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scott barlow

Potash Corp. of Saskatchewan, Agrium Inc. and all global fertilizer stocks are going to get blasted today. The end of a Russian marketing cartel is the direct catalyst, but in truth, the pressure has been building on the sector for some time.

Early Tuesday morning, Bloomberg reported that Russia's OAO Uralkali, the world's largest potash producer, had abandoned a deal with the government of Belarus that was designed to limit production to preserve the commodity price. The news was interpreted as a sign of a price war in the fertilizer sector, setting the stage for OAO Uralkali to reduce inventories at the expense of everyone's profitability.

High fertilizer inventories are a global problem. China has improved domestic production of fertilizer and as a result, imports have fallen. June fertilizer exports to China were lower by 11 per cent year over year.

The 2012 drought in North America has also added to headaches for the industry. Last year's high corn prices led to an increase in supply for 2013. Corn prices – regarded as the best means of gauging future demand for fertilizer - are now falling, taking the stock prices for global fertilizer companies with them.

U.S. inventories of potash are 37 per cent above the 10-year average, according to Bloomberg data. This creates a huge overhang on the commodity price, particularly if OAO Uralkali puts downward pressure on prices in Asian markets.

These three factors – reduced Chinese demand, low corn prices and already high inventories – result in a bleak environment for the sector that will likely continue until global inventories are run down. Stocks are already getting crushed and there's really no light at the end of the tunnel at the moment.