P&KToday: Oversupply Weighs on Potash Profits

January 29, 2016 11:46 AM

P&K was mixed on the week with DAP and potash slightly higher.

  • DAP $74.44 below year-ago pricing -- higher 4 cents/st on the week to $499.49/st.
  • MAP $77.24 below year-ago -- lower $4.64/st this week to $515.91/st.
  • Potash $101.41 below year-ago -- higher 55 cents/st this week to $381.21/st.
  • The average cash corn price figured in to P&K this week is $3.57 3/4.
  • The national average corn basis firmed 1/2 cent from last week to 3 cents above March futures. The national average cash corn price firmed 1/4 cents from last week to $3.71 3/4. Basis is softer than the three-year average, which is 5 cents above futures for this week.

PotashPotash producers continue to struggle amid rising potash stockpiles and declining revenue prospects. Executives at PotashCorp (POT) say they are adopting a more cautious outlook as 2016 does not look like it will offer a recovery for potash prices. Shares in the company reached a nine-year low on Monday, crimping dividends by 34%. The company noted earlier this week that they do not plan any more mine closures, but 2016 will be a tough year in the potash sector. "Weaker fertilizer prices late in the year reduced our earnings for the quarter, giving rise to a more cautious outlook for all three nutrients as we begin 2016," said PotashCorp President and Chief Executive Officer Jochen Tilk in a company press release.

Potash producers around the globe look to China at this time of year when that country typically signs supply contracts, the price of which set the global price floor. Last year, Belorussian Potash Company (BPC) undercut the rest of the industry when it signed a deal with China for $15 per ton under market expectations. If an outside producer like BPC undercuts prices again, the repercussions would be felt across the sector and companies will continue to struggle to maintain profitability.

Painful as it is for potash producers, end users stand to benefit and it comes at a good time for farmers. With margins just a tight on the farm and following two years of solid crop yields, growers will be able to replace potassium in the soil at a very affordable rate. At prices reported to the Inputs Monitor, if a grower applies 180 pounds of anhydrous per acre, it will cost $64.80 per acre.

PieChartIf fertilizer costs are to account for 18% of expected new-crop revenue, based on December 2016 futures (at midmorning Friday at $3.91) we have $110.75 to spend on fertilizer altogether. Subtracting 180 lbs/acre for anhydrous, we are left with $45.95 to spend on P&K. That does not leave a lot of room, but at current prices of 32 cents per pound, a 100 pound per acre application would run $32.00 per acre. That does not leave much on the table for phosphate, which is overpriced within the fertilizer space. It is more likely farmers will absorb the added expense of phosphate and trim potash applications accordingly. Still, at $16 per acre, a 50 pound per acre application rate of vitamin K is within reach and would benefit the soil profile, and add yield potential.

*I understand lots of farmers will supplement spring N applications with UAN or some other form of sidedress, but by the pound, all of our nitrogen products are priced very closely together, and the pie chart at right gives us a fairly accurate visual of the balance between overall returns per acre versus 18% spent on fertilizer.

PhosphatePhosphate fundamentals are set to improve as China has eliminated export taxes on phosphoric acid and decreased taxes on phosphate rock shipments. Variability and uncertainty in acid markets have been a major supportive factor in phosphate manufacture and producers have been making purchases hand-to-mouth in recent months. Global prices favor imports over U.S. produced product and phosphate from foreign shores are priced below domestic values. That will keep U.S. phosphate producers on the sidelines for the time being.

Along with $64.80 for 180 lbs NH3, $16 per acre for 50 pounds of potash, the remainder gets us $29.95 in phosphate. At today's price per pound, that's 57.6 pounds per acre of DAP. Those P&K application rates are a little on the skimpy side, but as farmers look to manage risk in this environment of low crop returns, it will be important to know the limits of the inputs budget.

Despite a near panic among potash producers, prices are not expected to rebound for another year. In fact, some experts are still projecting continued softness for retail potash prices. Phosphate is less certain but as China lowers export prices for feedstocks, U.S. production may revive slightly. But U.S. phosphate producers have been very conservative as the ag sector weathers the economic storm of low prices, and supplies are relatively balanced globally.

The downside for phosphate is limited but weak demand prospects will also help limit upside risk for the time being. Potash prices will remain at current levels due to the global oversupply and will very likely continue to fall until spring demand interrupts the downtrend. For now, wait on booking P&K until we observe a clear price low.

By the Pound --

DAP is priced at 52 cents/lbP2O5; MAP at 48 1/2 cents/lbP2O5; Potash is at 32 cents/lbK2O.

The following is an updated table of P&K pricing by the pound as reported to your Inputs Monitor for the week ended January 22, 2016.

P&K pricing by the pound -- 1/29/2016

DAP $P/lb

MAP $P/lb
Potash $K/lb
$0.48 1/2
$0.60 1/4
$0.56 1/4
$0.40 1/4