Indian woes could continue to weigh heavily on producers, with falling subsidies and currency depreciation resulting in fewer purchases by domestic farmers. It is important to note that farmers in emerging markets still view potash as an expensive luxury, which is not great news for exporters such as Potash Corp./Saskatchewan (USA) (NYSE:POT). Meanwhile, China has been subsidizing the overproduction of fertilizers, which has left massive amounts of nutrients at ports destined for export. The industry wants trade to go in the opposite direction.
PotashCorp is responding to oversupply by cutting production at its Lanigan and Rocanville mines. Management “expects to exit the third quarter with inventories at their lowest mark in years”. That will likely ensure that mines run full schedules in 2014, unless prices fail to pick up and India and China retain their current policies.
Industry round-up
Will international worries spook the earnings out of peers such as CF Industries Holdings, Inc. (NYSE:CF), Mosaic Co (NYSE:MOS), and Agrium Inc. (USA) (NYSE:AGU) ? Well, the pressure on potash prices isn’t good news for Mosaic Co (NYSE:MOS)’s expansion plans. The company is currently spending $6 billion increasing potash capacity to 11.6 million metric tons by 2015 and to 15 million metric tons by 2021. That could become a major cause for concern from investors who are skeptical that market forces are not headed for the predicted rebound.
Additionally, phosphorus nutrient prices have been weaker this year, which will hurt Mosaic Co (NYSE:MOS) even further. Nitrogen remains strong this year, but prices have wavered thanks to overproduction in China. That has weighed more heavily on products that are less value-added than nitrogen and ammonium derivatives, however. That alone could cushion the blow for Agrium Inc. (USA) (NYSE:AGU) and CF Industries Holdings, Inc. (NYSE:CF), although the latter deals extensively in phosphate.
As you can see, the entire industry will have to respond to market conditions. I expect to see other companies announce dismal results or production cuts when they report in the coming weeks. Brace yourself.
Foolish bottom line
Investors got a reminder of just how cyclical and unpredictable the fertilizer industry can be. This was the worst second quarter — i.e. growing season — for the company in years. However, there are plenty of positives for long-term investors. The company’s dividend has increased 950% in the last 10 quarters, efficiency remains at near record levels, major capex projects are nearly complete, and worldwide demand for nutrients continues to grow. Competition from China and less than friendly policies in India both may pose bigger risks than previously thought, but PotashCorp isn’t exactly facing a doomsday scenario. I cannot guarantee that shares won’t sink if selling prices continue to dip, but I think long-term investors have good reason to stay the course.
The article Are PotashCorp Earnings a Bad Omen for Fertilizer Producers? originally appeared on Fool.com is written by Maxx Chatsko.
Fool contributor Maxx Chatsko has no position in any stocks mentioned. Check out his personal portfolio, his CAPS page, or follow him on Twitter @BlacknGoldFool to keep up with his writing on energy, bioprocessing, and biotechnology.The Motley Fool owns shares of CF Industries Holdings (NYSE:CF).
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