08/03/09 Gaithersburg, Maryland
All the factors that set the fertilizer bull market in motion in the first place are still here. Populations are still growing. Diets are shifting toward more fruits, vegetables and meats — all fertilizer intensive. As Potash CEO Bill Doyle says, “This will continue to put pressure on global grain supplies, as farmers are being challenged to produce more with land and water resources that are shrinking on a per capita basis.”
Fertilizers are a key part in meeting that challenge. And the farmers are financially in good shape to buy more. The debt-to-equity ratio for the U.S. farmer is only around 10-15%.
Overseas, farmers are subsidized directly. In India, the government picks up the tab of higher fertilizer costs. As Doyle pointed out: “With low grain stocks and low yields and 1.2 billion people, they’re not going to drop the ball. They’ll continue to support the Indian farmer.” China has also started to subsidize the Chinese farmer, helping out with seed, machinery and fertilizer.
But since fertilizer application rates fell around the world this year, it is hard to imagine a strong harvest. We will see. As grain inventories are already low, I expect we’ll need a strong planting season in early 2010. That means a strong demand for fertilizers.
At current pricing for potash, there is no incentive to boost production by investing in new capacity. The financial crisis also laid low any plans for more potash. A greenfield project — that is, one started from scratch — needs a higher price to make it work.
As Doyle pointed out, the cost for a 2-million-tonne facility in Saskatchewan is approaching $3 billion. That doesn’t include the infrastructure you need around it. Plus, it would take nearly a decade to get that new project generating a return on investment.
So from an investment point of view, potash still looks very good.
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