Tuesday’s announcement that a Russian firm most people have never heard of left a cartel that nobody knew existed didn’t make the nightly news, but that doesn’t mean it’s not important.
Prior to yesterday’s announcement that Russian fertilizer giant Uralkali was leaving the Belarusian Potash Company, most investors probably didn’t know that a potash cartel—let alone two potash cartels—even existed.
In fact, many investors probably may not know what potash is, so they would be excused for not knowing there were two major cartels that “managed” production and prices to the point that the global potash market had to take its cues from the fertilizer-industry equivalent of OPEC.
Before we get into the details of the announcement and how it’s likely to impact your agriculture ETFs moving forward, it’s worth taking a step back to discuss what potash is.
When most people think of fertilizer, they tend to picture either manure or some form of organic matter, like compost. While both of these are in fact fertilizer products, the most efficient fertilizer compound is potash, which is a combination of salt and potassium.
Without going all Bill Nye, the Science guy on you, potassium is so useful in agricultural applications because it enhances everything from water retention to yield to nutrient density.
Most of the world’s potash was formed—at least in large scale—millions of years ago as oceans and seas dried up. Over time, these deposits were covered by thousands of feet of earth. As such, commercial potash mining operations require equipment and technology that allows for the mining of potash thousands of feet below the earth’s surface.
The largest producer of potash—Canada—is also home to the largest reserve of potash on earth. The second-largest producer of potash on earth is Russia, which takes us back to the news that Russian potash giant Uralkali has left the Belarusian Potash Cartel (BPC), and why you should care.
The fact is, 90 percent of the world’s potash production is dedicated to fertilizer. That means that of the 40 million tons or so of potash that’s produced globally on an annual basis, 36 million tons is being deployed in agriculture. Given that fact, it stands to reason that any collusion could have a massive impact on the price of potash, the price of agricultural products and, in turn, the price of food.
Well, wouldn’t you know it, prior to yesterday’s announcement, two cartels—Canpotex and BPC—controlled roughly 70 percent of global potash sales.
In other words, one of the companies involved in controlling and managing prices and production for more than two-thirds of global potash production just announced it was going out on its own.
To borrow a quote from the Reuters article I linked to above: “It would be like Saudi Arabia leaving OPEC.”
That may sound like hyperbole, but Russia is the world’s second-largest producer of potash, behind Canada, whose own cartel is still firmly in place despite BHP’s attempt to buy the group’s dominant firm and exit the cartel in 2010.
To show just how devastating this could be to the pricing power of Canpotex’s biggest players—Potash Corp. of Saskatchewan, Mosaic and Agrium—look no further than their price action since Monday’s close: Potash and Mosaic are both down roughly 20 percent, while Agrium is down just 5 percent.
The implications for ETF investors may be farther-reaching than one might expect. The obvious segment of the market that investors should be concerned with is global agricultural equity ETFs.
Whether this represents a massive shift in the global potash market’s structure remains to be seen, but it’s clear the market seems to think so.
This means investors in agriculture ETFs need to adjust their expectations for the performance of the North American potash producers who dominate the landscape and the exposure in these funds.
If that weren’t enough, it’s also worth examining how much exposure you have to these firms vis-a-vis basic materials ETFs like the Materials Select Sector SPDR Fund (NYSEArca: XLB) and the iShares U.S. Basic Materials ETF (NYSEArca: IYM), which have 15-20 percent exposure to agricultural chemicals.
The bottom line is this: Sometimes it’s the news stories you didn’t see coming that can have the biggest impact on your portfolio.
That may never be truer than it was yesterday.
