Canadian potash may ease China corn shortage

The growing gap between China’s corn needs and its domestic production could be narrowed if growers applied more potash, says PotashCorp.

And that appears to be happening.

China imported 1.9 million tonnes of the nutrient during the first quarter of 2012, and sales have been brisk in the second quarter.

“The Chinese know they need to catch up after a few years of falling behind on their potash application,” PotashCorp. president Bill Doyle told investors attending BMO Capital Markets’ 2012 Farm to Market Conference.

Chinese farmers have been applying significant amounts of nitrogen to their corn crops but skimping on potash. Doyle said there is a big opportunity for China to boost yields for a key commodity that is increasingly in short supply.

One of the burning questions in the grain industry is how much corn China will import in 2012-13. That is expected to have a big impact on corn and other crop prices.

Industry estimates range from a low of two million tonnes to a high of 12.5 million. The U.S. Department of Agriculture is forecasting seven million tonnes, up from five million tonnes in 2011-12.

China’s future corn imports could depend on its potash imports. Doyle anticipates continued good movement of the commodity to China during the second half of 2012 as growers address soil nutrient deficiencies.

“Are they going to import potash or are they going to import corn? I say both,” he said.

Farmers could also benefit from increased potash use in India, where Doyle said the ratio of nitrogen to potash application is out of whack.

“This is one of the key reasons (India’s) yields are approximately one-quarter of those achieved in the United States,” he told investors.

India’s potash purchases have dropped in each of the last two years. The country’s growers had been making progress on their nitrogen-to-potash ratio, getting it down as low as 4.7 to one in 2010.

Last year the ratio jumped to higher than six to one, primarily because of a delay in potash contract negotiations. This year Doyle estimates it will fall somewhere in the range of 6.5 to 6.8 to one.

“That’s going to affect yields in India,” he said.

A short crop would put more inflationary pressure on food prices, which is a politically sensitive issue in India.

“It’s a lot more efficient to import potash than it is to import food,” said Doyle.

India is the main reason why global potash consumption has dropped below the long-term trend of three percent annual growth during the last couple of years.

“We think 2013 is going to be a big rebound year in potash in India because they just can’t keep doing what they’re doing, and they know that,” he said.

Another factor behind slumping potash sales is the “destocking” practices of dealers, who are in-creasingly afraid of getting caught holding high-priced product if markets drop.

Dealers acted cautiously in early 2012, reducing their inventories to the point that it caused a North American fertilizer shortage.

“Demand has picked up significantly in the second quarter and we expect that will carry into the second half of the year,” said Doyle.

He believes there will be plenty of fall demand for potash in North America, despite a U.S. Department of Agriculture forecast of a record 14.8 million tonne corn crop in 2012-13 based on yields of 166 bushels per acre.

A large corn crop could decrease prices, which could in turn reduce corn acres next year and lower demand for potash.

“I think the USDA has this set up for perfection at the moment,” said Doyle.

The fortunes of the U.S. corn crop depend heavily on June rain. Doyle said the USDA predicted an average yield of 164 bu. in 2010, but it came in at 152 bu.

Even if U.S. growers harvest a record crop and corn prices fall to $4 per bu., he said, it would still be profitable for growers to spend money on fertilizer for next year’s crop.

Doyle anticipates a rebound in global potash demand starting next year.

History shows growth may even exceed the trend line for the next few years as growers compensate for two years of nutrient neglect.

PotashCorp. has been gearing up for increased global food and fertilizer demand.

In 2003, it embarked on a massive $9.7 billion expansion and debottlenecking project at all six of its Canadian potash mines. Three-quarters of the capital has been spent and five of the nine projects are complete.

Most of the projects will be complete by the end of the year.

Operational capacity will balloon to 17.1 million tonnes of annual potash production, up from 10.11 million tonnes when the project started.

Doyle has heard of 62 other potential potash mine projects considered around the world.

“We see no more than a handful of those coming to being,” he said.

He is tired of hearing about new potash mines that will be up and running by 2015.

“It is humorous to me at the very least because it’s just not possible.”

Doyle said brownfield, or expansion, projects typically take more than seven years to complete, while greenfield, or new mine, construction is far more daunting.

It takes three years just to put a shaft in the ground.

“We don’t see a lot of these talked-about projects coming to fruition,” he told investors.

Another factor working against new projects is Saskatchewan’s superheated economy. The price of steel, concrete, copper and labour are all on the rise.

“Between 2013 and 2015, Western Canada is going to have a big labour crunch. You’re going to see a lot of inflation on the labour side,” said Doyle.

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