Citigroup Analyst Pessimistic on Fertilizer Industry

After holding off from buying fertilizers last year, industry analysts have expected farmers to return to their potash-buying ways this fall, but a recent survey among growers and distributors has Citigroup Global Markets less than confident this will happen any time soon.

P.J. Juvekar, analyst with Citigroup, recently conducted a survey, talked to fertilizer distributors, and even went to a farming convention in Illinois.

"Based on our discussions it seems that the fall fertilizer application season is likely to be weaker than expected," he said in a note to clients. "Our earlier thesis that farmers could not skip application indefinitely ... still stands, but application may be delayed past fall."

Several factors concern Mr. Juvekar, including the fact that farmers may be harvesting their crops two to four weeks later than usual, delaying and limiting the fall fertilizer application window.

"Every month that passes without normal volumes increases the risk a producer will break in price, which is what happened in July when Silvinit lowered price sto US$460 a tonne," he said. Silvinit agreed to a contract with India earlier this summer.

As well, while most expected China to agree to terms with producers shortly after India did, so far that has not happened. There is definite risk that China will also use volume as an incentive for lower prices.

At the same time, while producers have historically been able to hold rank on pricing, the recent Silvinit deal shows there are cracks in the facade.

"In the recent weak demand environment, some producers have shown a willingness to place volume over price to generate cash. Potash is a global commodity and pricing resolve is only as strong as the weakest link in the chain," he said.

Yet another problem is shrinking income for many farmers as corn prices have plummeted 25% year-to-date, with the U.S. Deparment of Agriculture forecasting farmer net income to fall 38% to US$54-billion. The current price of US$3.15 a bushel is also not enough, as one Illinoisian farmer claimed to need prices at US$4 a bushel to break even.

All of this has left Mr. Juvekar with a rather pessimistic view of the industry in the short term. He has cut the forecasted potash export price in for 2010-2011 to US$400 a tonne from US$450.

He is also dropping ratings on both Potash Corp. of Saskatchewan Inc. (POT) and Mosaic Co. (MOS) to Hold from Buy while slashing target prices to US$98 and US$54 from US$115 and US$62 respectively.