By Leia Michele Toovey- Exclusive to Potash Investing News
The potash market is primarily controlled by Canpotex and Belarusian Potash Company (BPC). Canpotex is the marketing arm for North American potash producers, responsible for negotiating the long term contracts with potash consumers such as China and India. BPC, headquartered in Belarus but with strong ties to Russia, functions on the same level as Canpotex, settling long term potash deals as well as delivering the nutrient to its buyers. The long term potash contracts are generally agreed upon once per year. Because these two firms settle the long term contract prices, they essentially control the global potash price.
Potash is still available on the spot market; however, the spot market takes its pricing cues from the long-term market. The contracts involve agreeing up on a price, and an amount of product to be delivered at the price. Agreeing on long-term potash contracts is advantageous to both the producer, and the purchaser. The buyers are guaranteed price stability, and the sellers know that they will sell a certain amount of their product. Generally speaking, if a purchaser agrees to buy more potash, they have more negotiating power when it comes to settling on a price.
The long-term potash contracts are generally settled upon at the beginning of the year. This is not set in stone, sometimes negotiations extend, and sometimes consumers will come back to the table, provided that they find themselves in need of fertilizer. Consumers have also been known to stockpile the crop nutrient. This fact became apparent in 2008 when the purchasers seemed to all together avoid the market. Speculation was that they were opting to use their stockpiles over purchasing new potash, waiting for a drop in market prices.
Regardless of precisely when they come to market, potash needs to be applied to fields at minimum every 2 years. Skipping more than one year’s application will result in a decline in crop yields. Consumption of potash rises during the spring planting season, but in some parts of the world it rises in the fall planting season.
The way the potash market is controlled has led to many accusations of price fixing. In fact, Potash Corp of Saskatchewan (NYSE:POT), Agrium (NYSE:AGU), Mosaic (NYSE:MOS), and Russian and Belarusian producers are facing a class-action suit over the accusations. The accuser, Gage’s Fertilizer & Grain Inc., claims that these companies manipulate the supply of potash deliberately in order to keep the prices high. “Potash suppliers repeatedly attributed dramatic price increases to a `tight supply/demand balance’ when in fact a number of defendants had excess potash capacity,” Gage’s Fertilizer said in the complaint. “These statements were a pretext to conceal defendants’ conspiracy to restrict supply and fix prices of potash.”
This is not the first time that rumors of collusion have hit the potash market. In 2000, a group of fertilizer distributors and farm cooperatives alleged that North American potash producers conspired to raise prices in the late 1980s and early 1990s. The US Supreme Court tossed out this lawsuit citing insufficient evidence.
The accusations most certainly stem from the volatility the market has experienced in the recent past. During the commodity bubble of 2003-2008, potash was one of the hottest commodities surging from obscurity at $200 a tonne to a staggering $1000 a tonne. Analysts loved the potash stocks, claiming that investing in potash companies was a no-brainer because “people have to eat” and “farmers have to buy potash.” They were thought of as recession proof stocks and considered safe investments. This market enthusiasm did not last long as investors dumped potash stocks during the market crash of 2008 and have largely stayed away from the sector through 2010.
Currently, the potash market is struggling to regain traction. The deflationary environment, the lower value of grain crops, and the hesitation of farmers to return to the market have all contributed the fertilizer’s fall to $342 per tonne. This low was reached in February 2010, and as of July 2010 potash is selling for around $368 per tonne.