“Playing the Potash Field” is the name of a report that Rabobank of the Netherlands, through it’s global Food and Agribusiness Research department, came out with today. In short their conclusion is that between now and 2020 the potash market is going to change, from one that is a near perfect oligopoly to one that will have supply exceed demand by 59 to 100%. Rabobank is usually not taken seriously in the Netherlands. They do not pay taxes the way other banks do and are considered to be a little boorish, they are in fact mostly farmers. So when it comes to matters pertaining to farming perhaps these guys know what they are talking about. Here is the big picture chart;

Running an oligopoly ( Canpotex) is doing something that is patently illegal if it were not the government itself that is not just blessing it but very instrumental in creating it. What it takes is a certain level of collusion (much like Encana and Chesapeake are now alleged to be involved in) resulting in price-fixing. This allows the participants to collect the “monopoly rent” by keeping supply well below demand. The polite term for these schemes is therefore a supply management system (eggs , milk , poultry etc.)

Brazil , India and China are going to move into the business or open mines in their own countries. Regardless how it is done the oversupply will materialize according to the report. That would imply that the monopoly rent disappears. How much is that?

This is from Wikipedia. Price per unit is on the vertical axis and number of units on the horizontal. Less units the higher the price, so the demand curve slopes down. With a monopoly or oligopoly supply is kept low which yields a high price. In an ideal world with full competition  costs will equal the price for the marginal producer. For Potash it would mean that it would lose almost the entire turquoise area.It would only keep the small slice that represents the difference between an efficient and a marginal producer, paying the top dog $700 mln. over ten years does not leave much. We do not know the exact amount as we do not know how elastic the demand is or what the marginal production costs are, but suffice it that the amount is considerable. In this context $15 is not that farfetched. The supply curve in the above monopoly situation is the vertical line through Q. Only one amount at one price is offered. With 59% oversupply the supply curve will shift down and to the right so that the price per unit would drop even further.

P.S. We have seen this movie before with guano, bird droppings of the coast of Peru and Chili. Here is a quote describing the situation;

Guano became a very important part of the development of agriculture in these United States. During the peak of the guano era, drastic steps were taken to maintain a supply for the U.S. farmer. "On August 18, 1856, Congress passed an act to authorize protection to be given to citizens of the United States who may discover guano, under which any citizen of the United States was authorized to take possession of and occupy any unclaimed island, rock or key containing guano. The discoverers of such islands were entitled to exclusive rights to the deposits thereon, but the guano could only be removed for the use of the citizens of the United States.

Back in Feb. of 2011 we argued that POT was within $5  of peaking when it was at $182 pre split (3 to 1). In post split terms that would imply a high of just over $62 (nice Fibo #!). We have not commented on it since. Here is today’s chart;

According to the company’s CEO and also the premier of Saskatchewan where the company mines and which province used to own this business as a “crown” corporation, the stock was worth more, a lot more in fact than the take-over bid of US $130 per share made by BHP at the time, which today is about C$45. In the frenzy following BHP’s unsolicited bid the stock managed to go right up to the target. Then the deal was officially killed for unexplained reasons having to do with Canada’s interests and here we are , roughly $20 or 30% lower. In our view the damage has only just started as the stock could literally be quartered on its way to $10, the 4th wave of previous degree, our original long-term target.

At a p/e of 16 this stock is still overpriced in my opinion. Regression to the mean would suggest something in the vicinity of $20. The EW count would suggest a new low. Looking at AGU and MOS similar conclusions can be drawn. This is just a too crowded trade for my liking and with all the hoepla with the premier of Sak. and national interest concepts against foreign takeovers etc.etc. this stock should move further out of the limelight, usually with the net effect that the stock drops in value.

Looking at the short–term chart , the stock traded above its level for some time so the direction was rather clear. Right now we are sitting on the edge of the sill after a year or more of going sideways. I would not be surprised if , for instance when they report less than stellar results next time (like MOS) this one could gap down leaving behind a nice island. We are , of course out at about the $60 level a long time ago.

Potash should be within $5 of the ultimate top. The wave structure is complete.