Conflicting Data

It is no secret that higher prices for agricultural commodities is typically bullish for inputs, especially fertilizers. However there seems to be a disconnect based upon recent data that has been published.
Over the last several days the Wall Street Journal and the U.S. Department of Agriculture have published data regarding food and agricultural commodity pricing. These data points seem to conflict with each other. On one hand the USDA has indicated that favorable growing conditions will likely lead to a record agricultural production. Corn is further hampered by an increase in corn stocks of 39 percent over last year, which is pushing the price of corn to four year lows. However the Fed is concerned that inflation associated with food is growing. The price index for all food items is expected to increase by three percent over last year.
These data seem to contradict one another. Lower cost of grains should translate to lower cost for all food items. But certainly the data isn’t bearing this thesis out.
To find out more about this and the effect that this might have on fertilizer projects, contact Schlumpberger Inc .

U.S. Corn Production Food Inflation

What Drives Fertilizer Use?

On first thought the answer would likely be yield or economics. Upon deeper contemplation the answer might be growing populations. However one of the other drivers for the use of fertilizer is changing diets. As standards of living increase, one of the changes that people make are improvements to their diet. For example the daily caloric intake in China has gone up by 50 percent since 1978. Within this increase is a near doubling of protein consumption, of which the majority of this is due to eating more meat. This is partially why for example Australian beef exports saw strong increases last year in beef exports.
What does this increase in meat consumption have to do with fertilizer? This increase in consumption ultimately increases the consumption of grains. Depending upon the protein type, more grain must be utilized to produce more meat. For example, for every pound of chicken, two pounds of grain are used to grow this protein. For cattle it is eight times, pork is almost four to one. Certainly this is dependent upon what the animal is fed but it takes more grain to produce more protein. This along with growing populations is why China has gone from being an exporter of corn, to an importer.
How does one increase the production of grains? Certainly one of the ways this is achieved is through the proper use of fertilization.
If you would like to discuss a fertilizer or other mining project, please contact Schlumpberger Inc.


“Organic” Sales Growth

sylvanite ore

Recently Schlumpberger Inc had the opportunity to discuss a project with a management team. This project was a greenfield project that was looking to develop not only a new mine, but also an undeveloped deposit. Further research into the project showed that roughly half of the sales from the project was to go into an area that historically had poor agricultural yields, and would essentially be a new market for this project. The “yield gap” between the existing agricultural production and what was attainable for this area of sales was approximately 80 percent. In other words, the yield of corn in this area was one fifth of what could be attained with proper agricultural knowledge and access to agricultural inputs.
This “organic” growth is exciting for a project, it represents an untapped market that has the potential to sustain sales for this operation, as well as improving yields, and possibly reducing hunger in an area.
If you would like to discuss the potash markets, please contact Schlumpberger Inc.

Will Mosaic’s Purchase of ADM Upset the Potash Apple Cart?

On 15 April Mosaic announced that they were buying Archer Daniels Midland Company’s fertilizer distribution business in Brazil and Paraguay for $350MM. While not yet finalized, this deal would provide blending and warehousing in these countries as well as logistics services.

This seemingly represents a sound strategy in that it expands market access for Mosaic particularly in Brazil. With 2014 GDP growth expected to increase by over three percent, Brazil represents 80 percent of the Latin American potash market, has nutrient deficient soils, and is a large producer of corn, sugar cane and soy beans. This important market grew 4.6 percent in fertilizer use in 2013 alone. This region is further characterized by difficulties in transporting not only the crop nutrients, but also the finished agricultural products. Improved logistics would certainly aid these issues likely improving sales.

Obviously sales of phosphates in this area will be straight forward. However how will sales of potash be affected with this strategy? Campotex seemingly adds an additional wrinkle to this deal. Will the potash tonnes be sold outside of Campotex, or will this just improve movement of Mosaic’s allocation within this region? This certainly has the potential to upset the potash balance, at least in Brazil.

The Slow Route to Increased Potash Prices

While no one has a crystal ball, it is our opinion that potash prices will likely rise, but at a slow rate. It is no secret that the potash market is largely controlled by an oligopoly. This being said however, it is not a perfect oligopoly, there is “leakage” of approximately one-third due to producers outside of the oligopoly. These producers enjoy some of the benefits of the oligopoly, but to a degree function outside of this structure. Additionally there is a natural reluctance to higher prices within an oligopoly. The kinked demand curve of the oligopoly helps describe this reluctance of the upward rise in prices.
The kinked demand curve shows that there is an elastic demand at higher prices, yet an inelastic demand curve at lower prices. This curve is shown in figure 1.


Kinked Demand Curve

Figure 1 Kinked Oligopoly Demand Curve

This curve indicates that there is a reluctance to raise prices as others can then step in and sell tonnage at the lower price, but little is gained by lowering prices due to the inelasticity of the demand curve. This is further exacerbated by those producers that operate outside of the cartels. If those in the oligopoly “agree” to raise prices, there is roughly a third of the production that producers must then make a decision whether to raise prices or to expand their market share by holding prices at the lower level. This decision is a bit of a balancing act for these producers at least to the point where they have consumed (sold) all of their production. Some will likely decide to raise prices while others may not decide to do so. A portion of this decision would likely involve where they are in terms of capacity, overall costs, and in terms of marginal costs.

Furthering this example, below is a simplified model that compares the current capacity, future capacity, and effective capacities, of those in the oligopoly, and those outside of the cartels. A snapshot of this model is shown in figure 2. This model makes some simplified assumptions on expansions, effective capacities, and market growth, but shows that in “early” years, there would not be as much ability to raise prices, as there would be in later years. This model is simplified, and certainly all losses to producers is not going to occur to oligopoly members, but will be distributed likely across all producers depending upon the structure of their costs of production. Additionally as the producers approach effective capacity (whatever that may actually be) the likelihood of expansions and greenfield projects increases, which would again put the model in flux, as well as the ability to alter the price of potash. This also does not address pricing issues such as increased agricultural commodity prices, loss of capacity due to facility issues (flooding, strike, etc.), or capacity issues as a result of things such as world turmoil (Russia, Ukraine, etc.). It should also be remembered, that North American portion of the oligopoly only applies to tonnage sold outside of North America, in North America there is a more “normal” supply and demand curve. This of course only applies to the point at which an arbitrage opportunity exists for those in the rest of the world to exploit.

Simplified Model


Figure 2 Simplified Model of Potash Production and Market by Member Type

If you would like to discuss this, or any mining or management opportunities, please contact Schlumpberger Inc.

Highfield Resources Completes PFS

Highfield released a PFS for their Javier Potash Project in Spain. The study indicates that this relatively shallow deposit will be accessed via decline and have a CapEx cost of $307.9MM (USD). Operating costs are expected to be $162.5 per tonne for the expected production of 860K tonnes per year.

Contact Schlumpberger Inc to discuss this or any other potash or mining projects.LHD

Indian Elections Complete, What is the Future for Potash Sales?

With the completion of the elections in India, hopefully some of the uncertainty has been removed from the Indian economy. In recent years the emphasis has been on nitrogen based fertilizers in India by virtue of a shrinking potash subsidy. This among other things has resulted in a decrease in total potash consumption from a high of about six million tonnes to approximately 3.5 million tonnes. This reduction has resulted in an unbalanced application of fertilizer which will ultimately result in a reduction in agricultural yield.

As this is an important market regarding potash sales, it will be interesting to see how quickly, and if Mr. Modi will be able to reform the subsidy program and/or institute new policies to balance fertilization and ultimately boost agricultural yield while not putting the country in fiscal peril.

Contact Schlumpberger Inc to discuss the potash markets.