I was wondering how long it would take for the accusations to fly that Potash Corp. is a victim of short sellers. Not long, apparently. On Thursday a Merrill Lynch analyst downgraded the stock from a buy to underperform (that’s wishy-washy for sell, by the way) because of fears of a slowdown. When the fertilizer maker’s shares lost 35 per cent of their value—wiping billions from its market cap and helping to drive down the TSX by a whopping 800 points—money managers and investors quickly pointed the finger at those scourges of the investment world. In one Globe story a money manager said short selling was the only possible explanation for the rout. “Is there any reason to take $30 off Potash Corp.?” he asked. “I don’t think so.”
Really? I can think of a one or two off the top of my head. I laid some of them out in this story a couple months ago if you want to get the full run down.
-Potash, a key ingredient in fertilizer, isn’t nearly as rare as its promoters make it out to be. Potash is often compared to oil, suggesting the mineral is somehow scarce. It’s not. And once you know where to find it, it’s relatively easy to mine. Luckily much of it happens to be buried under Saskatchewan—not exactly a war zone or tin-pot dictatorship like those regimes that control some of the world’s largest oil fields. By some counts, there’s 300 years worth of potash waiting to be dug up.
-But potash prices have skyrocketed because of demand from the hungry middle-classes in China and India, no? This is the line that’s repeated over and over again by bullish potash investors. It goes like this: With the world’s population set to grow to 9 billion over the next four decades, farmers will have no choice but to use fertilizer to boost their yields. But this argument overlooks the fact that the world’s population is already nearly three times greater than it was half a century ago. Guess how much potash prices have risen over that time. Slightly more than squat. Until recently, potash prices were actually in the red.
So when people point out that the price for a ton of potash has jumped over the last year or so, remember one thing. There is no futures market for potash. That means commodity investors don’t set the price for the mineral in an open market. Potash producers do. Coincidentally, in a lawsuit last month a fertilizer customer accused Potash Corp. and others in the industry of fixing prices. The companies deny the allegation.
Anyway, here’s a quote I used to end my original story that I think bears repeating, because it says more than any critical analysis ever could. It comes from a newspaper report summing up a speech by Louis Ware, the former president of International Minerals and Chemical Corp., and his outlook for the potash industry. “The growing world population, the heavy withdrawals of soil minerals and advanced methods of farming all point toward an ever-increasing demand for potash.” That was in 1957. It took nearly 50 years for potash prices to get much above where they were when Ware gave his speech.
But I’m sure the collapse of fertilizer shares is just the dasterdly work of short sellers.