Falling Food Prices: The Good, The Bad, And The Ugly
Mosaic’s announcement that it will cut potash production over the next 4 months puts focus on falling demand and slowing prices in the agricultural sector. After an earnings miss by Potash Corp. a few weeks ago, and a slowing UN FAO food price index, falling commodity prices suggest the global economy is slowing, putting further downward pressure on food inflation.
Global demand for agricultural products appears to be slowing, despite a secular uptrend in food demand as the world’s population continues to grow. Mosaic announced on Friday it was cutting 20% of its planned potash production over the next four months.
Mosaic’s CEO, Jim Prokopanko, highlighted the contradiction, noting that “cautious dealer sentiment continues to delay purchases and lower near-term demand for potash” while “farmer economics remain strong.” Prokopanko added “we continued to expect […] record setting global potash shipments in 2012.”
The problem appears to be global economic uncertainty, forcing dealers to run down inventories and delay major orders. In its latest earnings report, Mosaic’s large Canadian rival, Potash, missed estimates on significantly lower potash sales volume and price realization, according to RBC Capital Markets.
While the analysts have an “outperform” rating on the stock, they expressed concern over Potash’s lowering of its global 2012 sales outlook. Potash Corp said it expects global sales to fall between 55 and 58 million tons, from a previous forecast of 58 to 60 million. In 2011, global sales were approximately 55 million.
The global dynamic in food and commodity markets took a structural turn late in 2011. The UN’s Food and Agriculture Organization (FAO) warned in early 2011 about the prospects of a global food crisis, noting prices were rising exponentially (they peaked in February 2011). In part fueled by easy money, several rounds of quantitative easing in the U.S and the U.K., and a belief that emerging market demand (especially from China and India) would continue to surge, prices skyrocketed.
But as QE2 came to an end and the global economy began to exhibit very real signs of a slowdown, and as the European sovereign debt crisis came back with a vengeance, prices began to ease. The FAO’s food price index ended 2011 at its lowest levels since November 2010.
It’s not just commodities related to the agricultural sector, though. Freeport McMoran, one of the largest copper producers, had a tumultuous 2011 as copper prices began to fall on concerns Chinese demand was easing. BHP Billiton, which had that failed bid for Potash Corp. in 2010, also had a bad performance last year. Deere and Company, maker of John Deere tractors and farm equipment, has been on an uptrend since the end of 2011, though.
Falling food prices are definitely a welcome phenomenon, particularly in emerging economies where food makes up a big chunk of people’s disposable incomes. But in the U.S., it could help feed further disinflation. Fed Chairman Ben Bernanke has warned consistently of the threats of deflation; given his focus on the Great Depression, markets shouldn’t disregard further quantitative easing (QE3) if consumer prices begin a marked downward trend.
According to Potash Corp, demand for the chemical (used in fertilizers, along with nitrogen and phosphates) should begin to recover in the second quarter of 2012 and strengthen going forward. Mosaic’s management agrees that long-term prospects for their markets are more than bullish.
It’s the short-term they’re afraid of, though. As Prokopanko put it, “while we are confident fundamentals will ultimately prevail, we’ve taken steps that reflect the near-term supply and demand balance for potash.”
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