May 1, 2017 / 11:01 AM / 3 months ago

RPT-Storage wars: New U.S. potash player K+S faces warehouse squeeze

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By Rod Nickel

WINNIPEG, Manitoba, May 1 (Reuters) - Germany's K+S AG will crack into the U.S. fertilizer market this spring when it opens the first new western Canadian potash mine in nearly five decades.

But the fifth-largest global potash seller faces a stiff challenge before it makes a single delivery: where to store the pink granular nutrient until farmers need it.

The U.S. market for potash - a key type of fertilizer used to grow corn and wheat - is already dominated by Potash Corp of Saskatchewan, Agrium Inc and Mosaic. It's also saturated: potash prices are near nine-year lows.

Not only do these market leaders have an ample supply of potash, they also boast a string of warehouses built strategically across the Midwest where they can quickly distribute their product to U.S. farmers, who have a narrow window every spring to fertilize.

K+S, which will open its Legacy mine on Tuesday in Saskatchewan, told Reuters it is still in "planning phase" of a warehouse network with Koch Industries Inc, which will sell K+S' potash in the United States under a marketing agreement.

K+S spokesman Michael Wudonig added the company is confident it will find sufficient storage. Koch spokesman Rob Carlton declined to comment.

Investors don't have a clear understanding of K+S' missing warehouse link as it opens Legacy, according to analyst Charles Neivert, who covers the fertilizer industry at Cowen.

“How are they going to get into a U.S. market that effectively is grossly over-supplied already and isn’t growing? Where are they going to find room to put the (potash)?" Neivert asked.

K+S' success in distributing potash has big market implications, given there is already a glut of global capacity. Even more potash from Legacy will threaten a modest price recovery seen so far this year. For a graphic, click tmsnrt.rs/2oMvk6G

Since K+S broke ground on Legacy, U.S. potash prices have fallen roughly in half, to around $250 per tonne, according to data published by BMO.

K+S plans to sell up to 500,000 tonnes of potash annually in the United States, accounting for some 7 percent of U.S. demand, according to industry estimates. Legacy will also answer a longer-term supply issue K+S faces, as potash at its other mines is depleted.

Warehouses Already Occupied

Potash Corp, Agrium and other potash players dominate the U.S. market by leveraging their own warehouses and longtime leases with others to position potash for just-in-time application by farmers.

The alternative is relying on the 10- to 14-day railway trip for potash to move from mines in Saskatchewan to buyers in the Midwest and northern Plains.

"Many of the large warehouses already have space consigned, so (K+S') opportunity to get placed in the large facilities could be difficult," said Gary Halvorson, vice-president of retail agronomy at U.S. farm cooperative CHS Inc.

"That is a very key piece of supply chain," Halvorson added. "For any manufacturer of dry fertilizer, they really need to put their back into having tonnes close enough to end users."

CHS has nearly 500 U.S. farm retail stores along with warehouse space that it leases to potash suppliers. It has not leased space to K+S, the company said.

"That's the challenge K+S faces to break into the market," said Joe Dillier, director of supply and merchandising at Growmark, an Illinois-based farm cooperative and distributor that leases some storage space to potash miners.

K+S partner Koch could store some of K+S' potash in its own fertilizer warehouses, and K+S has said it will take until year end to reach Legacy's full annual output pace of 2 million tonnes. Three-quarters of production will be sold to industrial users or off-shore buyers.

Legacy is opening as farmers plan to sow less corn, a fertilizer-intensive crop, making crop nutrient sales a bigger challenge.

To break in, Koch may need to cut prices to sway U.S. buyers, since K+S' logistics will not be as smooth as for established players, said industry consultant Kelvin Feist.

"There is no easy way in - you have to discount the price," Feist said. "Koch is late to the party."

Lower costs would be timely for U.S. farmers, struggling with declining incomes and used to dealing with a consolidated farm input sector, said Aaron Heley Lehman, president of Iowa Farmers Union. He welcomes the potash mine.

"It's long overdue for our farmers to have more choice."

Reporting by Rod Nickel in Winnipeg, Manitoba; Editing by Denny Thomas and Edward Tobin

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