How commodity bull markets end: check out today’s fert action

Don’t worry, the long term commodity bull market probably isn’t dead.

But today’s plunge in share prices for major potash fertilizer manufacturers, including Potash Corporation of Saskatchewan (down about 20 percent right now), shows how easily the commodity bull market apple cart can be overturned.

Look at this chart:

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That’s an awe-inspiring drop.

It was provoked, as was an equivalent drop in the shares of other fertilizer manufacturers today, by news that a Russian fertilizer manufacturer was walking out of a European cartel that helps force fert prices higher by holding back supplies, like OPEC does with oil.

Some analysts expect potash prices to drop from about $400 per tonne to $300. That doesn’t do much for profit margins.

This is a fertilizer-specific story and you might think there’s not much applicability to crop and meat prices, especially because the fert market is rigged by outrageous cartels like the one in Europe or our very own here in Canada. That’s not true of crops and meats, right?

I’d say: Wrong.

Our ag markets are ridiculously rigged by bogus commercial and government actions that radically affect supply and demand. With 40 percent of U.S. corn going to ethanol, how can anyone claim crop prices aren’t profoundly manipulated by artificial structures? And artificial structures can fall fast, as the unravelling of the European potash cartel reveals. The ag commodity bull market story is based on the idea that the world wants to eat more and more and that farmers just aren’t going to be able to keep up, so there will be a long, long, long demand-driven bull market. But what happens if countries like India and other backward places drop their opposition to genetically modified crops and their farmers start cranking out higher and higher yields? There are lots of ways like that the world could both boost crop and meat production and reduce consumption. All of a sudden, bull market stories of chronic and permanent shortages become stories of supply gluts and declining demand.

Look what’s been happening with the perception of the world running out of oil. The Peak Oil panic has disappeared faster than anyone would have predicted back in 2008, when it was in vogue. Now the world seems awash in energy sources and people have gotten so relaxed about energy supplies that the Obama administration appears to be getting ready to permanently reject our Canadian oceans of heavy oil.

I’ve been following the commodity bull market since the early 2000s, when it first appeared, and I’m guessing it’ll last a handful more years. Perhaps, especially with crops, we’ll get another big burst of prices when another shortage appears and maybe we’ll even get higher highs than we got in last summer’s Midwest drought rally. It’s certainly possible.

But at some point market psychology will likely profoundly change and we’ll enter a long term commodity bear market. Psychology is what takes prices high and it’s what’ll take prices low. To see how that sort of psychology is playing out today in the fertilizer market, just read these lines at the end of a Business Insider story on today’s plunge:

“There was a point a couple of years ago, when it seemed like these companies could do no wrong. There was reportedly a shortage of raw materials, and we were in the midst of this massive agriboom, which was partly predicted on endless demand from China. Now the commodity boom has peaked, and the China story isn’t so exciting.”

I don’t think farmers will face low and loss-making prices for crops for a few more years, but I’m sure we’ll enter a period like that at some point, so take a lesson from the fertilizer market today and have a Plan B in your desk drawer for the kind of crappy days that we used to experience, when crops seemed like permanent losers.

 

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