Potash: Buy, Sell, or Hold?

Rock salt debris mountain near Wathlingen, Germany.

Take a look at the literature over the last three years and you’re likely to come away just as confused as when you started. “The future looks bleak.” “Potash capacity expected to rise 37% between 2011 and 2015.” “Uralkali declares price war on potash market.” “Potash demand projected to increase 3.1 percent between 2011 and 2015.” “Potash markets peaked in 2011.” “Potash: 2013 the Year of Demand Recovery.” And if that wasn’t enough fuel for confusion, “Real estate prices in Canada soaring on the back of petroleum and potash production.” So what’s going on to generate such disparate opinions?

Let’s rewind to 2011 and track this through. In that year, the Food and Agriculture Organization of the United Nations released a report entitled, Current World Fertilizer Trends and Outlook to 2015, in which they reported:

“Consumption/demand projections based on agronomic considerations and other market factors indicate the world potential balance of potash to increase from 42,700 (thousand tons) in 2011 to 59,600 (thousand tons) in 2015,” and the aforementioned, “…demand for potash is projected to increase by 3.1 percent between 2011 and 2015.”

Granted, it was just a projection, but based on market activity at the time, it was entirely reasonable. Then the bubble burst. Emerging markets – unbeknownst to all at the time – topped in late 2011 and began a precipitous decline through the start of 2012. The world looked bleak.

Chinese and Indian contracts expired and – as of November 2012 – had not yet been renewed. That was a big hit to the market. China accounts for about 20 percent of potash consumption, followed a close second by the Indian subcontinent. By their actions, these two major consumers took the potash market hostage.

Fast-forward to the beginning of 2013. Potash shipments for 2012 were estimated at 50 to 52 million tons. Not too bad. With Chinese and Indian contracts nailed down, market insiders looked ahead to 2013 and forecasted a global potash shipment increase to 56 – 58 million tons. 2013 was indeed shaping up to be the year of demand recovery.

Mid-2013, however, still yielded headlines like, “Potash Future Looks Bleak.” Then, in August, Uralkali, a large Russian potash producer, made a bold move, switched their business strategy, and opted for volume over price. Something was going on. Confused? Not really surprising. This shift would serve to increase the total potash available, drive prices down, and introduce competition into the market. These lower prices coupled with competition could eventually lead to lower food prices as farmers pass on their savings. So does this signal something good or something bad for the potash market? Looking at the numbers, it’s hard to tell.

Nevertheless, major players seemed to follow suit and production ramped up. We see evidence of this production through unlikely and indirect methods – like studying sunlight by looking at the moon. The Vancouver Sun reported early last month, through the Saskatoon Housing Initiatives Partnership, that real estate markets are booming. They are booming because of potash production. All the people involved in potash production – from land holders to day laborers – are benefiting from this move. As a result, real estate markets react accordingly. Interesting, no?

Though this headline may seem incidental to a discussion of commodities markets, it actually strikes at the heart of the matter: fertilizer is intimately connected with people…and there are a lot of people on the planet right now.

Last year, world population reached 7.2 billion. That number could increase to 8.2 billion by 2025 and reach 9.6 billion by 2050. Population increases demand food production increases. Dramatic population increases – such as those forecasted – demand dramatic food production increases. And dramatic food production increases inexorably lead to dramatic fertilizer production increases. Fertilizer is intimately connected with people.

But that’s not all that’s going on here; population is only one variable in this complex equation. Not only is population increasing but the wealth of that population is increasing in tandem. This new-found wealth is used to move many large groups of people away from simple subsistence diets to more complex and varied diets. As a result, food demand increases.

In addition, the so called “middle class phenomenon” is now in full effect. These emerging middle classes – which will almost triple in the next 15 years – have begun altering their eating habits even further to incorporate foods that require more fertilizer-intensive agriculture. People demand food. Food (production) demands fertilizer.

When we examine fertilizer production and demand through the lens of population growth rather than through the lens of market trends, we see a much clearer picture: potash demand will go up. It’s just a matter of time. Remember, over the long run (read five, ten, fifteen years), markets tend upward. There may be valleys along the way but the elevation averages up. But when time and investing are thrown into the same shaker, patience becomes all important. Several years ago, I remember seeing a graph reporting the performance of the mutual fund market over a forty or fifty-year period. Though there were definite ups and down (some large some small) along the way, the general trend was an increase from left to right. But to reap the rewards of this trend required the same thing that investing in the current potash market: patience and a willingness to go long.

So buy, sell, or hold? In the end, that’s entirely up to you. By all means, do your research but don’t get bogged down in the market numbers. It’s easy to get confused with all the contradictory information being propagated around the internet. Do what we did above and look at the problem through one lens at a time. Reducing the problem to its essential pieces can make for much simpler analysis and easier decision making. And remember to keep in mind what is really driving fertilizer production: an increasing population demanding more and more food.

Mike Luft

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