Expectations for Fall Harvest
SAM HALPERT: This year we're coming off a summer, or a year, when we had record droughts in the U.S. and prices went up and farmers responded with very large acreage amounts. We had a wet spring and that has definitely hurt some prospects, but it still looks like this year we'll wind up with close to a record corn crop. Soy should also be a very large harvest.
There is some concern because of the late planting of soy, which may lead to frost issues and the crop not quite developing as people would like, but so far things look good. Prices in soy have held up reasonably well and I think it bodes well for a large Latin American harvest. Brazil and Argentina together are a bigger soy producer than the U.S. and that's important in terms of where prices will head going forward.
Low Prices: Effect on Agriculture Companies
HALPERT: We do see prices moving lower on the ag side in terms of corn and soy. Again, we've got to get through the harvest year and make sure that we don't have a cold fall. But if that comes to pass, there are several companies in several industries that are going to feel a little bit of pressure. The long-term outlook for ag is still pretty good, but short-term equipment companies may feel some pressure because the farmer is not quite feeling as flush.
Again, it's been a couple pretty good years for the farmer, so it's going to take more than one year on the equipment side, but that will be something to look for. On the fertilizer side, here are some industry-specific things going on that may change the way the farmer reacts but for the most part, farmers will be little more cautious. The one other thing to consider is, if prices move lower we’re likely to see less acreage next year in corn, which should mean less nitrogen demand. That's getting a little specific, but that's something we’re likely to see.
Recent Activity in the Potash Market
HALPERT: In early August, the potash industry witnessed a dramatic change in its structure. You had two pricing groups that worked a lot like OPEC has in crude oil. The eastern European -- Russian and Belarusian group -- split up so it's dramatically changed the way potash will get priced. The two could get back together, but right now you have a commodity that's dramatically in surplus, you've got a commodity that is way above the marginal cost of production, and you had a strategy where they definitely sought price over volume. That's changed. You're going to see volume over price with pricing moving lower.
Potash doesn't actually have that dramatic an effect on the farmer or the industry. It's not a major input. China and India under-apply, but potash is more about protecting the downside on yield rather than promoting yield. Nitrogen is more about promoting the yield, so I don't think you're going to see a dramatic increase in volume. I think we will see some increase in volume on the potash side, and ultimately it doesn't mean that you'll see greater yields for the whole globe, but rather marginal improvement.
Outlook and Possible Catalysts
HALPERT: One of the exciting things about the ag space right now is that lower prices should elicit an acreage response from the farmer. We may have low corn prices this fall but hopefully by next spring, prices will bottom out. Less acreage will set up for potentially higher prices. This could benefit a lot of companies in the ag space: the fertilizer producers, the retail companies the processors, the handlers and people involved in logistics. All those companies have seen fewer crops to work with because of the drought, and hopefully we get a big crop next year, and the more they have the better. As we go forward, there are some positives to look for in the ag space.
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