able to increase prices above 2008 numbers. MOP has seen a normalization of inventory levels. Chemical & Mining's production of SOP + MOP has increased every year since 2006. It has continued expansion into the Salar de Atacama. Chemical & Mining estimates it will have capacity of 2 million MT in 2013. Increases in price and volumes should continue to improve margins. Potassium accounted for 29 per cent of company revenues ($528 million) in 2010. It was 28 per cent of company gross margins.

Agrium Inc. (AGU) has three company divisions:
  1. Agrium Retail - $7 Billion in 2010 Net Sales
  2. Agrium Wholesale - $3.7 Billion in 2010 Net Sales
  3. Advanced Technologies - $.4 Billion in 2010 Net Sales

Agrium is one of the three members of Canpotex. Although a great deal of its business is retail, the company still produces a large amount of potash. Agrium's wholesale business has fertilizer capacity of:

  • 5 Million Tonnes of Nitrogen Annually
  • 2 Million Tonnes of Potassium Annually
  • 1 Million Tonnes of Phosphate Annually

It should be noted, Agrium would be affected much less by potash pricing, given the size of the company and the amount of potash it produces. Agrium's first quarter of 2011 had an optimistic outlook for potash prices. It stated potash demand is continuing to improve. The International Fertilizer Industry Association reported 2010 potash deliveries totaled 55 million tonnes, much higher than expected at the beginning of 2010. The IFIA also stated North American potash inventories decreased by 9 per cent in March of 2011. These levels are 25 per cent below average. Agrium states the most important factor to potash pricing going forward is the upcoming supply agreement with India.

Mosaic (MOS) has been going through a change as a company. Cargill, a private company, distributed all of its Mosaic shares. This made Mosaic a fully independent company. It is the largest combined producer of phosphate and potash. Value is increasing in Mosaic's phosphate business. It is the largest integrated phosphate producer. Mosaic states crop nutrient markets are very tight.

In my opinion, Mosaic is in a much better position then Agrium. I am not certain it is a fair comparison as Agrium is more of a retail operation. Mosaic's phosphate position is important, but Potash more so. It is growing its potash business. An estimated additional 5.1 million tonnes of capacity is being added to an already large potash business. It is important to note that Mosaic has a reversion of 1.3 million tonnes produced under a tolling agreement. It has three potash capacity expansions under way:

  1. Belle Plaine-completed in 2012 with peaking capacity of .6 million tonnes from an investment of $.5 billion.
  2. Colonsay - completed in 2014 with peaking capacity of .7 million tonnes from an investment of $.7 billion.
  3. Esterhazy - completed in 2017 with peaking capacity of 1.8 million tonnes from an investment of $2 billion.

And two future expansion projects:

  1. Belle Plaine - will start in 2016 with peaking capacity of 1.4 million tonnes
  2. Colonsay - will start in 2016 with peaking capacity of .6 million tonnes

The tolling agreement for 1.3 million tonnes is also ending. Total additional capacity is 6.4 million tonnes of potash. When added to its existing production totals 16.8 million tonnes. Much of this additional potash production is from Brownfield projects and is cost effective.

Potash is procured from mines. Unlike phosphorous and nitrogen, it is very difficult to increase production. Even if the company had the time and money, another issue has to do with organization. Currently 70 per cent of the world's potash comes from one duopoly. The first part of this duopoly is Canpotex. It is composed of three owners:

  1. Potash - 54 per cent Ownership
  2. Mosaic - 37 per cent Ownership
  3. Agrium - 9 per cent Ownership

Potash Corp. also has significant investments in some of the largest potash producers in the world. This is advantageous to the potash producers. There is less chance of a company significantly decreasing prices to get contracts. It is also difficult for countries like China or India to obtain the amounts they need. For more information please read Canpotex: Potash Duopoly. It is my opinion all three nutrients will have a good year, but potash is the best long term play.

TheCropSite News Desk



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