For a long time, the most valuable company in Canada, as measured by their stock market value, was the Royal Bank of Canada. Banks are a nice steady business that throw off lots of cash every year and it made sense that RBC was king of the hill.
Well, now there's a new giant on the block and they make fertilizer.
Actually, The Potash Corporation of Saskatchewan makes, well, potash, which is a key ingredient in fertilizer. It has a market value of somewhere around $67-billion this Friday afternoon.
Now I know they're celebrating at Potash HQ in Saskatoon over that fact – wow, the Grey Cup and the King of the Market all in one year! — but one of my favourite Bay Street economists, Merrill Lynch's David Wolf (left), has an important comment out this afternoon that just might dampen all this Potash Corp. excitement:
We're not industry specialists. But we think the following four observations are important:
- First, there's plenty of potash – nearly 300 years of known reserves at current consumption rates, according to the International Fertilizer Association.
- Second, you could hardly have found a worse investment in modern times – according to the US Geological Survey, real potash prices have fallen 95% from their record (peace-time) peak in 1919 through the recent trough in 2003.
- Third, the current combined market cap of the three large North American producers (POT, AGU and the US' Mosaic) is bigger than the value of the all of the potash ever sold in the history of the world (or, at least, in the roughly 100 years of available records).
- Fourth, and in our view most importantly, we believe that the euphoria in the fertilizer sector reflects a potentially dangerous broader trend across the commodity spectrum – investors mapping evident short-term supply/demand imbalances into expectations of persistent long-term supply/demand imbalances. We know that a long period of underinvestment in energy, metal and (yes even) potash supply has left producers unable to keep up with rising demand from booming emerging markets. But we also know that higher prices are now giving producers enormous incentive to develop new supply. That can't happen immediately, given long lead times on mines, the seasonality of agriculture, etc. In most cases, however, it eventually will (not a big surprise that no one's found or developed much potash capacity over the past 20 years – nobody's had reason to, until now). And even where supply appears limited over the longer term, such as in oil (where political issues are particularly important), if you can't find more, you find alternatives – as many companies (including the oil majors themselves) are aggressively working towards.