Good News for Some Long-Term Potash Investors

It’s been a wild year for fertilizer stocks. Many investors who have been loading up on agriculture stocks right along with the hedge and mutual funds have taken some big lumps over the past couple of months, but it looks like the panic selling period is behind us.

When overleveraged traders and hedge funds are forced to sell anything and everything, we’re all forced to relearn that fundamentals mean next to nothing in a bear market. But that could be slowly starting to change right now. And if it does, the long-term outlook for fertilizer and potash should be getting a boost.

As we’ve already seen, miners who enjoyed the run-up in commodities are now dealing with falling commodity prices. A lot of marginal mines have been forced to shut down.

Over the long-term, mine shutdowns are very good for commodities. The global economy will turn around and demand for commodities will be back on the rise, but if this downturn lasts long enough and more mines are forced to shut down, we could be right back where we’ve been over the past five years when supply was significantly lagging demand.

Of course, a few commodities have been able to weather the storm. Gold has only fallen about 30% from its highs earlier this year, molybdenum has held up relatively well, but one of the strongest has been potash.

The fertilizer ingredient, which is priced in private negotiations between buyers and sellers, hasn’t experienced virtually any downturn at all. After soaring to $1,000 a tonne over the summer, potash prices haven’t taken a big downward swing like most other commodities. That doesn’t mean potash companies aren’t expecting lower prices in the near-term.

Earlier today, the Russia-based potash producer Uralkali (URALY) announced it will be cutting potash production in 2008 (huh…seemed unthinkable just a few months ago, right?). In response to the announcement (view original here), the company stated:

“The decision … is prompted by the current decrease in potash fertilizers purchased in the global market … The planned reduction in production offers Uralkali a good opportunity to repair and modernise its facilities that for the last several years have been used at their full capacity.”

“Liquidity crisis is hindering the farmers’ ability to purchase and use fertilizers.”

It looks like no one is immune from the credit crunch, not even farmers.

The problems in the potash industry don’t stop there. Yesterday, Rio Tinto (RTP) announced it will “cautiously” push forward with its potash mine development plans in Argentina.

The South American country has watched its stock market collapse and a big part of the nation’s pension plan disappear right along with it. To make up for the losses, the Argentine government is considering ratcheting up export taxes. This would greatly impact the profitability of the Rio Tinto’s potash mine currently under development.

Despite all of the bad news, at the end of the day, I consider it mostly good news for potash stocks over the long-term.

The major North American producers like Potash Corp (POT), Mosaic (MOS), and Agrium (AGU) will continue to produce potash. They’re still making a lot of money. But Uralkali drawing down production is a sign there could be even weaker times ahead for potash prices.

Over the long-term, potash producers will be seeing even more gains. After the recent slide, fertilizer stocks have most of the potential bad news to come already built into them. There is more potash production expected to come on line over the next decade, but these events prove expectations are probably a bit too high for the actual growth in potash production. As a result, we could be in for another solid (although somewhat more volatile) slide from here.

For the time being, there are still plenty of quality agriculture stocks out there which are just as undervalued as fertilizer stocks. After what has happened over the last couple of months, I can’t tell you where they will be in the next week or month, but if you’ve got a couple of years to wait, they’re probably going to be significantly higher.

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