The Mosaic Co. reported a sharp drop in net income for the third quarter ending Feb. 28, 2009, to $58.8 million ($.13 per diluted share) from the year-ago record-setting $520.8 million ($1.17 per share). Net sales dropped to $1.37 billion, down from $2.15 billion. Mosaic said the primary drivers for third-quarter results were significantly lower sales and production volumes, and a decline in phosphate selling prices as demand for crop nutrients slowed.
The company said phosphate sales have been improving and as a result production is now closer to normal levels, though Mosaic does not expect to reach full capacity in the fourth quarter. Mosaic expects potash to remain weak in the fourth quarter. It expects fourth-quarter phosphate results will be above the third quarter, but not the year-ago comparison.
“Despite the turmoil in commodity markets, we remain confident that long-term agricultural fundamentals are excellent,” said Jim Prokopanko, Mosaic president and CEO. “This is a self-correcting cycle because demand for crop nutrients can only be deferred so long. Large crops are still required to secure the world’s food supply, and crop nutrients will play an essential role in achieving that objective. We are well positioned financially and strategically to serve our customers and create value for our shareholders.”
“The crop nutrient industry just endured one of the weakest fall application seasons on record,” Prokopanko continued. “With an expected rebound this spring, we estimate U.S. nutrient use could decline approximately 10-15 percent this crop year, with more pronounced declines in phosphate and potash usage than for nitrogen.” The company said that overall, the U.S. may see the largest one-year drop in nutrient use since 1983, when the government implemented the payment-in-kind (PIK) program to cut production.
Prokopanko said the situation outside the U.S. is expected to be modestly better, with India and China appearing immune from this global trend. He said crop nutrient use in those countries continues due to population growth and their drive for food security. He noted that PhosChem recently signed a large contract in India, and that product in North America is starting to move from producers to dealers and from dealers to farmers.
He said several catalysts could jump-start the market, including China and India’s annual contracts and the North American spring season, as well as continued improvement in Brazil. He said Brazil could also begin sourcing normal volumes of phosphate and potash at midyear.
He noted USDA still projects that world grain and oilseed use will increase a solid 2.4 percent in the 2008-09 crop year.
Phosphates saw an operating loss in the third quarter of $123.9 million on sales of $552.4 million, versus the year-ago income of $442.7 million and $1.26 billion, respectively. Sales volumes were cut in half at 1.1 million mt, down from 2.2 million mt. Phosphate crop nutrients sales were off 51 percent to North America and 49 percent to the international market. The average DAP price for the quarter was $413/mt, down from the year-ago $487/mt. Mosaic said fourth-quarter prices are running in the mid-$300s/mt.
Firm potash prices kept operating results in that sector well into the plus column at $186 million on sales of $480.8 million, though down from the year-ago $195.9 million and $547.3 million, respectively. Potash sales volumes sank to 784,000 mt, or 76 percent from the year-ago 2.1 million mt. North American sales were off some 69 percent, while international sales were off only 7 percent. The average potash and K-Mag prices during the quarter were $565/mt and $354/mt, respectively, versus the year-ago $221/mt and $145/mt.
The offshore segment had a third-quarter loss of $103.6 million on sales of $334.7 million, down from the year-ago income of $18.1 million and $387 million, respectively.
Buoyed by earlier strength in 2008, nine-month Mosaic net earnings stand at $2.2 billion ($4.94 per share) on sales of $8.7 billion, up from the year-ago $1.2 billion ($2.74 per share) and $6.34 billion.
Nine-month phosphate earnings were $1.08 billion on sales of $4.9 billion, versus the year-ago $1.1 billion and $3.67 billion. Sales volumes were off, at 4.42 million mt from 6.73 million mt. Phosphate crop nutrient sales were off 40 percent in the North American market and 28 percent internationally. The average DAP price was $886/mt versus the year-ago $435/mt.
Nine-month potash earnings were $1.2 million on sales of $2.43 million, up from the year-ago $467.3 million and $1.4 billion. Sales volumes were down, at 4.4 million mt from 6.2 million mt. Potash crop nutrient sales were off 47 percent in North America and 24 percent internationally. Mosaic expects potash volumes to be off 2 million mt in fiscal 2009.
The average nine-month potash and K-Mag crop nutrient price was $518/mt and $309/mt, respectively, versus the year-ago $185/mt and $133/mt.
The offshore segment had a nine-month loss of $64.7 million on sales of $1.95 billion, versus the year-ago income of $73.9 million and sales of $1.53 billion.
Mosaic said potash sales volumes will likely remain constrained until the annual Chinese contract is inked. Mosaic is now expecting that to occur mid-year. It estimated that current Chinese inventories at the ports are 1.6 million mt, with 2-3 million mt inland.
Prokopanko said until then it will be all eyes on China and India, and that is going to set the tone for future pricing. Company plans are to curtail production until the demand returns and the market finds a price at which it will clear the product.
Richard McLellan, senior vice president, commercial, said anything beyond June is too late for them to order product without shorting the dealers close to the farmers. He said by June, North and Latin America pipelines should need restocking as well. With everybody waiting to better their position, the industry could have North America, Latin America, India, and China all with cupboards bare saying “okay, it’s time to get some potash,” and in the meantime the major producers in the world have curtailed production. “So, it can get pretty tight pretty quick.” However, the company also reiterated that it can respond quickly if demand does return.
Mosaic said it is fully committed to its potash production plans. As for why not produce more potash now and put it in inventory for later, the company said it only has about six weeks worth of space of potash inventories.
The company said fourth-quarter phosphate gross profit is expected to be positive, but it will still be adversely impacted by higher cost raw materials and finished products that remain in inventory.
Dr. Michael Rahm, vice president of market analysis and strategic planning, said U.S. phosphate usage could be down this year 10-20 percent and potash 20-30 percent. “Farmers are spending lots, they’re investing lots of working capital with very high-tech seed, herbicides and so forth, and to cut back on application rates is a very difficult decision, I would think, at the farm level.” He said phosphate demand outlook for India remains extremely robust.