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Once mighty potash falls

The notion that agricultural commodities were impervious to the spread of the economic crisis now in the US, took a huge hit Thursday, as the price for potash dropped considerably.


October 3, 2008
By Globe and Mail

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October 3, 2008

Vancouver, BC -Potash Corp. of Saskatchewan Inc. was Canada's unlikeliest stock market darling, producing a commodity few investors understand. But the producer of raw material for fertilizer rallied to become the most valuable company in the country and helped drive Toronto stocks to a record in June.


On Thursday, it was the biggest force in the dramatic selloff in commodities stocks, sinking the country's benchmark equity index below 11,000 for the first time in two years.

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A downgrade by Merrill Lynch & Co. to underperform triggered the chaotic selling spree, played into fear in the market about the global credit contagion hitting this until-now robust sector.


Potash Corp. fell 26 percent, down $35.50 to $101 and down 59 percent from the height of $244.03 a share that it reached in June, when it was propelled by soaring prices of food and fertilizer.


In three-and-a-half months, the company has gone from the most valuable in Canada –worth $77 billion at its apex –to losing its place in the top 10  standing at Thursday's close at No. 11, worth $31 billion –with $10.8 billion of that torched Thursday.


The wild decline highlights the controversy surrounding long-term demand for potash and other fertilizer products.


Investors are scrapping the belief that led them to bid the stock up earlier this year: that fertilizer prices will continue to rise as demand for food grows, even as the economy slows.


Now, prices for corn, wheat and soybeans are plummeting along with other commodities prices. “The near-term fertilizer demand outlook has become more uncertain,” analyst Don Carson of Merrill said in a report Thursday morning.


Mr. Carson cut his rating on Potash Corp. and other fertilizer names after U.S.-based rival Mosaic Co. admitted late Wednesday its quarterly profit was far short of expectations. Mosaic stock fell 41 percent Thursday. It is down an astounding 75 percent since its June peak. Shares of Calgary-based Agrium Inc. were down 23.03 percent.


But Potash Corp. says the long-term factors underpinning fertilizer demand remain strong and have coalesced over several decades. The food-fertilizer story is sound, the company said. The reasons: Global grain reserves remain low, and the middle class in China and India keep boosting food demand. There is a shortage of potash, and new supply isn't arriving soon.


“These corrections tend to happen in the extremes both directions,” said Bill Johnson, a Potash spokesman.


Potash Corp.'s swoon has come as investors have fallen out of love with commodities in general, said Wayne Brownlee, chief financial officer of Potash Corp.


“One thing that happened, especially in our sector, was we got a lot of momentum money into the stock, [people] who were buying on momentum as opposed to perhaps buying on a thorough understanding of the fundamentals. Basically, they're in and out, like the tide in the ocean,” Mr. Brownlee recently told The Globe and Mail.


Unlike crude oil and natural gas, both of which are far below their peaks earlier this year, the price of potash is in fact likely to rise higher, based on recent spot trades. Potash is not traded like oil and gas, which, along with other commodities such as wheat and gold, are traded daily on bourses that include the New York Mercantile Exchange and the Chicago Board of Trade.


Notwithstanding the occasional spot sales, potash deals are mostly conducted bilaterally between a buyer (such as China) and the seller (the producer) for contracts usually one year in length.


Among the factors driving potash stocks lower is the questionable longevity of high potash prices. There is palpable worry among investors about whether expensive potash is becoming unaffordable for farmers, and there are more worries about crop prices falling back.


In April, Potash Corp. and two other companies inked a deal with China for potash this year at almost $600 (U.S.) a tonne, a stunning price, given that it was more than triple the year-earlier figure.


Then, prices went even higher, with spot sales around $1,000 this summer. And potash on a spot basis has been leaving the Vancouver harbour at $800 a tonne.


Merrill Lynch's call to sell Thursday was based in part on potash prices not reaching heights some producers think they can get to. And there have been earlier warnings. Scotia Capital Inc. grew wary in the summer about fertilizer stocks, as critics said the stocks' valuations looked overextended, with commentators such as Citigroup's chief stocks strategist warning of a “dot-corn” bubble.


“We do accept the hype has gone away because people discovered this and fell in love with it. It's like the first date and second date but then it becomes routine,” said analyst Terence Ortslan of TSO and Associates. “But nothing has changed fundamentally, absolutely nothing has changed.”


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