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Potash Corporation of Saskatchewan (POT) |
| Revision as of 14:08, August 17, 2009 (edit) Iamitamin - Sr. Director (Talk | contribs) (→Business & Financial Metrics) ← Previous diff |
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| The Potash Corporation dominates the world Potash market, which is the highest margin fertilizer business. [[earnings description]] | The Potash Corporation dominates the world Potash market, which is the highest margin fertilizer business. [[earnings description]] | ||
| - | [[Image:POThistorical.jpg|thumb|400px|Potash Corporation (POT) historical performance<ref name=POThistorical>[http://www.sec.gov/Archives/edgar/data/855931/000095012309030982/o56365e10vq.htm#001 POT, Q2 2009, 10-Q, Part 1, Page 57]</ref> | + | [[Image:POThistorical.jpg|thumb|400px|Potash Corporation (POT) historical performance<ref name=POThistorical>[http://www.sec.gov/Archives/edgar/data/855931/000095012309030982/o56365e10vq.htm#001 POT, Q2 2009, 10-Q, Part 1, Page 57]</ref> ]] |
| The following graph shows that the Potash corporation has enjoyed higher profitability and [[Return on Equity (ROE)]] than its peers.<ref name=YHOOFNCEPOT>[http://finance.yahoo.com/q/ks?s=POT|Yahoo Finance: POT, MOS, AGU Key Statistics and Historical Prices]</ref> | The following graph shows that the Potash corporation has enjoyed higher profitability and [[Return on Equity (ROE)]] than its peers.<ref name=YHOOFNCEPOT>[http://finance.yahoo.com/q/ks?s=POT|Yahoo Finance: POT, MOS, AGU Key Statistics and Historical Prices]</ref> | ||
Revision as of 14:15, August 17, 2009
The Potash Corporation, the world’s largest Potash producer, helps farmers grow more crops per acre by selling them potash, and nitrogen, which are key ingredients for fertilizer. It also produces phosphates which are used to make herbicides, like Monsanto Company (MON)'s Round-Up. When demand for crops is high, and there is nothing wrong with fields that would prevent farmers from growing crops (such as being destroyed by natural disasters), Potash sells more fertilizer.[1]
Rising gas prices from 2007-2008 massively increased demand for biofuels like ethanol and soybean oil. Droughts, economic growth, and natural disasters simultaneously caused the destruction of much arable land. Farmers needed to grow more crops with less soil, so they bought abnormal amounts of fertilizer from Potash at high prices. By the time fuel prices had reached their peak in Summer 2008, Potash’s share price had gained over 400%.[2]
Demand for bio-fuels has since collapsed along with Potash’s share price. Because bio-fuels have lower yields than petroleum, gas needs to be very expensive for them to be cost effective.[3]
Crude prices have made a partial recovery in 2009 on hopes of a market recovery. [2] So long as bio-fuel is a popular alternative energy source , high crude oil prices will benefit the Potash Corporation.
Offsetting its reliance on oil, Potash has very internationally diversified revenues. Over 41% of the company’s sales took place outside of North America in 2008. This increased from 29% in 2007, and 28% in 2006. [1]
Emerging Market indices have outperformed the US markets by over 40% on a dollar adjusted basis since 2005. [2] Prosperity in the developing world has resulted in a demand for more agriculture intensive food. For example the average Chinese citizen now eats twice as much meat as he/she did in 1990.[3] Each pound of meat produced requires about 16 pounds of grain for feed, which encourages farmers to improve yields and buy more fertilizer. [4]Not only does the growth of emerging markets benefit agricultural production, but it also increases aggregate oil demand, which in turn encourages bio-fuel production. Thus, a stronger developing world means a better business for Potash. The performance of emerging markets can be approximated by the Vanguard Emerging Markets ETF (VWO).
Potash is well equipped to expand internationally because of its enormous size and market share. Together with MOS, Potash controls about 75% of the world Potash market. Despite floundering world demand due to declining crop prices in 2009, these two companies have maintained their high contract pricing. This monopolistic pricing power is a function of a competitive landscape with extremely high Barriers to entry and Economies of scale .[5] Potash Corporation estimated in 2007 that a new entrant would have to spend at least $2.5B to get a new mine operational.[6] The policy of keeping prices up has, of course, been quite controversial in the context of the world food shortage, and October 2, 2008 saw the beginning of an antitrust lawsuit against the Potash Company that has yet to be resolved. [7]
As its anti-trust lawsuit pointed out, Potash primarily competes with only 2 other companies, Mosaic Company (MOS) and Agrium (AGU) . The Potash Company has made significant strides eroding Agrium’s dominance in Nitrogen production, while Mosaic and Agrium have been assaulting Potash’s phosphate market share. [1]
Company Overview
Business & Financial Metrics
The Potash Corporation dominates the world Potash market, which is the highest margin fertilizer business. earnings description
The following graph shows that the Potash corporation has enjoyed higher profitability and Return on Equity (ROE) than its peers.[9]
This relative economic strength has led to a premium price being placed on the Potash Corporation compared to its peers. You pay $5.24 for every $1 of Potash Corporation book value, where you would only pay $1.71 for $1 of Agrium book value, and $2.86 for $1 of Mosaic book value. This means that the market believes that Potash can leverage its on-book assets about 190-342% more efficiently than its competitors over time. This extreme valuation difference could be because Potash Corporation has a return on assets of 14.24%, which is 16% higher than Mosaic's and 47% higher than Agrium's.[9]
Investors pay about a 10% more for a dollar of Potash earnings than its competitors as of 2009, which could reflect the company's aggressive balance sheet. Notice that Potash has a much lower current ratio than its peers, which implies that it is relatively more interested in expansion. [9]The company's high debt to equity ratio further verifies Potash's intention to aggressively expand its business.
This aggression will pay off in the scenario predicted by the USDA, which anticipates Potash prices seeing near-record highs in Fall of 2009. Notice that current Potash prices are hundreds of percentage points higher than historical averages due to the effects of the world food shortage.[10]
While other agricultural fertilizers have seen price increases, Potash has seen the greatest surge. The following ammonia futures chart helps explain why the Potash company has enjoyed greater results than Agrium, which focuses on nitrogen (ammonia) fertilizer.
Thus, it is important to note that Potash's superior performance has been largely driven by macro-economic conditions and its status as a Potash monopoly, rather than inherent company advantages that could weather a commodity price collapse. [10]
Business Segments
Potash Corp sells its fertilizers and crop nutrients to three markets in over 50 countries:[11]
- Fertilizer, along with its crop nutrients (potash, nitrogen, and phosphate), is sold to to a number of retailers and distributors who then sell the fertilizer to farmers around the globe.
- Feed supplements are for livestock, like cattle. The rising population and increasing meat consumption around the globe have grown this division as farmers demand more feed for their animals.
- Industrial sells potash, nitrogen, phosphate, and ammonia to companies for a wide variety of products, such as computer screens, soaps, soft drinks, metal treatments, food products, and plastics[12].
Products
- Potash (17% of world production, 43.1% revenue)[14] is POT's main product. It is an important crop nutrient used for fertilizer and is limited in supply. It is mined in just 12 countries worldwide[6], and 50% of the world's reserves are in Canada,[15] where it has seven mines. Potash is mostly used in POT's fertilizer products.
- Nitrogen (2% of world production, 30.5% revenue)[14] is a naturally occurring gas that is necessary for cell maturation, plastics, resins, and is a key component of proteins and enzymes.[12] It is used in POT's fertilizers, animal feed, and industrial products.
- Phosphate (5% of world production, 26.4% revenue)[14] is a key nutrient used in increase crop yields, in soft drinks, and other food products.[16] Phosphates are mostly used in POT's industrial products.
Trends and Forces
International Demand for Round Up (TM), and Genetically Modified Foods
The key ingredient in Monsanto Company (MON) 's Round-Up weed-killer is an herbicide called Glyphosate. [17]
Potash Corporation produces the phosphates necessary to produce this chemical. Starting around 1996, soybeans and other plants were genetically modified to resist Glyphosate. The crops resist the pesticide, the weeds do not, yields increase.
Spring and Summer 2009 have seen a collapse in demand for Glyphosate, resulting in lower prices and corresponding profits from the Potash Corporation's phosphate sales. [18]
Outside of food prices, European and Asian scrutiny of Genetically Modified Foods influences the demand for Glyphosate. Studies have found that exposure to glyphosate decreases mammalian sperm count by up to 50% and causes numerous genetic problems. Other studies suggest that the Glyphosate causes plant disease and soil damage. Monsanto, of course, vehemently denies the validity of these studies. [19], [20]
If these studies are to believed, then the international glyphosate market will shrink in the long run, causing POT's profits to falter.
Falling Natural Gas Prices and Global Climate Change
Natural Gas generally makes up 90% of the cash cost of producing ammonia. After spiking in 2008, Natural Gas has become much cheaper during 2009. Cheaper natural gas means lower production cost and higher margins. More expensive natural gas damages POT's profitability. [21]
So long as weather stays warm and factories stay unproductive, natural gas prices will stay low and benefit the Potash Company. [22]
2009 World Food Crisis and Drought
Large farming regions within the United States, India, and China are experiencing severe drought conditions that makes growing crops extremely difficult. On one hand, higher demand for food due to lower supply will improve demand to fertilizer. On the other hand, farms will not pay for fertilizer if there is not enough water to grow crops. [23]
Despite drought conditions in California, however, the Midwest is expected to yield a record corn and soybean crop in 2009. Good weather and favorable pollination conditions have driven crop prices down, anticipating record supply surpluses. [24], [25]
Even with supply surpluses, the world food crisis will place some upward pressure on food prices. A 2008 FAO report pegged the number of undernourished people in the world at 963 million, nearly 15 percent of the world's population. [26] Many liberal organizations blame US fertilizer companies for misleading farmers and partially contributing to the world shortage, but at the end of the day, high demand for food will translate into high fertilizer demand absent a severe worldwide drought.
High food prices, and moderate drought conditions will improve demand for the Potash Company's products. Severe drought conditions will decrease demand. Low food prices, and great weather will decrease demand for the Potash Company's products.
Lower Gas Prices, Ethanol Demand
Ethanol in the U.S. is produced from corn, one of the most fertilizer and nitrogen intensive crops. [27] From 2007-2008, corn prices jumped 125% due to heightened demand for biofuels, food, and livestock feed. [28]
The demand for Ethanol and biofuels peaked in 2008 along with gas prices, only to falter in 2009. People only consume ethanol, it seems, when gas prices are extremely high. For instance, the Midwest has seen a 52% drop in ethanol consumption, with only a 3% drop in gasoline consumption. Ethanol is about 15-20% less efficient than gasoline, and studies have shown it needs to be about 40 cents cheaper per gallon to compete. [29]
When there is less demand for ethanol, there is less demand for corn fertilizers. Lower gas prices hurt the Potash Company's bottom line.
Reduction in Arable Land
The amount of arable land worldwide is dwindling. The population boom has cut the amount of arable land per person in half over the past 50 years.[27] Brazil, China, and India are three of the five most populous countries and are trying to meet the growing demand for food, fuel, and feed for livestock. Brazil, China, and India each have just 7%, 15%, and 49% of arable farmland, respectively,[30] and with their respective populations on the rise, these countries need to make the most of the arable land they have. In addition, weather factors such as temperature, rain, floods, droughts, and hurricanes destroy arable land for a particular crop season and many times the land is unusable for a few seasons.
Reduction in arable land should increase the demand for yield-increasing fertilizers in the long run and benefit the Potash Company. In the short run, however, violent destruction of arable land through natural disasters could disrupt the Potash Company's contracts and damage the company's profitability.
Competition
Potash Corp has few competitors since the fertilizer industry has significant barriers to entry and Economies of scale . Potash Corp estimates that it would cost upwards of $2.5B for a new company to enter the industry.[6] A company would need five to seven years of development time to build mines and factories, build rail and gas lines, and purchase rail cars and storage before it can even begin making a profit.
Potash Corp has two main competitors, Mosaic Company (MOS) and Agrium (AGU). Studying the market-share graph below you will notice that the potash market has been in deadlock between Mosaic and Potash corp since 2005. Potash made a successful play on phosphates from 2005-2007, but started losing out to Agrium and Mosaic in 2008. Potash has enjoyed its largest competitive success in the expansion of its Nitrogen production, which has directly eroded Agrium's superior market-share.
.
- Mosaic Company (MOS) is a $19.04 Billion[31] fertilizer company, the second largest potash producer, and the largest phosphate producer with 15% and 16% of global market share, respectively[32].
- Agrium (AGU) is a $5.82 Billion nitrogen and supplies fertilizer producer. In addition, it produces potash and phosphate like its competitors and has a 16% global share of the retail fertilizer market due to the major increase in global demand for its fertilizer and crop nutrient products. [33] [34] and had a $206 M year-over-year net income increase[34]
Although Potash Corp and its competitors have similar revenues, POT's ability to set favorable prices by controlling the limited supply of potash have set it ahead of its competitors in terms of net income and margins. In addition, it also competes with private, government owned companies. Government owned companies are not usually profit driven. Government owned companies can set their prices below market value to help subsidize their farmers costs and would force the other companies in the industry to lower their prices too, or face losing their customers.
| Leading Fertilizer Producers 2008 Financial Comparison | ||||
|---|---|---|---|---|
| Company | Revenue | Net Income | Profit Margin | Operating Margin |
| Potash Corporation[35] | $9.4 B | $3.5 B | 37.00% | 49.07% |
| Mosaic Company (MOS)[36] | $9.8 B | $2.1 B | 21.232% | 28.60% |
| Agrium (AGU)[37] | $10.3 B | $1.3 B | 12.87% | 19.34% |
| Leading Fertilizer Producers' 2008 Annual Nutrient Capacity (million tonnes) | ||||
|---|---|---|---|---|
| Company | Phosphate | Potash | Nitrogen | |
| Potash Corporation[38] | 2.4 | 13.2 | 3.5 | |
| Mosaic Company (MOS)[39] | 9.4 | 10.4 | 0.5 | |
| Agrium (AGU)[40] | 1.0 | 2.1 | 5.0 | |
<autowikidata/>
References
- ↑ 1.0 1.1 1.2 | Potash Corp. 2008 Annual Report, "Company Overview: Potash," p. 1
- ↑ 2.0 2.1 2.2 | Potash Corp (POT) Google Finance Chart
- ↑ 3.0 3.1 “Low gas prices hurt sales of ethanol”, ABC
- ↑ Meat production details
- ↑ Potash contract news release, Reuters 2009
- ↑ 6.0 6.1 6.2 | Potash Corp. 2007 Annual Report, "Company Overview: Potash," p. 10
- ↑ Potash Corp. 2009 Q1 Report, p. 8
- ↑ POT, Q2 2009, 10-Q, Part 1, Page 57
- ↑ 9.0 9.1 9.2 Finance: POT, MOS, AGU Key Statistics and Historical Prices
- ↑ 10.0 10.1 l|Farm Futures
- ↑ | Potash Corp. of Saskatchewan 2007 Annual Report, "Company Overview", p. 6
- ↑ 12.0 12.1 | Potash Corp. of Saskatchewan 2007 Online Annual Report, "Essential Nutrients," p.5
- ↑
- ↑ 14.0 14.1 14.2 | Potash Corp. of Saskatchewan 2008 Annual Report, "Company Overview", p. 7
- ↑ | Potash Corp 2007 Online Annual Report, "6 Keys to Understanding Our Business," p. 17
- ↑ | Answers.com: "phosphate" definition
- ↑ Wikipedia Article About Round-Up
- ↑ | Potash Corp. Cuts Earnings, HAARETZ Israel News
- ↑ | Chem Tox Summary of Glyphosate and Other Pesticide Evidence
- ↑ | Wikipedia Synopsis of Round-Up Pros and Cons
- ↑ | Potash 2008 10k, p.10
- ↑ | Natural Gas Prices Lowest in Years
- ↑ | Map of International Drought, Global Researcher
- ↑ | UNL's Drought Monitor
- ↑ | Good corn pollination in the 2009 season so far
- ↑ [http://www.un.org/apps/news/story.asp?NewsID=30256&Cr=Food+crisis&Cr1 | UN News Centre]
- ↑ 27.0 27.1
- ↑ | www.wikinvest.com: Corn Prices
- ↑ [http://news.yahoo.com/s/ap/20090714/ap_on_re_ca/us_farm_scene_e85_outlook | Yahoo News: Massive Ethanol Decrease in 2009]
- ↑ | C.I.A. World Factbook: Brazil, China, India
- ↑ | Google Finance, "Market Cap Info"
- ↑ | www.wikinvest.com, Mosaic Company (MOS)
- ↑ | MSN Money: Agrium Inc (AGU), "Highlights"
- ↑ 34.0 34.1 | www.wikinvest.com, Agrium Inc.
- ↑ 2008 POT 10K
- ↑ 2008 MOS 10K
- ↑ 2008 Agrium 10K
- ↑ 2008 POT 10K
- ↑ 2008 MOS 10K
- ↑ [Agrium (AGU)|Agrium]]<ref>[http://www.agrium.com/uploads/Agrium_Fact_Sheet.pdf September 2008 Agrium Fact Sheet]</li></ol></ref>
External links
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