One of the biggest threats to Potash Corp. of Saskatchewan's profit is stacked in the back room of the All Points Co-Op in rural Nebraska. That's where manager Gregg Anderson piles the bags and bags of fertilizer he can't sell.
"We bought the stuff when it was at its peak last year," says Mr. Anderson, who manages the co-op in Gothenburg, about 400 kilometres west of Omaha. "Now we're stuck with it. I offer it to customers, but they're digging in their heels and saying they aren't going to pay that kind of price. So they go without."
Farmers, it appears, are proving to be more price sensitive than people thought, and are gambling that fertilizer sellers like Mr. Anderson will lower their prices next year. That, in turn, is having an effect in places like Saskatoon, where Potash Corp. announced yet another cut to production, an 800,000-tonne curtailment that brings its total reductions to 5.5 million tonnes since August.
The clog in the supply chain has pushed global stockpiles of fertilizer 100 per cent above their five-year average, Goldman Sachs estimates.
While wholesale prices for potash have moved about 30 per cent lower since peaking near $1,000 last year, retail prices have only come down about 13 per cent. The disconnect was created by retailers who stocked up as prices were on their way up, anticipating ever-higher demand on what seemed like an insatiable appetite for potash-enriched fertilizer, renowned for its ability to improve the taste, texture and nutritional value of many crops.
Retailers have stubbornly held their prices steady this year, said Rabobank International assistant vice-president and industry analyst Erin FitzPatrick. And farmers, faced with lower end prices for their crops, have chosen to forgo fertilizer to save money.
"Maybe more importantly, once retailers sell the fertilizer, they aren't restocking," Ms. FitzPatrick said. "There has been a fundamental change in risk management at these retailers because they were put in a tough spot for the first time because of the dramatic increase in prices."
Europe's largest producer, K+S AG, also dealt the industry a blow yesterday as it forecast a "significant" decline in profit and lowered its asking price to $600 from $750 a tonne.
Investors did some curtailing of their own yesterday, shaving 10 per cent off the Potash Corp.'s shares in its sharpest decline since early March. Other potash producers were also hit, with Agrium Inc. down 7.3 and Mosaic Co. down 9.6 per cent.
Potash Corp.'s shares had climbed almost 50 per cent from January to May as investors bet that a global economic recovery could spur demand for fertilizers as farmers looked to improve their yields, but a recent pullback now has them 21 per cent higher on the year.
Seventeen analysts follow the company, with 14 "buy" ratings and three "holds." Their average price target, according to Bloomberg, is $144.75 - a 25 per cent premium from yesterday's close but still 41 per cent lower from where it was trading a year ago.
In April, Potash Corp. said its first-quarter profit fell 45 per cent from a year earlier to $308.3-million (U.S.) because "fertilizer sales ground to a virtual halt." Revenue dropped to $922.5-million from $1.89-billion.
The world's largest potash producers are currently negotiating with China and India on a new three-year contract. Domestically mined potash is now being traded in China for about $450 a tonne, but until the contracts are settled analysts aren't sure where prices will settle. The uncertainty is such that Potash has suggested it may begin selling the commodity on the spot market rather than lock into a longer deal.
Despite the production cut, Potash Corp. expects demand to pick up later this year as farmers look to replenish lost nutrients. Most fields can go a year without fertilizer - farmers till the soil to redistribute the nutrients - but any longer than that and yields could be compromised.
"Although near-term potash fundamentals are very soft, the potash stocks have been outperforming the market," said Goldman Sachs analyst Robert Koort. "While we believe that long-term fundamentals for potash are solid, the short-term pain for producers will continue until prices drop to a level that more sufficiently drives inventory restocking."
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