Potash and Phosphate Q411 Outlook

Despite debt burdens and weak macroeconomics threaten to derail the global economic recovery, the potash and phosphate markets are positioned to post a strong fourth quarter. The prices that producers have charged for both crop nutrients have rallied aggressively so far this year, with the biggest gains made in the third quarter, when producers were able to ink supply contracts with their largest customers, including: India, China, and Brazil.

Earlier this year, India and Canpotex engaged in a lengthy tug-o-war for prices. Eventually, India was willing to fork out the cash to purchase potash, despite earlier threats to take a "potash holiday." In August, Canpotex, agreed to supply Indian customers potash at an average $500 per ton for the last quarter of 2011. The deal extends into the first 3 months of 2012; however, prices will go up by $30 per ton in the New Year. In the first week of September, PhosChem, Potash Corp (NYSE:POT) and Mosaic's (NYSE:MOS) phosphate marketing arm, increased phosphate prices for the next 6 months by $65 per ton.

The fertilizers are being supported by a robust grains market, with low inventories and high prices providing plenty of incentive for farmers to boost their yields, and the best way to increase agriculture output is to fertilize. Potash is currently selling for around $520-$550 per ton, and for the fourth quarter, prices will likely see an increase in the range of $30-$50 per ton, depending on the contract. Purchasers will shell out around $680 per ton (including freight) for phosphate to be delivered in the fourth-quarter 2011.

Prices for both phosphate and potash on the spot-market should benefit from the same fundamentals buoying the contract markets. Inventories of both phosphate and potash are at record lows, and with farmers rushing to settle long-term contracts, the amount of material left on the spot-market is slim. Earlier this year, fertilizer market analysts warned that phosphate inventories were so tight that there may be delays for farmers trying to purchase phosphate on the spot market. Both Canpotex and BPC have already stated that farmers have already committed to purchases through the fourth quarter. There is even a rumor that farmers are already looking into locking down supplies for the spring 2012 planting season.

While it is fairly certain what potash prices for the fourth quarter will be, thanks to the fact that majority of potash contracts are settled well in advance, it is hard to determine, with the same amount of precision, how spot prices will react in the fourth quarter. That being said, global potash shipments are expected to climb to 58 million tons in 2011, similar to the previous peak in 2007. The rapid rebound in potash demand before production was able to ramp-up is the main reason behind the bull run in fertilizer prices so far in 2011. Low inventories have granted potash and phosphate producers plenty of reason to hike prices so far in 2011, and purchasers have been bearing these increases. There is no reason why this pattern should change in fourth-quarter, even though the global economic picture remains bleak, this does not appear to be impacting the agricultural sector.

Market participants should prepare for a very volatile spot market in the fourth quarter, due to stockpiles of various grains remaining at record lows. The primary obstacle faced by the grains market is that weather is a key factor in predicting supply. Now, with the markets needing "perfect yields" of grains, for a few seasons, before stockpiles will be able to build back up, any sign of bad weather can potentially send grain prices higher. Alternatively, perfect weather could cause a steep price correction. Fertilizers will mirror this pattern, as a great deal of the sentiment behind potash and phosphate relates to its use as a means to increase grain output.

Securities Disclosure: I, Leia Toovey, have equity interests in Potash Corp of Saskatchewan. -Potash Investing News