Wake up call... Last call
US Chemical majors have noted the strong performance of their agricultural divisions based on vigorous sales in the past quarter for their agricultural science divisions, typically involved in the production of genetically modified seeds, pesticides and other productivity boosters. Much of the demand was driven by Latin America where farmers have taken advantage of higher crop prices, increasing their sowings. In particular, Dow Chemical, whose AgroSciences division is involved in producing and researching a variety of specialty cooking oils, herbicides, weed killers, seeds and grass varieties was the Dow Chemical Group’s best performer. Dow’s other divisions suffered substantial losses in various geographic regions, prompting cutbacks; nevertheless, the Company said it would focus more investment in the Agricultural divisions, given its high margins and continued near and medium term growth potential. There has indeed been a tightening in the supply of crops such as corn and soybeans, which will has forced an overall increase of their food prices worldwide. A trend toward higher prices of potash will also be sustained by high prices for oilseeds due to a drought in southern Brazil and Argentina that has caused prices of soybeans to increase sharply over the same period a year ago.
The demand for agricultural products noted by Dow was shared by DuPont, whose own sales of fungicides and insecticides increases. DuPont also shares Dow’s optimism as far as the agricultural market potential is concerned based on a continued planting season in South America and the start of the planting season in the northern hemisphere heading into 2013. The higher seed prices will encourage farmers to produce more crops, requiring more potash. These results are in an odd contrast to the gloomy sales noted by Potash giant Potash Corporation of Saskatoon, which said its profits dropped by 22%. High crop prices have stimulated investment in agricultural inputs in many world regions, chemical and mineral; the discrepancy is to be sought in sales strategies rather than demand. As noted in a recent article in this column, Chinese and Indian buyers have started to challenge the almost monopolistic approach taken by PotashCorp and similarly sized potash producers in North America and Russia, Belarus that have relied on cartel like organizations (Canpotex and Phosagro) to set prices.
There is an ongoing tug-o-war between Chinese and Indian potash buyers (and predictably they are among the biggest drivers of demand) and these potash pricing agencies. The struggle should open up the market for more junior players emerging in North America and increasingly in Africa, as they start coming ‘on stream’ in the next few years. That said, the markets and investors will remain cautious making the negotiation for crop nutrients in China more complex. European prospects to overcome the credit crisis and the slow economic recovery in the United States, what is certain is that potash prices will not hit any new records but by the end of the year even as demand should remain strong.