U.S. farmers look poised to offer battered North American potash miners a sorely needed respite after the breakup of a trading alliance between Russia and Belarus.
The exit of the world's top producer of the pink crop nutrient, Russia's Uralkali OAO, from Belarusian Potash Company and the miner's switch to a volume-driven strategy has weakened potash prices. In the wake of that development, off-shore buyers to the sidelines to digest the biggest changes to global potash trading since BPC formed eight years ago.
The breakup escalated into a diplomatic row after Belarus arrested Uralkali Chief Executive Vladislav Baumgertner and Russian media has speculated that the main owner of Uralkali, Suleiman Kerimov, may be under pressure to sell his stake so the alliance can re-form.
Half-a-world away however, U.S. growers, who pay a premium for potash compared to Chinese and Indian buyers who negotiate bulk purchases, may offer relief to miners like Potash Corp of Saskatchewan and Mosaic Co.
Flush U.S. farmers are expected to deliver traditionally strong autumn demand for the crop nutrient, even as off-shore buyers hold out for lower prices.
U.S. farmers will have ample reason to apply the fertilizer this autumn at normal levels once they wrap up the harvest, according to a Reuters poll of 11 farm retail dealers, who buy crop nutrients from wholesalers and sell fertilizer to farmers.
The United States is reaping what's expected to be a record-large corn crop and its fourth-biggest soybean crop, providing farmers ample income to buy potash, a fertilizer that boosts yield and promotes root growth, dealers said.
"We're pulling off incredible yields on corn and soybeans that take a lot of potash and phosphate," said Larry Jayroe, Memphis, Tennessee-based regional fertilizer manager for Jimmy Sanders, a U.S. chain of farm retail dealers.
"What (farmers) made on wheat, plus what they made on soybeans, that's a grand slam, not a home run."
While U.S. fertilizer prices will still be well down from a year ago, strong autumn demand could help stabilize earnings and shares of Potash Corp, Mosaic, Intrepid Potash Inc and Agrium Inc, which have been under pressure since the mid-summer split.
Shares of Potash Corp and Mosaic, the two biggest North American producers, have fallen 18 percent and 15 percent respectively since BPC collapsed on July 30.
Potash Corp shares stumbled on Friday after the Saskatoon, Saskatchewan-based miner warned quarterly profit would be below analysts' expectations.
Yet David Hintzsche, president of his family's farm retail business in north central Illinois, the heart of the U.S. corn belt, said he's "cautiously optimistic," farmers will be brisk potash buyers.
"I think demand will be pretty good in our area," he said. "(But) those decisions will be made a lot closer to the time of application, especially with potash prices falling. There's really no incentive for people to order potash before they need it."
Eight out of 11 U.S. farm retailers surveyed said farmer potash demand looks about normal, while two said it was weak and one described it as strong. Reuters received responses from dealer companies based in Illinois, Iowa, Tennessee, Ohio, California, Indiana, Nebraska and Minnesota.
Another reason farmers are keen to apply fertilizer is that some applied lighter amounts a year ago after a severe drought, said Bill Wolf, president of the plant nutrient group at The Andersons Inc.
The dealers also said they're backing up their optimism with their own orders.
Nine out of 11 retailers said they are buying about the same volume of potash as usual from their wholesale suppliers - such as Potash Corp and Mosaic - despite a bigger than normal build-up of supply at the mine level and falling prices.
In a normal autumn, farmers apply about one-third of the potash used for fertilizer annually in the United States, which has ranged in recent years from about 4.5 million to 5.4 million tons annually, according to data from The Fertilizer Institute and NPK Fertilizer Advisory Services.
Slow Harvest a Risk
To be sure potash producers, like farmers, are at the mercy of the weather. The U.S. harvest of corn and soybeans was moving at the slowest pace in four years, according to a U.S. Department of Agriculture report on Sept. 30, raising concerns that farmers may not have time before winter to spread as much potash as they would like.
"The thing that really scares me is we (could) have another 2012 - a terrible fall because of weather and nobody buys anything," Jayroe of Jimmy Sanders said. "That could be ugly."
Potash Corp, Mosaic and Agrium have all lowered their third-quarter guidance, with Potash Corp, the first to report quarterly earnings on Oct. 24. Potash Corp said its reduction reflected lower than forecast potash sales volumes, but those are understood to be mainly off-shore shipments.
Disappointing U.S. fall sales could force North American fertilizer producers into a dilemma between production cuts to underpin prices, or a new emphasis on volume over price heading into 2014 that would ramp up a global fight for market share.
It's also possible - although not at all predictable - that Russia and Belarus could quickly patch up their differences and return to a disciplined production model that once again makes strong prices the goal over market share. Such a move could lead buyers to conclude prices have hit a floor, resulting in strong off-shore demand in the fourth quarter.
The weather notwithstanding, fertilizer producers say they expect a strong U.S. season because grain prices are high enough to justify farmers spending more to maximize yields of next year's crops. Still, Mosaic admits noticing some hesitation.
"It's really a matter of psychology now that the supply chain is reluctant to put product in when you have (Uralkali) stating - and now they're trying to pull that back and retract - that 'we might do $300 or lower than $300 (per tonne) potash," said Mosaic Chief Executive Jim Prokopanko during the company's analyst day on Oct. 7. "Farmers in Nebraska, palm plantation owners in southeast Asia, they all heard that. I don't think it's going to happen."
The price of standard muriate of potash (MOP) in southeast Asia averaged $365 per tonne, down from $490 a year ago, while the U.S. corn belt price of granular MOP averaged $389, a steep drop from $504 a year earlier, according to data released Oct. 4 by Mosaic.
Agrium said Oct. 8 that it expects a strong U.S. application season for potash and phosphate, while Potash Corp is in a quiet period ahead of reporting quarterly results and declined to comment.
Analysts aren't so sure better times are around the corner.
Only six brokers rate Potash Corp as a "buy" or "strong buy," with 17 rating is as a "hold" and four giving it an "underperform" recommendation, according to Thomson Reuters data.
Three months earlier, prior to BPC's breakup, 17 rated Potash as a "buy" or "strong buy", 10 as a "hold" and two at "underperform."
Not only is off-shore demand soft, but there is excessive supply.
Supplies at the mine level were some 31 percent larger in August than the five-year average at the mine level, according to industry data.
"The signal out there to the farm community is that potash prices are unstable, that it's not likely they're going to increase," said Gene Gauss, vice-president of fertilizer and nutrition for California-based Wilbur-Ellis. "Farmers are just waiting for when they need it."