Potash in 2012: Rising populations create new demand growth
Potash is a vital fertilizer for farmers around the world. As populations rise and land available for agriculture diminishes, the need for increased crop yields grows dramatically.
The increased demand for farmed food globally helped fuel the recovery of potash prices in 2010 and 2011, as farmers used more of the fertilizer to achieve the necessary crop yields.
Emerging markets have been the demand drivers for potash over the past few years, a trend that should continue through 2012.
While GDP growth of the BRIC countries may come down slightly in 2012, China’s economy is still expected to expand roughly nine percent. India is expected to grow at roughly eight percent. As middle class income grows in these markets, fundamental changes to the agricultural sector historically supports potash demand.
Ben Isaacson, Director of Global Fertilizers for Scotia Capital explained: “Emerging economies will continue to drive growth for potash consumption through the remainder of the decade. There are two reasons why. First, the middle class is rising in developing nations, which leads to higher per capita real income, and therefore an improvement to diet quality, such as increased beef consumption, as well as higher quality fruits and vegetables. This trend has resulted in a general tightening of global grain markets.
“For example, one ton of beef requires eight tons of grain, compared to four tons of grain for pork, and two tons of grain for chicken. As the supply/demand balance for crops continue to tighten, resulting in higher prices, there is a higher motivation by farmers to maximize crop yields through optimal fertilizer application.
“Second, developing nations have historically over-applied nitrogen and under-applied potash. A good rule-of-thumb ratio to use for nitrogen to potash is 2:1. In the U.S. and Europe, we typically see close to that ratio used. However, in India and China, the ratio is 5:1 and 7:1, respectively. Developing nation governments are under pressure to educate their farmers to use more potash and less nitrogen in order to ensure food security,”
China does have large inventories of potash, which may delay restocking in the first half of the year. However, Isaacson believes that it may be in China’s best interest to restock soon. “China is looking for an H1 2012 rollover at $470/t (CFR), while global suppliers are seeking a bump toward the $530/t area. With 4.5 million tonnes of potash inventories on hand, as well as another 4 million tonnes of production, we believe China could hold out until the summer.
“However, on the back of recent production cuts by PotashCorp and Uralkali, we believe it is in China’s interest to settle quickly while they have the upper hand. We are forecasting H1 2012 Chinese potash price of between $470/t and $480/t,” explained Isaacson.
Depending on the port of delivery, potash prices are currently ranging between $450 and $550/t.
The current apprehension over the direction of the global economy hangs over all commodities. However, the current fundamentals of the potash market, the continued growth of emerging markets, and the need for increased crop yields worldwide are supporting factors for potash prices. Many are expecting prices to rebound this spring as demand returns.
“There continues to be investor uncertainty as to how much of the seemingly soft fertilizer market is demand deferral compared to demand destruction.
We are starting to see early signs of potash buying interest increase in the
U.S. However, the European market should remain soft due to tighter credit conditions at the dealer and farmer levels,” stated Isaacson, adding, “There are definitely pockets of demand destruction occurring throughout the world — most notably in India — due to the subsidy reforms there, which could reverse on April 1.”
The fundamentals of the potash market remain strong. While food commodity prices are high, fertilizer prices lag behind their historical ratios. This factor gives the potash market an exciting upside potential.
“We have no doubt that we will see a return to fundamentals in 2012. The reason why lies in a comparison of farmer economics ahead of the fertilizer cycle crash in 2008/09 versus where they are today. Back in 08/09, fertilizer prices were in the $900/t to $1,200/t range when corn had dropped to less than $3/bu. Today, fertilizers are in the $400/t – $500/t range with corn over $6/bu.
“Simply put, farmer economics not only work, but they remain fantastic. Therefore, we’re convinced that what we’re experiencing today is mostly demand deferral and not demand destruction. If true, then we have pent up demand for spring application, and we should continue to see buyer interest begin to snap back over the near-term,” stated Isaacson.